Supplies between companies in the same VAT group are disregarded for VAT purposes by virtue of Section 43(1)(a) of the Value Added Tax Act 1994 . A case that recently reached the Court of Appeal concerned whether this disregard applies if the supplying...
A CVA is a procedure that may assist a company in addressing its financial difficulties by coming to an agreement with its creditors. CVA’s are governed under Part I of the Insolvency Act 1986 (“IA 1986”).
The implementation of a CVA is done under the supervision of an insolvency practitioner and they are known as the nominee before the CVA proposals are approved and as the supervisors afterwards. A CVA will bind all unsecured creditors of a company is the requisite majority of creditors vote in favour of the proposals. It should be noted that a CVA does not affect the rights of secured creditors or preferential creditors unless they agree to the proposals.
Essentially a CVA will enable a company to either settle its debts by paying only a proportion of the amount that it owes or to come to some other arrangement with its creditors regarding the payment of its debts.
What entities are entitled to a CVA?
A company is eligible for the CVA procedure if:
- The company is a registered company under the Companies Act 2006 (“CA 2006”) in England and Wales or Scotland. Companies that were immediately before the commencement of the CA 2006 were formed and registered under the Companies Act 1985. Companies incorporated in Northern Ireland are not eligible for the CVA procedure under the IA 1986. Northern Ireland has its own form of CVA procedure that is outside the scope of this article;
- A company incorporated in a member state of the European Economic Area (“EEA”) other than the UK; and
- A company not incorporated in an EEA member state, but having its centre of main interests in an EEA member state, other than Denmark.
When and how does a CVA come into force?
A CVA will come into force at the time when the company’s creditors approve a CVA proposal made in respect of the company. It is common for the CVA documentation to specify a different date from which its provisions apply.
A proposed CVA is considered and voted upon by the creditors of the company by one of a number of permitted procedures. The permitted procedures include e-mail, correspondence and internet meetings.
For a CVA to be approved, it will require a vote in favour by at least 75% by value of the debt of the creditors who vote on it. There is a further condition that no more than 50% by value of the debt of any creditors who vote against the proposal are creditors who are unconnected with the company.
What is the effect on creditors?
Once the CVA has been approved, it will bind all of the unsecured creditors of a company who were entitled to vote on the CVA proposal. This means that it will bind creditors who voted against the CVA, creditors who received notice of the CVA proposal but did not vote and creditors who would have been entitled to vote but did not receive notice of the CVA proposal, despite being entitled to be notified of it. CVA’s will therefore be binding upon both the known and unknown creditors.
A creditor will be prevented from taking steps against the company that the terms of the CVA prohibit once the creditor has become bound by that CVA. This usually means that a creditor will be prevented from recovering any debt that falls within the CVA other than by way of an agreed mechanism set out in the CVA.
Where a CVA proposal is made in respect of a “small company”, the company can obtain a temporary, optional moratorium. This is similar to the moratorium that applies to a company in administration. Please see our separate article on administration for more details on the moratorium.
Where a creditor is bound by a CVA without having received notice of the decision procedure and that creditor does not receive any payments under the CVA, the company will be liable to pay that creditor the amount he should have received under the CVA when it ends. This will not apply however where the CVA comes to an end prematurely. It should be noted that it is a criminal offence if a director makes any false representation for the purpose of obtaining the approval of the creditors to a CVA in order to prevent directors from deliberately concealing known creditors.
How can a creditor challenge a CVA?
Where a creditor was entitled to notice of the CVA proposal and feels unfairly prejudiced by the CVA, they can apply to the Court for an order to revoke the CVA in question. If the creditor does not find about the CVA before payments have been made under it, it is not clear whether the Court will unwind those payments that have already been made to the other creditors.
Further to the above, a CVA can be challenged on the ground that there was a material irregularity in the conduct of the procedure used for the consideration of the CVA proposal.
Advantages and disadvantages of CVA’s:
There are both advantages and disadvantages to CVA’s and we have summarised these below.
Advantages:
- A CVA is a more informal insolvency procedure and may not involve the Court;
- Due to CVA’s being more informal, they are usually cheaper than the more formal insolvency procedures, which can mean that there are more funds available to be paid to the creditors whom receive a higher proportion of the debt from the company as a result;
- There is an optional moratorium available for certain small companies to protect the company from creditors’ actions whilst the proposal for the CVA is being put into place;
- It is possible to combine a CVA with administration. This will bring the benefit of the statutory administration moratorium and the administrator will then be able to put together a suitable set of CVA proposals with the view to persuading the creditors to save the company; and
- As opposed to schemes of arrangement, a CVA can be a main proceeding under the EC Regulation on insolvency proceedings (Insolvency Regulation) and is therefore a useful method for European cross-border insolvencies.
Disadvantages:
- The CVA procedure does not have an automatic statutory moratorium preventing creditors from taking action. The optional moratorium only applies to certain small companies and it is dependent then on obtaining the consent of the secured creditors to the moratorium for it to work;
- CVA’s are not binding on secured or preferential creditors;
- CVA’s are rarely used in practice without the company being in administration at the same time. This is likely to increase the costs and the detrimental effect on a company’s business is the consequence of formal insolvency proceedings;
- Under a CVA, the facilitation of company assets to its members cannot take place if the proposed distribution is otherwise unlawful under the CA 2006.
How we can help
T G Baynes have an experienced debt recovery department and civil litigation department that have dealt with a number of cases that have concerned CVA’s. As a result of this, T G Baynes is able to advise you appropriately regarding CVA’s as well as alert you to any of the risks and problems you may face.
If you are a debtor with a CVA or are a creditor with a debtor in a CVA, please do not hesitate to contact us.