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Company Voluntary Agreements

Proposals and nominee’s report

The Insolvency Act 1986 aims to promote agreement between companies in financial difficulties and their creditors. The advantages of this type of voluntary agreement are that it is relatively inexpensive, reasonably informal, it may extend the life of the company and it binds even creditors who do not vote in favour of it. Similarly it does not require every member to consent to it.

CVA proposals may be brought by directors of a company in financial difficulty, liquidators, or administrators. These proposals would set out a means by which debts can be rescheduled and resolved. Under the Act, a nominated qualified insolvency practitioner must then be appointed to implement these agreements. Where the nominee is not the administrator or liquidator, then the person making the proposal must submit details of the proposals together with a report on the company’s financial position to the nominated person. The nominee will then submit a report to the court within 28 days detailing whether or not he thinks that meetings should be called with creditors and members to consider the proposals. Each meeting may then approve the proposals or may suggest modifications. Proposals however cannot affect the rights of secured or preferential creditors without their individual consent.

Approval of proposals is constituted by 75% of the creditors at the meeting voting in favour of the proposals and by a bare majority approval of members. The results of the meetings will be reported to the court, and, if approval is reached at both meetings the proposals take effect and become binding on every person who was entitled to appear at the meeting.

If the company was in liquidation or administration at the time of the approvals, the court may sist the liquidation or administration to allow the agreement to be implemented.

The proposals may still be challenged in court by a member or creditor who makes a case that he has been unfairly prejudiced by the agreement, or as a result of some irregularity.

If members reject the proposal but the creditors agree, the creditors can impose the agreement on the company.

Once the proposal has been approved, the nominee takes on the role of supervisor, reporting the outcome of the meetings to the Registrar of Companies and is then responsible for implementing the agreement, which at this stage becomes formally known as a CVA.

The CVA continues until such time as all payments have been made or any required time limit has expired. If a CVA has not been completed satisfactorily, the supervisor will petition the court for a winding up or administration order. The supervisor will then notify the Registrar of Companies, the court, and all creditors of the termination.

Content of proposals

The proposals put forward may be relatively straightforward or may be as complex as the circumstances dictate. Usually they will put forward something definite to creditors, as opposed to what they might obtain if the company were to be wound up. Common types of proposals include:

a) A moratorium on the repayment of debt, with creditors agreeing not to enforced debts for a stated period of time.

b) Composition of debt, where an agreed proportion of the debt is agreed in settlement, e.g. 60 pence per pound.

c) Debt for equity swap, where creditors may swap their debt for shares in the company. This eases cash-flow problems for the company and creditors are normally offered preferential shares which permit repayment by dividend as soon as the company returns to profitability. Usually major restructuring of the company would be required in order for this to be acceptable to creditors.

Implementation of an approved scheme by the supervisor

Once approval has been granted by both members and creditors, the scheme becomes binding on all parties who had notice of the meeting and were entitled to vote at the meeting, as well as to any other creditors who, had they been given notice of the meeting would have been entitled to vote at it. The scheme must not however affect the rights of secured or preferential creditors to enforce their security. The nominee then usually becomes the scheme supervisor with responsibility for its implementation, unless the court or meetings decide otherwise.

No automatic moratorium

For companies not yet in administration, no moratorium is automatically put in place until a CVA is approved, meaning that creditors can continue to pursue their securities until such time as a scheme is finally approved. CVA s therefore are often more effective following an administration order where a moratorium is put in place to protect company assets.

Alternatively, directors of a company not yet in administration, seeking to reach approval for a CVA may apply for a moratorium of up to 28 days which allows them time to put a proposal to creditors. The directors would submit a report to the nominee detailing the terms of the proposed arrangement and giving information on the financial position of the company. The nominee would then consider the likelihood of reaching creditors’ and members’ approval, the likelihood of the company being able to carry on its affairs in the short term and whether he considers that member and creditor meetings should be called to put forward the proposals. If the nominee’s consent is given, directors must then file all of the documentation, together with the nominee’s consent to act, and a statement that the company is eligible for a moratorium with the court.

 Trade Marks
 Competition Act
 Directors’ Duties
 Directors’ Duties – General
 Memorandum & Articles of Association
 Company Voluntary Agreements
 Company Contracts
 Public Limited Companies
 Formation of a Private Company

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