Insolvency Discourse by Kubi Udofia info@kubiudofia.com
Introduction
One of the notable provisions in the Companies and Allied Matters Act, 2020 (CAMA 2020) is the Company Voluntary Arrangements (CVA). The CVA is modelled after the CVA in the United Kingdom (UK) Insolvency Act. In England, CVAs have been used in the debt restructuring of notable firms including Pizza Express (2020), House of Fraser (2018), Byron Burger (2018), Mothercare (2018), Carpetright (2018), Prezzo (2018), Toys ‘R’ Us (2017), Fitness First (2012), Travelodge (2012), JJB Sports (2009, 2011), Blacks Leisure (2009), Focus DIY (2009) etc. Many English CVAs have been “landlord-only” CVAs. These involve compromising substantial long-term leasehold liabilities, without interfering with other unsecured claims.
This discourse examines primary features of CVAs.
What is a CVA?
A CVA is a binding agreement for debt repayment, between a company and its unsecured creditors. It provides an opportunity for the company to negotiate achievable repayment terms with its creditors, and avoid insolvent liquidation.
Who may propose a CVA?
Directors of a company may propose an arrangement to the company’s creditors. Where the company is in administration or liquidation, the administrator or the liquidator respectively, may propose an arrangement.
What is the Procedure for approving CVAs?
Company directors are required to prepare a proposal, embodying the debt restructuring plan. The proposal will name an insolvency practitioner, to act as a nominee. The nominee is required to submit a report to Court opining on its viability, and whether meetings of creditors and members should be convened to consider the proposal: section 435(2). Unless the Court orders otherwise, the nominee would convene the meetings. Where the company is in administration or liquidation, the administrator or liquidator (respectively) will summon the meetings: Section 436(1)(b).
A proposal would typically embody valuable information such as the company’s assets, liabilities, nominees’ fees/expenses, the supervisor, guarantees, timing, conduct of business during the CVA, further credit facilities etc. Generally, the repayment plan should be realistic and implementable to incentivise creditors’ approval. Instructively, it is an offence for a company official to make a false representation or act fraudulently, in order to obtain approval of an arrangement: Section 441.
The meetings may approve the proposal, with or without modifications. However, the following proposals and/or modifications are impermissible: (i) a modification which results in the cessation of the CVA, (ii) a proposal/modification which affects the rights of a secured creditor without their consent, and (iii) a proposal which alters the payment priority of preferential creditors without their consent: Section 437. English Insolvency law requires an arrangement proposal to be approved by 75% of creditors (in terms of the value of debt), and over 50% of members.
Where the creditors’ meeting and the members’ meeting take similar decisions, the decisions will become effective: Section 438(2)(a). Where there are differing decisions from the meetings, a member may apply to Court within 28 days of the decisions, for the decision taken at the members’ meeting to have effect. The Court may grant such application or make any other order it deems fit: Section 438(5). Upon approval, the CVA would be implemented under the supervision of an insolvency practitioner (a supervisor). The nominee may transition to a supervisor.
What is the effect of a CVA on Creditors?
If the meeting of creditors and the meeting of members approve the proposal, it will become binding on all unsecured creditors. It will bind every creditor entitled to vote at the meeting, as if he were party to the arrangement. This will be the case, irrespective of whether or not the creditor (i) voted at the meeting, (ii) was present at the meeting, or (iii) received notice of the meeting.
What Options are available to aggrieved Parties?
CVAs may be challenged by a creditor, member, nominee or by an administrator or liquidator, where the company is in administration or liquidation respectively. It may be challenged on the ground that it unfairly prejudices the interest of a creditor, member or contributory: Section 440(1)(a). English Courts often adopt two approaches in ascertaining unfair prejudice. Horizontal prejudice ascertains whether a creditor is treated less favourably than other similarly situated creditors, without justification. Vertical prejudice ascertains whether a creditor is in a worse position than he would be in administration or liquidation: Mourant & Co Trustees Ltd v Sixty UK Ltd (2010) EWHC 1890.
The terms in Prudential Assurance Company Ltd v PRG Powerhouse Ltd [2007] BCC 500 was held to be unfairly prejudicial to landlords who had given up their guarantees, but were not given any additional benefit in compensation. In Discovery (Northampton) Ltd v Debenhams Retail Ltd (2019) EWHC 2441, the Court ordered the deletion of a term which required landlords to waive/release rights to forfeit leases. The Court held that landlords’ rights to forfeit were proprietary rights and not contractual rights or security interests, hence could not be compromised by a CVA.
A CVA may also be challenged on the ground that there has been material irregularity at or in relation to the creditors’ or members’ meetings: Section 440(1)(b); Sisu Capital Fund Ltd v Tucker [2005] EWHC 2170.
Where the challenge is successful, the Court may revoke or suspend any decision approving the CVA or taken at the meetings. Alternatively, the Court may order the convening of further meetings to consider revised proposals, or reconsider the original proposal.
A person who is dissatisfied with a Supervisor’s act, omission or decision in implementing the terms of a CVA, may apply to court for redress. The court may confirm, reverse or modify the Supervisor’s act or decision, or make any order it deems fit: Section 442(3).
What is the difference between a CVA and a Scheme of Arrangement in Chapter 27 of CAMA?
Schemes under Chapter 27 of CAMA 2020 differ from CVAs, in a number of respects. In contrast to CVAs, schemes are characterised by extensive court involvement. Schemes require only creditors’ meetings/approval, whilst CVAs require creditors’ and members’ meetings. Whilst schemes bind secured and preferential creditors, CVAs may only bind secured and preferential creditors with their consent. Whilst there is no moratorium in CVAs, CAMA 2020 has introduced a moratorium for schemes: Section 717(1). Schemes require identification of, and approval by, different classes of creditors. There is no such requirement in CVAs. Unlike CVAs, no nominees or supervisors are required in schemes.
What are the likely consequences of a default in implementing the terms of a CVA?
The terms of a CVA, may be implemented like any other commercial agreement. They often specify events and consequences of default. Where a company defaults, creditors may cease to be bound by the CVA, and would be able to take unilateral actions against the company.
Further, the CVA may empower the supervisor to petition for the company’s liquidation. Instructively, Section 442(4) of CAMA 2020 provides that the supervisor is “included among the persons who may apply to the Court for the winding up of the company or for an administration order”.
What are the Advantages of CVAs?
(i) Companies remain under control of directors/internal management, and there is no disruption of business operations. This reduces the risk of cash flow insolvency.
(ii) CVAs are private, and there is no requirement for customers or the public to be notified of the process.
(iii) CVAs are flexible and allow debtors to propose diverse arrangements to creditors depending on the debtor’s financial position.
(iv) CVAs are neither complicated nor expensive, when compared to other formal insolvency procedures.
(v) CVAs do not interfere with, or suspend rights of secured creditors, except with their consent.
(vi) Unsecured creditors stand a good chance of being paid their debts, compared to liquidation and administration.
(vii) CVAs are binding on both consenting and non-consenting unsecured creditors.
What are the Disadvantages of CVAs?
(i) Secured and preferential creditors are not bound by CVAs, and may call in administrators.
(ii) The absence of a moratorium exposes CVAs to the risk of being torpedoed by creditors. Under UK law, small companies undergoing CVA may apply to court for a 28-day moratorium on creditors’ enforcement action.
(iii) Unsecured creditors are bound by the terms notwithstanding that they opposed same, or had not received notice of the meeting.
(iv) Directors are allowed to remain in office, and there is no investigation of conducts which may have contributed to the company’s distress.
Are there potential legal issues to look out for in CVAs?
Guarantee-stripping: This is common in English CVAs. In Prudential Assurance Company Ltd v PRG Powerhouse Ltd (supra), the Court held that a CVA could compromise only the liabilities between the company and its creditors, and not claims between the company’s creditors and third parties. Accordingly, where a CVA specifies that creditors shall not claim against third party guarantors, the clause may be enforced by the debtor-company, but not the third party. In Mourant & Co Trustees Ltd v Sixty UK Ltd (supra), the Court cancelled a CVA where a party was to lose the benefit of a guarantee given by the debtor-company’s parent company.
Contingent Debts: Can CVAs cover contingent debts? Contingent debts are debts which may become due in future, upon the occurrence of specified events. In Re Cancol Ltd [1996] 1 All ER 37, Knox J. held that a tenant company’s CVA covered future rents under a lease. In Re T&N Ltd [2006] 3 All ER 697 an English Court held that the holder of a contingent claim was a creditor for purposes of a CVA, and a creditor need not have an accrued cause of action.
Quote
“A CVA IS A BINDING AGREEMENT FOR DEBT REPAYMENT, BETWEEN A COMPANY AND ITS UNSECURED CREDITORS. IT PROVIDES AN OPPORTUNITY FOR THE COMPANY TO NEGOTIATE ACHIEVABLE REPAYMENT TERMS WITH ITS CREDITORS, AND AVOID INSOLVENT LIQUIDATION”
