What is in a CVA?

What is in a CVA?


By Adam McCaw, Solicitor and Licensed Insolvency Practitioner

 

In view of the development not just at Glasgow Rangers (to which I return briefly at the end of this article), but at a number of other football clubs, I have been asked as a Licensed Insolvency Practitioner and solicitor specialising in insolvency to write a short piece for Full Contact explaining what a CVA actually is.

A CVA is a Company Voluntary Arrangement pursuant to Part I of the Insolvency Act 1986. It operates as a binding agreement between a company and its current creditors. It will not affect the rights of or liability to creditors to whom debts are incurred after the approval of the CVA. or where the proposal for a CVA is made by a liquidator or administrator of the company it will not affect those creditors to whom liability is incurred after the commencement of the liquidation or the administration, in respect of whom there are specific rules that will usually result in payment in full.

Unlike a normal contract, it is not necessary for every party bound by a CVA to have agreed to its terms. That is decided by a meeting of the company’s creditors convened for the purpose of voting on the proposal put to them by the directors, administrator or liquidator of the company. If 75% in value of those creditors in attendance and voting at the meeting approve the proposal then, subject to 50% in value of the creditors with no connection to the company also having voted in favour, it will become a CVA binding all of the creditors who were entitled to vote whether they did or not. A meeting of the members must also be convened and approval can usually be taken for granted but rejection of the proposal by the members would ordinarily be inconsequential as it is within the power of the creditors to approve an arrangement even where rejected by the members.

Creditors may when casting their vote make approval conditional upon modifications to the proposal. If modifications are put forward by a creditor they must be accepted by the required voting majorities to be incorporated into the arrangement.

Creditors must prove their debts for the purpose of voting by submitting written notice of their claim to the chairman of the creditors meeting or the nominee. There is a separate opportunity to prove claims for dividend purposes. The chairman will decide whether they are entitled to vote and the sum for which their vote will be cast. Votes may be cast by proxy and it is not uncommon for the chairman to have a substantial proxy vote which may give general authority to vote at the chairman’s discretion or which may give specific instructions. A proxy will not be able to exercise a vote other than in accordance with his proxy and there are specific provisions which apply to the submission of forms of proxy.

A nominee must be appointed by the proponents of the CVA proposal to whom the proposal and a statement of affairs must be submitted. The nominee must be a Licensed Insolvency Practitioner and will usually have a heavy hand in the drafting of the proposal document

The nominee must report on the proposal and that report, together with the proposal and statement of affairs, must be sent by the nominee to the members and creditors with notice of the meetings at which they will vote on the proposal. It is the responsibility of the nominee to convene and chair the meetings (or to nominate somebody suitable to do so in his place).

Usually the nominee will be appointed to supervise the CVA but it is open to the meetings of members and creditors to nominate alternatives (subject to certain conditions), with the choice of the creditors prevailing. Any CVA must be supervised by a Licensed Insolvency Practitioner.

The approved proposal governs the obligations of the company and the rights of the creditors in respect of the included claims and the supervisor is responsible for overseeing the terms but the carrying into effect of the arrangement terms is a matter for the company. The fruition of a CVA is the payment of a dividend to creditors (usually) based upon the value of their claims.

If the company complies fully with the terms of the proposal it will be concluded by the issuing of a certificate of completion which has the effect of discharging the company from its liability to the creditors bound by the CVA. Failure of the CVA will usually result in administration or liquidation of the company.

Creditors faced with voting on a CVA proposal will be able to review estimated outcome comparisons which are included within the proposal document. These are an aid to voting but creditors would be advised to read the terms of the proposal in full to understand exactly what is to happen and what rights they have and to form their own view on the prospects of dividend. It is not uncommon for a CVA to fail with little return to the creditors bound by it.

Certain creditors, such as those who have security or those who will be required for the continued trading of the company (such as landlords) must be particularly careful in how they cast their votes as the proposal may regulate the enforcement of their security or their future dealings with the company. If a creditor is unfairly prejudiced by a proposal or believe that there is a material irregularity in connection with the meeting of creditors they may challenge its approval.

Various football clubs have entered into CVA in the last decade and have included within their proposals provision for the payment in full of football creditors in order to comply with the football creditor rule, giving those creditors a super priority. For example in the case of Portsmouth it was provided that the FA Premier League would pay the football creditors and deduct the money paid from the club’s parachute payment, leaving other creditors to share in the limited dividend. The Rangers CVA does not specifically deal with the treatment of football creditors but I would be surprised if provision is not made by the Green consortium in order to avoid sanction for breach of those regulations. The football creditor rule has, as reported by Full Contact, survived a recent challenge by HMRC and is something that one would think the emergent Rangers FC will be required to comply with if the SFA is genuinely committed to a fair playing ground between its member clubs.

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