Advice If You Are A Creditor Of A Company Proposing A CVA

Information for creditors of a company proposing a CVA

You will usually be sent a letter saying that the company is currently preparing a proposal for a CVA in order to restructure its debts. Once that proposal is filed at court a bonafide copy should to be sent to all creditors.  Attached will be proxy form for you to complete to show proof of your debt and how you intend to vote at the forthcoming creditors meeting, that has been called by the nominee.   A creditors meeting date will be proposed and you will be asked to vote on the proposal.  If it is accepted by 75% by value of the creditors then the arrangement will be approved and you will receive a “dividend” on the debt as set out in the proposal.

If the CVA proposes repayments to creditors over a 3-5 year period then this  dividend will start to be paid out 1 year from the approval of the CVA.  Some CVAs are for a much shorter period and the dividend may be paid after 3-6 months.

The CVA allows the company to restructure its debts as part of  the recovery process.  It is recommended that you continue to supply the company on the best terms you can, this may of course mean proforma, as by voiting for the proposal you are also supporting the company.

Once the CVA is approved the creditors are bound by the arrangement as above.  The dividends are payable out of either future profits, third party funds or the sale of specific assets.   This dividend can be anywhere between 15p in the pound to 100p in the pound spread out over 1-5 years. Although the more common dividend is around the 40p in the £1 mark.  The Nominee will have had to have made a comparison to the outcome in the event of a terminal insolvency such as administration or liquidation.

It is important to note that the CVA cannot compromise the secured debt.  In other words it cannot affect the rights of secured creditors to enforce security.  As such the bank does still have the power, as a charge holder, to appoint an administrator but as long as the debt is serviced and the company returns to profit the bank will generally be prepared to work with the CVA and the directors.

What if my debt cannot be valued at the point of the CVA creditors meeting?  For instance repairs and rent on a property occupied by the company proposing the CVA?

In a case called Chittenden v Pepper; Re Newlands (Seaford Educational Trust) [2006] EWHC 151  The courts found that if a debt is in the future and the liability cannot be determined at the meeting then the creditor has the right to only vote for £1.    In many ways this is fair as if a creditor has an uncertain claim they have not yet incurred an actual loss.  For instance repairs to a property have not been carried out yet or arrears of rent have not been incurred…