Creditors' Voluntary Arrangement

A creditors' voluntary arrangement enables a company experiencing financial difficulties to enter into a binding agreement with its creditors pursuant to which it will repay its liabilities (either in full or in part) over a period of time during and after which the incumbent management retains control of the business.

Topic

Summary
What is the nature of the procedure?

A statutory procedure introduced by Part I of the Insolvency Act 1986 to allow companies to avoid liquidation by coming to a binding agreement or compromise with their creditors. CVAs may be used to avoid or supplement other types of formal insolvency procedures (ie administration or liquidation).

Who can commence the procedure?
  1. The directors of a company (other than one which is in administration or being wound up),
  2. Where the company is in administration, the administrator, or
  3. Where the company is in liquidation, the liquidator.
Are there any corporate thresholds?

The majority of the company's directors must agree if the CVA is to be commenced by the directors.

Is there a moratorium?

No, a CVA does not automatically result in a statutory moratorium protecting the company from creditors taking action to recover their debts. However, for eligible small companies, the directors may apply for an optional 28 day moratorium (under section 1A and Schedule A1 of the Insolvency Act 1986) by filing the relevant documents in court at the time the nominee is appointed. For larger companies, the lack of a moratorium can be overcome by combining the CVA procedure with administration.

Who is in charge? A "nominee" will be appointed in relation to the preparation of the CVA. If and when the CVA is approved, a supervisor, who may be the same person as the nominee, is appointed to implement the CVA.
How are they selected, including voting thresholds? The proposal for a CVA will identify a person (normally an insolvency practitioner or, where the proposal is made by an administrator or liquidator, the administrator or liquidator of the company) who will act as nominee. The choice of supervisor will be made by the creditors.
Is there a plan? Who votes and what are the thresholds?

Yes. At the relevant meetings of members and creditors, the proposal must be approved by:

  1. a simple majority (ie more than 50 per cent) in value of members, and
  2. 75 per cent in value of the creditors (except secured creditors) present and voting (either in person or by proxy).

An approved CVA will bind all creditors (except secured and preferential creditors who disagree) including dissenting or abstaining creditors as well as untraced creditors who would have been entitled to vote if they had received notice of the meeting.

 What can the plan do?
The plan is very flexible, typically it may involve rescheduling or reducing the company's debts or a debt for equity swap. 
If not approved by the necessary majorities, can the plan still be approved? No.
What is the exit route? Often a CVA results in the company being relieved of its entire pre CVA debts and returned to the control of the directors.
What is the priority of payments?

Any proposal for a CVA must allow for the payment of any preferential debts first in priority to other unsecured creditors. Even so, a CVA will not bind secured and preferential creditors who disagree with the proposals.

Is there a creditors committee?

The terms of the proposal may provide for a creditors’ committee to be established.

How involved is the court? There is very little court involvement with a CVA.
How is the supervisor paid? Whatever is proposed and agreed upon by the requisite majority of creditors or members in the CVA itself.
Are there any general comments on the use of this procedure? CVAs offer a flexible approach to a company's difficulties, but the lack of a moratorium for larger companies means their use is limited.

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