A quick guide to CVAs, covering when they come into force, the effect on creditors, how a creditor can challenge them and more
What is a CVA?
A company voluntary arrangement (CVA) is a procedure that allows a company:
- To settle debts by paying only a proportion of the amount that it owes to creditors.
- To come to an arrangement with its creditors over the payment of its debts.
When and how does a CVA come into force?
A CVA comes into force from the date that the company’s creditors approve a CVA proposal made in respect of the company. It is common for the CVA documentation to specify a date from which its provisions apply.
The approval of a CVA (or any modification to the CVA proposal) by a creditors’ meeting requires a majority of over 75% (by value) of the creditors attending the meeting (in person or by proxy) to vote in favour of it. There is also a condition that at least 50% (by value) of the creditors that vote in favour of the CVA are unconnected with the company.
What is the effect of a CVA on creditors?
Once approved, the CVA binds all the unsecured creditors of a company entitled to notice of the CVA proposal. This means that a CVA binds:
- Creditors that voted against the CVA.
- Creditors that attended the creditors’ meeting called to consider the CVA proposal, but who did not vote.
- Creditors that did not attend the creditor’s meeting called to consider the CVA proposal.
- Creditors that did not receive notice of the creditor’s meeting called to consider the CVA proposal, despite being entitled to be notified of the meeting.
Once bound by a CVA, a creditor is prevented from taking steps against the company that the terms of the CVA prohibit. Typically these will be drafted to prevent the creditor from recovering any debt that falls within the scope of the CVA other than through an agreed mechanism set out in the CVA, or to enforce rights against the company that arise from the company’s failure to pay the debt in question in full.
Does the company proposing a CVA have the benefit of a statutory moratorium?
Where a CVA proposal is made in respect of a small company, the company can obtain a temporary, optional moratorium, similar in scope to that which applies to a company in administration.
How can a creditor challenge a CVA?
A creditor who was entitled to notice of the CVA proposals, and feels unfairly prejudiced by the CVA, can apply to court for an order revoking the CVA, or convening more meetings to consider a revised CVA. A CVA can also be challenged on the grounds that there was a material irregularity in the conduct of the meetings called to consider the CVA proposal.
What happens if the debtor company does not comply with the terms of the CVA?
The terms of the CVA will deal with this in most cases. Often, the CVA will provide that, on the debtor company’s default:
- The supervisor may petition for the company’s liquidation.
- The creditors of the debtor company cease to be bound by the CVA, allowing them to pursue the debtor company for the balance of the debt due.
- The supervisor must distribute any assets that he holds in partial satisfaction of the company’s debts.
This quick guide was produced by PLC Construction
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