The Association of Business Recovery Professionals (R3) which is the trade association for the United Kingdom’s insolvency profession, has launched a standard form of proposal (Standard Form) for company voluntary arrangements (CVAs) in light of the COVID-19 pandemic and the subsequent negative economic implications on businesses, especially small and medium-sized enterprises (SMEs). This has been prepared after consultation with insolvency professionals.
A CVA is a statutory agreement between a company and its creditors. It allows the company to come to an arrangement with its creditors over payment of its debts or to pay only a proportion of the debt it owes, while continuing to trade. A company can only arrange a CVA through an insolvency practitioner and is required to show that the company is still viable as a going concern. The CVA must be approved by 75 percent (by debt value) of the creditors who vote. CVAs are legally binding on all unsecured creditors and will typically last from one to five years (although there is no legal limit). Once the CVA has been entered into, the company will need to make the scheduled payments outlined in the CVA.
KEY FEATURES OF THE STANDARD FORM
Key features of the Standard Form include:
• A delayed period before payment of 100 percent of the company’s debts (which R3 suggests should be six months). The duration of the delayed period will predominantly depend on the specific circumstances and creditors of the company, and the time periods suggested in the Standard Form should be viewed as guidelines only.
• An explicit statement that the company is experiencing financial distress due to COVID-19 and for which the company will have to provide supporting details of its circumstances.
• New trading costs incurred during the CVA are to be paid out of new trading income and support from the UK government, where available.
• An additional introductory period of a maximum of three months, designed for companies that are still unable to restart their operations following the initial UK lockdown that began on 16 March 2020.
• A moratorium against creditors enforcing their historic pre-CVA debts during the “introductory period” and the “breathing space period” of the CVA. The Standard Form also includes mechanisms to extend these periods.
• During the CVA, a number of restrictions will apply to the company’s operations, including declaring dividends, increasing directors’ salaries and borrowing or selling the company’s business or assets (save in the ordinary course of business) without the consent of the CVA supervisor (the supervisor) or creditors.
• The ability to suspend payments if the company is located in an area that is currently under a local lockdown (such as businesses forced to close if they are in Tier 3 area).
• The ability to seek further decisions if more significant changes become necessary due to COVID-19.
The main advantage of the Standard Form is the moratorium placed on creditors, which gives the company some breathing space before its creditors can enforce their debts against it. The Standard Form can also be used in conjunction with the new moratorium for businesses introduced by the Corporate Insolvency and Governance Act 2020.
It is important to note that the Standard Form is not “one size fits all.” The Standard Form is also not intended to replace professional advice. Rather, it is intended to provide a foundation, which will save time and costs and make CVAs more accessible for SMEs.
Although CVAs are a bespoke process, the Standard Form will undoubtedly aid SMEs considering the CVA process. With the number of company insolvencies set to increase in the United Kingdom over the next few months, it is likely the Standard Form will be a useful tool for SMEs to set the foundation for further negotiations with creditors.
That being said, it should be noted HMRC will fall into the definition of “secondary preferential creditors” from 1 December 2020 under the Finance Act 2020. If a company owes a large debt to HMRC, then any proposed CVA will most likely fail. Whether this leads to a decrease in CVAs after 1 December 2020, or if the UK government will intervene in light of COVID-19, remains to be seen.
Should you have an insolvency-related issue then please contact Gary Pettit at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to email@example.com or access our website at www.pbcbusinessrecovery.co.uk