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Company voluntary arrangements and challenges by creditors

The Insolvency Service statistics for July to September 2016 show that the estimated number of Company Voluntary Arrangements (“CVA”) in the third quarter of this year fell by 31.8% compared to the same quarter in the previous year. It might be suggested that CVAs are losing popularity; however, the latest figures should be approached with caution. Although numbers are undoubtedly down, insolvency numbers have been declining steadily for a number of years and even small changes can result in a large change to the percentages when numbers are low.   

CVAs remain a powerful tool for companies in financial difficulty. They also remain a popular solution for companies struggling to pay rent to their landlords who may be looking to reduce the amount of rent payable, or avoid forfeiture. It is often forgotten that earlier this year the creditors of collapsed high street retailer, BHS, voted in favour of a CVA which significantly reduced the retailers’ obligation to pay rent for its stores. CVAs are still widely used in the industry and can be used by companies of all sizes.

We regularly advise companies on implementing CVAs. We also regularly advise landlords and other creditors on challenging CVAs. This article provides a short summary of the CVA procedure and sets out how a creditor can challenge the validity of a CVA.

What is a CVA?

A CVA is an insolvency procedure available to companies experiencing financial difficulties. CVA’s are designed as a mechanism for business rescue. They are a useful tool for viable businesses which have traded and been profitable in the past, but find themselves operating at a loss. 

The purpose of a CVA is to preserve the business and allow the company to avoid liquidation by coming to an informal, but binding, agreement or compromise with its unsecured creditors. The agreement or compromise with creditors is implemented under the supervision of an insolvency practitioner. CVAs normally involve the rescheduling or reduction of the company’s debts, but they can involve more complicated structures as well (such as debt equity swaps).

Once implemented, a CVA affects the rights of all the company’s unsecured creditors including landlords. The CVA will only affect the rights of secured or preferential creditors if they agree to the proposals.

How is a CVA implemented?

The procedure for implementing a CVA is relatively straightforward.

A CVA is normally proposed by the directors of the company. Before a CVA can be implemented, the directors need to appoint an insolvency practitioner (who is known as the nominee) to assist them with the process.

The nominee will assist the directors in reviewing the company’s finances and identifying whether a CVA is likely to preserve the business. A draft CVA may also be prepared. If a formal proposal is made, the nominee will submit a report to the Court to give notice of the CVA proposal. The nominee’s report will state whether he/she thinks the CVA proposal has a reasonable prospect of success. It will also contain a statement setting out the nominee’s view on whether meetings of the company and of the company’s creditors should be called to approve and implement the CVA.

If the nominee’s report is positive, meetings of the company and of the creditors will be called, on notice, to consider the CVA proposal. Minimum voting requirements for creditors must be met to approve the CVA proposal. If the voting requirements are met, the CVA takes effect from the date of the meeting and all unsecured creditors (including landlords) will be bound by the CVA from that date onwards. From this point onwards, the nominee also becomes known as the “supervisor” of the CVA.

If a CVA is implemented the directors of the company remain in control of the business. The  supervisor does not take over the day to day management of the business. The supervisor’s role is to implement the terms of the CVA and refer the matter back to Court if he/she continues that the CVA should be abandoned, or a further order is required to monitor the CVA.

How can a creditor challenge a CVA?

Once approval of a CVA has been reported to the Court, there is a limited period in which a creditor can apply to challenge the CVA.

A creditor can challenge a CVA under section 6 of the Insolvency Act 1986 on two grounds: (1) unfair prejudice or (2) material irregularity. To succeed on an unfair prejudice challenge, the challenging creditor will need to persuade the Court that the overall effect of the CVA is unfair and treats some creditors differently to others. To succeed on a material irregularity challenge, the challenging creditor will need to persuade the Court that the procedure for implementing a CVA was not correctly followed. Such challenges normally focus on voting at the creditors meeting.  

There are strict time limits for challenging a CVA. The challenging creditor must make an application within 28 days of the date approval of the CVA was reported to the Court or, in the case of a creditor who did not receive notice of the creditors meeting, within 28 days of the day on which the creditor became aware of the meeting. It is therefore extremely important that any creditor seeking to challenge a CVA acts quickly. Each CVA is different so specialist advice should be sought before a challenge is made.  

If you require advice on CVAs, or have any queries about the contents of this article, please contact Rachel Brown, Senior Associate in Druces LLP’s Litigation and Dispute Resolution team on 0207 638 9271 or by email at r.brown@druces.com

This news was posted on 17 November 2016.