What is a company voluntary arrangement?
A company voluntary arrangement (CVA) is a legal mechanism that allows a firm in financial difficulties to come up with solutions with its creditors. A CVA enables a business to negotiate terms with its creditors in the hopes of reducing or eliminating some of its obligations.
CVAs are a relatively new way to restructure bad leases, and they’ve been used in recent years to renegotiate undesirable contracts, notably in the retail and leisure sectors. CVAs have also assisted borrowers to negotiate unsecured bonds as well as large trade or unsecured guarantee obligations.
The Insolvency Act 1986 (the Act) and the Insolvency (England & Wales) Rules 2016 (the Rules) provide the procedures for carrying out a CVA.
A CVA is run under the supervision of an insolvency practitioner, but the existing management stays in place throughout the duration of the agreement. There is no legal requirement that a firm proposing a CVA be bankrupt or unable to pay its debts, however, a CVA is utilized when there is at least a potential for insolvency.
A CVA is only viable if the necessary majorities of the company’s creditors and shareholders agree to it:
It’s crucial to recall that this isn’t going to be easy. To begin, creditors must approve (or reject) the plans in a credit vote, which is comparable to a stock market poll. Furthermore, if a UK CVA plan receives the support of a majority of three-quarters or more (in value) of those who responded for creditors
A CVA may be implemented in more than one jurisdiction simultaneously. The decision to conduct a CVA is made by the boards of directors of both corporations before the end of their taxable year ending on or after December 31st, 2020. Any member of either corporation’s board and management who is also eligible to participate in the CVA should do so
CVAs are permitted to utilize a wide range of voting methods under the Rules. If the nominee requested a physical creditors’ meeting, it would be held automatically previously; however, following a change to the Rules in April 2017, the nominee may now propose electronic means of voting (such as email or video conferencing), indicating a shift away from meetings as the only method through which creditors’ interests can be determined.
Creditors with a physical meeting request, however, those who fulfil certain criteria may require one.
The CVA is a compromise agreement that the company negotiates with its creditors and shareholders. If the plan is approved by both the creditors and investors, it goes into effect. Unless restrained by court order, the creditors’ decision will take precedence over the shareholders’, even if there’s a dispute about whether or not to approve it.
The CVA binds all of the company’s unsecured creditors who were eligible to vote at the meeting (whether or not they voted) or would have been so entitled had they received notice of the meeting after it has been validated, regardless of whether or not they voted. Secured and preferred creditors, on the other hand, are unable to be
Who can propose a CVA?
A CVA may be proposed by the board of directors, an administrator (where the firm is in administration) or a liquidator (where the firm is in bankruptcy) to the company and its creditors. The creditor and stockholder have no right to make a proposal for a CVA.
Why use a CVA?
A company should consider a CVA for the following reasons:
- A CVA is a versatile legal document. CVAs do not restrict the terms or form of a transaction. They merely provide a framework for making a deal enforceable. A CVA may be used on its own or to complement other insolvency procedures, such as administration. Furthermore, though the CVA is handled by an insolvency lawyer, the agreement between the company and its creditors; the supervisor is not involved in any way
- A CVA does not require the company to be bankrupt. This implies that intervention can be taken as soon as possible if there are any indications of trouble.
- A CVA is a confidential alternative to a scheme of arrangement that can be utilized without the need for a court hearing unless one is challenged. As a result, it may be less expensive than other formal processes like a scheme of arrangement.
- A CVA is a mechanism established to “cram down” dissenting unsecured creditors. A CVA enables commercial agreements to be made binding on all unsecured creditors, even if there is a dissenting minority, eliminating the requirement for unanimity.
- if there is no need to give up their secured creditor rights. A CVA can only bind a secured or preferred creditor if he agrees. Secured creditors are entitled to vote, but they may do so only in reference to the unsecured portion of their claim.
Disadvantages of a CVA
- Is it unjust? Despite not having voted for the CVA, dissenting creditors will be bound by the Proposal.
- Is it possible for a CVA to be the precursor to bankruptcy? While CVAs have been successful in saving certain businesses, many more have gone bankrupt after using one. For example, the Toys R Us CVA was filed with creditors in December 2017. By February 28, 2018, the organization had entered administration. According to data from PwC, this March, 51% of retail CVAs fail.
Why not contact Irwin Insolvency for expert advice. They are the UK’s leading independent business rescue and restructuring firm, established in 2000 with offices in London, Guildford and Birmingham.