COMPANY VOLUNTARY ARRANGEMENT (CVA)

A CVA is a formal, recognised insolvency procedure first introduced by the Insolvency Act 1986, whereby creditors accept a proposal (with or without modification) put forward by the company, which includes terms under which their claims are paid or compromised over an agreed period of time.

As the CVA must be supervised by an insolvency practitioner, whose input will be required before the scheme can be approved, it will be necessary from the outset to identify an insolvency practitioner, who must sign a formal consent to act.

The proposal for the CVA is put forward by the directors, usually with direct help from the insolvency practitioner who, at this stage, is referred to as the Nominee.

Creditors and members vote on the proposal at meetings convened for that purpose. Approval of the arrangement requires in excess of 75% of creditors in value, voting in favour. A simple majority in excess of 50% of members voting in favour is then required for the arrangement to be binding on dissenting creditors or members, subject to a right of appeal to the Court by any member or creditor claiming undue prejudice as a result of being bound into the scheme against their will.

Where the meetings are in conflict, the decision of the creditors’ meeting will prevail, subject to the right of a member of the company to apply to the court.

There are now not one but two possible routes which may be followed leading to a CVA, depending upon the size of the company involved. The more recent route – not popular with insolvency practitioners because of the onerous reporting conditions it imposes upon them – allows the company to obtain an immediate moratorium against creditor action, whereas the original route does not provide this instant protection.

A CVA is a ‘reconstruction route’ in its own right, but is often used as an exit route from an administration. Although seldom implemented in practice, it can also be used to help reconstruct a company following administrative receivership and can also be used to enable a company to reverse out of liquidation.

The following flow-chart demonstrates the pivotal position held by the CVA route in corporate recovery and reconstruction strategy: