Fit, Feasible and Fair?
A company voluntary arrangement (“CVA”) is a rescue process which is used when a viable business is in need of a restructure but is unable to afford the associated costs and/or it is experiencing cashflow problems or creditor pressure and is in need of some breathing space.
A CVA is typically based on affordable monthly contributions from profits over a period usually between 3 and 5 years. The monthly contributions are paid to the Supervisor of the CVA, a licensed insolvency practitioner (“IP”), which is held on trust for the benefit of creditors. The trust funds are distributed to creditors during or at the end of the CVA.
Compared to other insolvency processes, there is very little legislation for CVAs. The proposed terms of a CVA are set out in a bespoke proposal and if approved by the required requisite of creditors, the terms are legally binding on all creditors.
In order for creditors to consider a CVA proposal, they would be provided with an estimated comparison statement which compares the dividend outcome in a CVA to an alternative insolvency process i.e. a liquidation or administration. It is key to ensure that, when proposing a CVA, all creditors in a particular category e.g. unsecured, are treated fairly.
However, post Covid-19, it would appear that CVAs are evolving.
Recently, we have seen a number of CVA proposals where creditors within the same category have been split in order to receive different dividends. For example, a CVA we advised on recently had proposed to split out landlords from trade creditors and then trade creditors were split into essential and non-essential categories. The timing and amount of the dividend for each category was different even though they are all unsecured creditors.
In addition, some CVAs we have advised on do not have an end date, the duration of the CVA is unknown. Due to not being able to produce business forecasts as a result of lockdown, the proposal simply states that the CVA will be fully implemented when the proposed dividend has been paid. In an extreme situation, that could be ten years or more.
Since the start of the pandemic, the insolvency profession has very much been focusing on rescue and this is clearly evident when reading current CVA proposals. However, when advising on a CVA, the IP needs to be satisfied that what is being proposed is fit, feasible and fair to all creditors. In some of the cases we have seen, we are not sure that the terms are fair to all creditors but what is being proposed is necessary to ensure survival of the business in very difficult circumstances.
It may be only a matter of time before we see new case law being introduced as a result of the current CVAs being proposed.
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