Karen Morean is a partner in the construction, engineering and procurement team at law firm Devonshires
With an increasingly difficult economic environment, insolvencies throughout the construction industry are on the rise. Compulsory Voluntary Arrangements (CVA) are often used as an interim procedure that a company takes to avoid immediate final insolvency proceedings such as liquidation or administration. Instead, a CVA can reschedule or reduce the company’s debt with the aim of a principle to negotiate with the CVA.
How does a CVA work?
A CVA is a legal agreement between a company and its unsecured creditors. This agreement is documented in a proposed CVA, which sets out the terms of the proposed CVA. Typically, the CVA proposal, if accepted, will impose a moratorium, which is a legal authorization that defers payments to the company and prevents creditors from making claims. The advantage of this approach to the company is that it allows a viable but struggling company to pay off its accumulated debts with any future profits.
“It is important to remember that a company proposing a CVA is for all intents and purposes insolvent”
When a company proposes a CVA, it is required to provide all known creditors with a copy of the proposal. This is usually a lengthy document that sets out the proposed terms, why a CVA is suitable and what returns creditors can expect. There is no one-size-fits-all and each CVA proposal is a tailor-made document tailored to the company’s individual circumstances. Creditors must also be given 14 days notice that a meeting will be held.
what next
The CVA proposal will set out the next steps. However, once the creditors have reviewed the proposal, they must do the following:
- Complete a proof of debt form: A copy of the proof of debt form is attached with the CVA proposal. The CVA proposal will also indicate when the form must be submitted and how it must be submitted.
- Attend the meeting of creditors: Details of the meeting of creditors will be found in the CVA proposal. It is worth taking notes to record the discussions at the creditors’ meeting.
- If a creditor does not want to attend the meeting, they can fill out a proxy form that states who will attend on their behalf and how the representative is authorized to vote.
All creditors have the right to vote at the creditors’ meeting and a CVA will only be approved if 75 percent or more (in value of debt) of creditors vote in favor of the proposal.
The proposed CVA will have a wealth of information, but most smart creditors will do a further search at Companies House to see if any additional information is available. If you’re a creditor, for example, it’s worth looking at disposals made by the company in the last two years, such as paying dividends or selling assets. The circumstances of these provisions should have been considered by the candidate under the proposed CVA and should probably be referred to.
Any doubts or concerns can be raised at the creditors’ meeting and/or in writing to the nominee and the company in order to obtain explanations.
Challenging the CVA
Even when a CVA is approved by the majority of creditors, it is possible for a creditor to raise a challenge to revoke it, but there is only a short period of time in which to do so.
Clause 6(1) of the Insolvency Act 1986 provides for two grounds on which a CVA may be challenged: material irregularity and/or unfair prejudice. Any such challenge must be brought before the Bankruptcy Court within 28 days of the CVA supervisor notifying the court of the creditors’ meeting’s decision.
Recently, the Insolvency Court reversed a proposed CVA by Mizen Design/Build Limited (MDB). The CVA provided for creditors benefiting from a parent company guarantee (PCG) to recover 7.5p. of the pound With the signing of the CVA, the claims against MDB’s parent were also compromised.
By successfully reversing the CVA, these PCG claims can be pursued against the parent company with the prospect of obtaining the full value of the claim, rather than the penny in the pound outcome outlined in the proposed CVA.
Implications in the future
Developers are advised to review CVA proposals carefully and consider their position, particularly if the CVA proposal provides for warranty withdrawal. If the CVA is approved at the meeting of creditors, there are tight deadlines and limited grounds for challenging the CVA.
It is particularly important to obtain legal advice at an early stage to ensure that the promoter’s position has not been prejudiced. Although contesting a CVA may be appropriate in some cases, it is important to remember that a company proposing a CVA is insolvent for all intents and purposes. This necessarily means that creditors are unlikely to receive the full value of their claims from the company.
Insolvency practitioners should be cautious, particularly where CVAs propose the withdrawal of parent company claims, to ensure that sufficient information is provided in relation to the parent company’s financial position. At the very least, the parent company’s filing of accounts with Companies House should be up to date or sufficient financial information should be provided to remedy this defect.
