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UnderUK insolvency law aninsolvent company can enter into acompany voluntary arrangement (CVA). The CVA is a form ofcomposition, similar to the personal IVA (individual voluntary arrangement), where an insolvency procedure allows acompany withdebt problems or that is insolvent to reach a voluntary agreement with its businesscreditors regarding repayment of all, or part of its corporate debts over an agreed period of time.[citation needed] The application for a CVA can be made by the agreement of alldirectors of the company, the legaladministrators of the company, or the appointed companyliquidator.[1]
A company voluntary arrangement can only be implemented by aninsolvency practitioner (IP), who will draft a proposal for the creditors. A meeting of creditors is held to see if the CVA is accepted. As long as 75% (by debt value) of the creditors who vote agree, then the CVA is accepted. All the company creditors are then bound to the terms of the proposal whether or not they voted. Creditors are also unable to commence further legal action as long as the terms are adhered to, and existing legal action such as awinding-up order ceases.[2]
During the CVA, payments are made in a single monthly amount paid to the insolvency practitioner. The fees charged by the insolvency practitioner will be deducted from these payments. The company is not required to fund any further costs.Companies House will register the fact the company is entering into a CVA and there will be a recording of it on its credit file.
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In order to initiate a CVA, a specific process must be followed to assess the company's viability for the arrangement and to establish a business recovery plan. The CVA process typically includes the following steps:
Companies can benefit from a CVA in numerous ways:[3]
Within a CVA, directors retain control of the business.
Directors have alegal duty to act properly and responsibly and to prioritise the interests of their creditors. The risks of liquidating a business may include disqualification from acting as a director of other companies and also personal reputation as a director. In an extreme case directors can be found personally liable to contribute towards the shortfall in payments to creditors. However, as a company voluntary arrangement is in the best interests of creditors, there is no investigation into the director's conduct.
Under a company voluntary arrangement, directors are not personally liable for the company's debts, unless they have given a personal guarantee. Even if a director has provided a guarantee, a CVA will mean a director is only liable if the company cannot pay and by continuing in business there is a retained source of income.
In theHigh Court case ofMead General Building Ltd v Dartmoor Properties Ltd, [2009] EWHC 200, Mead were the subject of a CVA, in part because Dartmoor had not paid them some monies due. Anadjudicator, appointed to direct how the dispute between the companies should be addressed temporarily, decided that Dartmoor should pay Mead £350,000 of outstanding debt. Dartmoor challenged the adjudicator's decision, declined to pay, and argued that the fact that Mead had a CVA in place jeopardised their financial position if they paid the adjudicated amount. The court was willing to enforce the adjudicator's decision, but also considered whether the CVA should affect the ruling. On thefacts of this particular case, the CVA, the IP's assessment and the support of Mead's creditors led the court to believe that Mead could trade its way out of their financial difficulties, and therefore that the adjudicator's award should be enforced.[4]