Once a company voluntary arrangement has been agreed and approved, it is legally binding. Crucially, however, the CVA’s payment terms have to be accepted by the company’s creditors. This requires careful planning and skilful negotiation by an insolvency practitioner on behalf of the insolvent company.
All too often, the company’s creditors are not willing to accept the terms offered by the insolvent company. In this case, directors are left with little option other than to find a different route out of the financial trouble they’re in.
Creditors Review Process
A company voluntary arrangement is drafted by an insolvency practitioner before being reviewed by the company’s directors. If the company directors are happy, the CVA will be submitted to the court and a copy sent to each of the company’s creditors.
The CVA must then be accepted by the company’s shareholders and creditors before it becomes a legally binding agreement. A shareholders’ meeting is held first. To be agreed, 50 percent of the shareholders (by value) must approve the document.
Once the shareholders have agreed the proposed terms of the CVA, a creditors’ meeting will be held. In this case, 75 percent of the company’s creditors (by the value of debt) must agree to the CVA for it to be passed. At this stage, it is not uncommon for the terms of the CVA to be rejected by creditors who are dissatisfied with the proposed value of their repayments.
What if the CVA is Rejected by the Shareholders or Creditors?
If the terms of your CVA are rejected by the company’s shareholders or creditors, you will need to think carefully about the other company rescue options available to save your business. In some cases, creditors will feel there are other options available which could increase their potential return. In reality, this is rarely the case.
Unsecured creditors are not considered a priority in insolvent liquidations, so in many cases, creditors pursuing a liquidation are unlikely to receive any repayment at all. For this reason, a well-constructed CVA, which offers at least part-payment of the company’s debt, should be accepted.
What Company Rescue Solutions are Available if the CVA Terms Fail to Be Accepted?
If your CVA is rejected and you have already explored all of the alternative finance options available to your business, then, generally speaking, there are three options left for you to consider.
• Administration – Entering into administration gives your business a window of up to eight weeks to formulate a plan to rescue or restructure the business. During this time any ongoing creditor action is ceased and an insolvency practitioner is appointed to take the reins of the company. It is their job to either rescue the company so it can continue as a going concern, or sell off company assets for the benefit of its creditors.
• Pre-pack Administration – A pre-pack administration involves the marketing and pre-arranged sale of a business before an administrator is appointed. In many cases, the company’s directors or shareholders will buy the business’s assets and set up a new company that operates under a different name. In the past, this system has been abused so there are some rules in place to make sure the pre-pack delivers the best possible outcome for the company’s creditors.
• Creditor’s Voluntary Liquidation (CVL) – If the terms of a CVA are rejected, the company directors may be left with no option other than to instigate a creditors’ voluntary liquidation. This will allow the business to avoid a compulsory liquidation, which could potentially be more damaging to the company’s directors. Under a CVL, the business’s assets will be liquidated for the benefit of the company’s creditors, but the directors are less likely to face scrutiny which could lead to accusations of wrongful or unlawful trading.
How can we help?
If your company is viable but is going through a challenging period financially, we can provide the expert advice and assistance you need to rescue your business. Please call 08000 746 757 or email: [email protected] to discuss the options available to you.