What is a CVA?
A company voluntary arrangement, or CVA, allows a company or LLP to enter into binding arrangements with its creditors for the composition of indebtedness with the purpose of staving off insolvency.
This gives the company a chance to trade out of its financial problems by, for instance, restructuring its rental obligations, while empowering creditors to decide among themselves how to share the burden of facilitating the necessary forbearance.
The legal basis of a CVA is not a court order of any sort but the contractual obligations assumed under the agreement between the company and its unsecured creditors. Unless they expressly consent to be bound by it, CVAs do not regulate the position of secured or preferential creditors.
Such contractual obligations follow proposals usually formulated, at the prompting of the company’s directors or its administrator or liquidator, by a licensed insolvency practitioner as nominee who then in due course also acts as supervisor during the currency of the CVA.
Is there a moratorium on claims during the preparation of a CVA?
There is no general automatic moratorium (as there is in an administration) during the preparation of a CVA, to protect the company from creditors moving quickly to recover their debts before the CVA is in place.
However, smaller companies can elect to adopt a 28-day moratorium. A small company is a company that satisfies two or more of the following: turnover no greater than £6.5m; balance sheet assets no greater than £3.26m; no more than 50 employees.
During such a (smaller company) moratorium no proceedings, execution or legal process can occur to recover debts due without the court’s permission. A moratorium also prevents a landlord from forfeiting the lease by physical re-entry or enforcing against company assets for rent arrears. All rent arrears will normally be caught, as will the tenant’s liability for future rent falling due within the currency of the CVA (unless expressly excluded: see Burford Midland Properties Ltd v Marley Extrusions Ltd and others [1995] 2 EGLR 15).
The moratorium for small companies comes into effect for 28 days (at least) from the date that the directors file a copy of the CVA proposal at court. This means that it is unusual for a landlord to have notice of a moratorium before it is already in place. The meetings called to consider the CVA proposal may extend the period of the moratorium for up to two months from the original date on which such meetings first occur.
How are the terms of a CVA decided?
In meetings of the company’s shareholders and the creditors (usually in successive meetings, but on the same day). Each meeting can approve, reject or modify the proposals and the CVA takes effect if either both meetings approve it, or just the creditors’ meeting approves it, although, where it is just the creditors’ meeting which approves it, it is open to any shareholder to mount a challenge to the CVA in court within 28 days of that meeting.
The party proposing the CVA must give at least 14 days’ notice of the meetings to every creditor of the company of whose claim and address the person summoning the meeting is aware.
Every creditor with notice of the creditors’ meeting is entitled to vote and votes are weighted to reflect the creditor’s debt. A 75% majority of a company’s unsecured creditors, in value, by reference to the creditors present in person or by proxy and voting on the resolution, can bind the remaining 25% even against the wishes of that 25%, though where there are connected creditors, the CVA will not be approved if more than 50% of unconnected creditors vote against it.
In relation to the meeting of the members of the company, a majority of more than 50% (by shareholding) of those attending the meeting is required to approve the CVA.
As regards a lease, the proposal will be likely to vary its terms for the duration of the CVA. The lease might be surrendered or the rent reduced or the terms amended in other ways. Recent years have seen CVAs used by high street retailers to surrender leases of their less profitable stores while keeping the leases of the better performing ones.
What is the effect of a CVA?
If and when the CVA is approved by the meeting(s), it regulates the rights of all unsecured creditors, in accordance with its terms. The vote binds every person who was entitled to vote at that meeting (whether or not present or represented at it and whether or not dissenting) or would have been so entitled had there been notice of it.
The CVA comes into effect from the date that the company’s creditors approve the proposal. The nominee becomes the supervisor of the CVA who must then monitor the company’s compliance with it. Most CVAs will include drafting defining the circumstances in which the company not complying with its terms will trigger a more formal insolvency: see Welsby and another v Brelec Installations Ltd (in liquidation) [2000] 2 BCLC 576.
Can a creditor with no notice of the meeting challenge a decision made at it?
A person who would have been entitled to vote at the creditors’ meeting if it had notice of it can apply to the court on the grounds either that the CVA unfairly prejudices it or that there has been some material irregularity at or in relation to any relevant meeting (see Re Cancol Ltd [1996] 1 All ER 37 and Re Newlands (Seaford) Educational Trust [2006] EWHC 1511 (Ch) as examples of the court considering these issues). They are both questions of fact, dealt with on a case-by-case basis.
Can a landlord forfeit for rent arrears pre-dating the CVA?
No. The right to forfeit does not constitute the landlord a secured creditor and neither does the right to forfeit for the full rent (as opposed to the CVA agreed rent) survive the CVA: see Thomas v Ken Thomas Ltd [2007] 1 EGLR 31. The rent which accrued due but was not paid before the CVA was proposed should be covered as a debt within the CVA, with the landlord’s right to recover the full rent going forward also superseded by its more limited rights under the CVA: the right to forfeit for future rent is therefore similarly cut down to a right to forfeit only in respect of rent as reduced by the CVA.
Will a landlord’s debt usually include future rent and claims for dilapidations?
The answer is that it can, in principle, if properly established, set out and documented.
Any issue in this regard is for the chairman of the meeting to evaluate. In Re Newlands, the chairman’s decision to refuse a landlord to claim for future rent (for the two years said to be necessary to attract a new tenant) and dilapidations was upheld on the basis that the evidence for each was insufficiently robust.
Where the creditor’s claim cannot be ascertained with accuracy because it is unliquidated, that unliquidated part of that creditor’s claim will be valued at £1 for voting purposes, unless the chairman rules otherwise (subject to appeal). Such appeals are not readily granted where the chairman’s decision is made in good faith: see, for example, Sisu Capital Fund Ltd and others v Tucker and others [2005] EWHC 2170 (Ch) and HMRC v Portsmouth City Football Club Ltd and others [2010] EWHC 2013 (Ch). The most promising basis of a challenge is one based on the landlord showing that it would actually be likely to receive more under a more drastic insolvency regime than under the proposed CVA: see Prudential Assurance Company Ltd and others v PRG Powerhouse Ltd and others [2007] EWHC 1002 (Ch).
Can a creditor vary the terms of a CVA?
No. There is no power to vary a CVA once approved in the absence of a clause within the CVA itself providing for its own variation: see Raja v Rubin [1999] 3 All ER 73. However, such clauses are common and when they are present, they are effective: see In the matter of Cotswold Company Ltd [2009] EWHC 1151 (Ch).
Does a CVA automatically absolve guarantors?
Usually not: see RA Securities Ltd v Mercantile Credit Co Ltd [1995] 3 All ER 581, in which Jacob J said that a CVA “is not for the benefit of solvent parties who happen to owe debts also owed by the debtor”, and Koutrouzas v Lombard Natwest Factors Ltd [2002] EWHC 1084 (QB).
However, where the guarantee does not specifically provide that it is not affected by indulgence granted to the principal debtor, a tenant’s CVA can release the guarantor from its obligations, depending on the CVA’s terms: see Johnson and another v Davies and another [1998] 3 EGLR 72.
Much therefore depends on the drafting of the CVA and the guarantee. The tendency of the courts is to seek to preserve rather than release the guarantor’s liability: see, for example, Mourant & Co Trustees Ltd and another v Sixty UK Ltd (in administration) and others [2010] 2 EGLR 125.
Is it possible for a creditor to direct or remove the supervisor?
Yes, if the statutory hurdles under paragraphs 74, 75 and 88 of Schedule B1 of the Insolvency Act 1986 are cleared. In the words of Henderson J in Mourant, it is the duty of office-holders under CVAs “to maintain an independent stance, to act in good faith, and only to propose a CVA if they are satisfied that it will not unfairly prejudice the interests of any creditor, member or contributory of the company”.
CVA checklist
What is a CVA?
- Is there a moratorium on claims during the preparation of a CVA?
- How are the terms of a CVA decided?
- What is the effect of a CVA?
- Can a creditor with no notice of the meeting challenge a decision made at it?
- Can a landlord forfeit for rent arrears pre-dating the CVA?
- Will a landlord’s debt usually include future rent and/or claims for dilapidations?
- Can a creditor vary the terms of a CVA?
- Does a CVA automatically absolve guarantors ?
- Is it possible for a creditor to direct or remove a supervisor?
Seitler’s leading practitioners
- Simeon Gilchrist, Edwin Coe LLP
- Jennifer Gill, Seth Lovis & Co
- Paul Knight, Shoosmiths
- Patrick McLoughlin, Addleshaw Goddard
- Mark Reading, Mishcon de Reya
- Danny Revitt, Irwin Mitchell
- Jonathan Ross, Forsters
Leading authorities and resources
- The Insolvency Act 1986
- The Insolvency Rules 1986
- Prudential Assurance Company Ltd and others v PRG Powerhouse Ltd and others [2007] EWHC 1002 (Ch)
- Mourant & Co Trustees Ltd and another v Sixty UK Ltd (in administration) and others [2010] 2 EGLR 125
Jonathan Seitler QC is a barrister at Wilberforce Chambers
