CVAs – What Are Creditor’s Rights?

There is no denying that it is tough out there for UK businesses at the moment. The cost-of-living crisis has meant households have less discretionary income and this has led to many well-known brands permanently closing their doors over the past 12 months. M&Co, Paperchase, Joules…these are just some of the familiar high street shops that fell into insolvency in 2022. The situation is showing few signs of improving, with the Insolvency Service reporting 1,671 corporate insolvencies in England and Wales in January, seven per cent higher than a year ago and eleven per cent above pre-pandemic levels in 2020.

Company Voluntary Arrangements (CVAs) provide companies in financial distress a way to avoid insolvency. For some creditors, however, they can result in their interests being unfairly prejudiced. One of the main objectors to the increasing use of CVAs are commercial property landlords. Many argue that CVAs are being used to “permanently rewrite contracts without any court oversight and to avoid contractual obligations freely entered into.”

Creditors have several rights when a debtor proposes a CVA. But they need to ensure they attend relevant meetings and table their concerns/objections firmly.

What is a CVA?

CVAs are governed by the Insolvency Act 1986. It is a formal agreement between a company and its unsecured creditors and provides a vehicle for a company to avoid insolvency. A CVA usually involves the company rescheduling or reducing its debts, for example, only paying a portion of what it owes to its creditors.

No legal proceedings can be brought against a company with a CVA in place.

How are CVAs created?

For a CVA to be an option a company must be insolvent or face a real risk of insolvency. The implementation of a CVA is normally suggested by the company’s directors. An insolvency practitioner is appointed to help them with the process. Once the CVA is approved by 75% of the company’s creditors, there is a limited period in which a creditor can challenge it on the grounds of either unfair prejudice or material irregularity.

Once the CVA is in place, all creditors are legally bound by it and will be repaid under the terms of the agreement. A CVA does have advantages, including ensuring unsecured creditors receive at least some of the money they are owed. This is less likely if the organisation is wound up or liquidated.

Can a creditor challenge a CVA?

A CVA can be challenged in court on the grounds of unfair prejudice or material irregularity within 28 days of it being approved by creditors, reported to the Court or, in the case of a creditor who was not given notice of the proposed CVA decision process, within 28 days of the day on which the creditor became aware of the decision process occurring. A creditor who was not told of the CVA process may challenge the CVA on the ground of unfair prejudice after the CVA ends provided it was not terminated prematurely.

What is considered unfair prejudice or material irregularity?

Under section 6 of the Insolvency Act 1986 creditors may challenge a CVA on two grounds, namely where:

1. the CVA unfairly prejudices the interests of a creditor, member, or contributory of the company; and/or
2. there has been some material irregularity at the meeting of the company or in relation to the relevant qualifying decision procedure.

Following the Coronavirus pandemic there were several court challenges by commercial property landlords concerning unfair prejudice and material irregularity of CVAs. For example, in Lazari Properties 2 Limited and others v New Look Retailers Limited, Butters and another [2021] EWHC 1209 (Ch), the landlords argued that the CVA implemented by the retailer was unfair because it treated creditors differently. In addition, they said that creditors who were not negatively impacted were able to approve a CVA that would bind creditors who were impaired by the agreement.

The Court rejected the landlords claim for the CVA to be modified, stating that they would have been worse off if the company was forced into administration. It added that the different treatment of landlords was justifiable as if they did not want to accept the terms of the CVA, they could simply terminate their leases.

Case law illustrates that the Courts will consider several factors when deciding whether or not a CVA contains unfair prejudice or material irregularity, including:

• Whether separate classes of creditors are treated differently.
• If there is prejudice against a certain class of creditors, whether that prejudice is justified.
• Is there a fair distribution of assets between secured and unsecured creditors.
• Did creditors in a similar position to the challenger also object to the terms of the agreement.
• Concerning landlords, were they given the option to end the lease.

A Solicitor will carefully examine all the facts surrounding the CVA and advise on whether or not a challenge is the best way forward. They can also provide retained legal support to businesses who do not have an in-house lawyer. For a fixed-fee, a Solicitor can act as an extension of your team, providing advice and identifying risks. By retaining legal services you would have the benefit of being alerted to the threat of a debtor becoming insolvent and/or a CVA being suggested.

How can I recover my debt before a CVA is proposed?

It is always best to proactively try and recover any business debts you are owed before it gets to the point of the debtor having to propose a CVA. Using advanced technology, our Debt-Claims Portal lets you create an account and upload information about your debtor, including how much is owed, contact details, addresses, and any informal steps taken to recover the debt, all in one place. Thereafter, if you need to send a Letter Before Action, you can create it through Debt-Claims. The letter will be checked by one of our team, all of whom are suitably qualified, and sent out on our letterhead. There is no need to pay for a separate Solicitor and we normally turnaround letters in 24 hours.

Debt-Claims will also inform you how much interest you are entitled to via a series of information buttons. The correct type of late-payment interest can be selected, and the final invoice is calculated automatically.

The Debt-Claims Portal is designed to allow you to undertake all preliminary debt recovery proceedings yourself, without having to pay legal fees. You can even go as far as issuing proceedings. If the debtor undertakes to defend proceedings, our fully qualified and regulated Disputes Resolution Solicitors will step in to advise and represent you.

Wrapping up

CVAs undoubtedly benefit unsecured creditors as they ensure that at least part of the debt will be paid. The alternatives (administration or liquidation) often result in smaller, unsecured creditors receiving nothing. However, it is crucial that all creditors receive the necessary information required to make an informed vote when it comes to approving a CVA. A Solicitor can review the terms of the agreement and advise you on the potential impacts of the CVA and help you secure an agreement that protects your best interests.

To minimise the risk of getting caught up in a CVA in the first place, register on our Debt-Claims Portal or email info@debt-claims.com

To talk to us about CVAs and/or retained legal support, please call us on 02476 231000 or email enquiries@askewslegal.co

Please note that this article does not constitute legal advice.