Corporate Voluntary Arrangements. A legitimate tool?

There has been much press coverage of late about corporate voluntary arrangements and the retail trade.

Corporate voluntary arrangements came into existence under the Insolvency Act 1986. The relevant sections are 1 to 7 inclusive. Insolvency rule 2 also applies.

The directors of the company may make a proposal for a CVA to its creditors for a composition in satisfaction of its or a scheme of arrangement of its affairs.

The company must registered under the Companies Act 2006 in England and Wales or Scotland. There are provisions in respect of overseas companies but I will not address those the purposes of this article. Where the nominee is not the liquidator or administrator company, as is usually the case, he or she shall then 28 days (or longer if the court provides) after he has he or she has given notice of the proposal for a voluntary arrangement submit a report to the court stating whether in his or her opinion on the proposal and arrangement has a reasonable prospect of being approved and implemented, whether it should be considered by meeting of the company and by its creditors and finally his or her opinion that the date, time and place at which such a meeting should take place.

For the purposes of enabling the nominee to prepare his or her report the person intended to make the proposal should submit to the nominee a document setting out the terms of the proposed voluntary arrangement (and the nominee usually assists in drafting this), a statement of the company’s affairs containing particulars of his creditors and debtors or other liabilities as well as any other prescribed information. There may be modifications to the proposals and also the proposals cannot limit the rights of secured creditors without their consent. After the conclusion of the meeting the chairman of such meeting shall report the results of the meeting to the court and also given notice of the results of the ratings meeting to such person as may be prescribed

Essentially the proposals have to achieve 75% of votes in favour in value to those who attend in person or by way of a proxy. If this is achieved then the proposals as approved are binding on all creditors who received notification of the creditors meeting

There are provisions in the Act for an application to be made to the Court on the basis of unfair prejudice against the interests of a creditor, member or contributory or if there is being some material irregularity at or in relation to the meeting company or in relation to the relevant qualifying decision procedure.

The Court has wide powers in dealing with such an application. It may revoke or suspend any decision improving the CVA. It may also give a direction for the summoning of a further meeting as well as directing any person to seek a decision on the company’s creditors.

The supervisor CVA also has the power to apply to court for directions alternatively for the winding up of the company or for an administration order.

Rule 2 of the Insolvency Rules go into somewhat greater detail, in particular, the requirements as to the contents of the proposal.

It is possible to apply for a CVA either with or without a moratorium against enforcement against the company but I will not address those the purpose of this article.

There has been much press coverage in respect of landlords being allegedly prejudiced by CVAs which have been approved in favour of a tenant being a retailer with multiple outlets. The reason for this is that landlords view themselves as having rent reductions imposed on them which are unfair. There has even been a report that a well-known high street retailer in all its forthcoming leases will insist that if a tenant in the same shopping centre enters into a CVA so resulting in a reduction of rent that automatically its own rent to the same landlord be reduced along similar lines. Such a position will not endear itself to landlords.

Various landlords have expressed considerable concern about CVAs being abused to their detriment. My personal view is that a CVA is a statutory contract and that if 75% of creditors in value approve it (together with any modifications) then it is a legitimate use of an existing statutory mechanism.

I expect that it will not be long before there is a challenge in the courts by a retail landlord on the basis of unfair prejudice. It will be interesting to see how that goes.

For further advice in relation to CVA or in general on any insolvency or corporate recovery related issues, please contact Richard Curtin on [email protected] or on 0207 822 2222.