NITIN JOSHI

The Insolvency Act of 1986 introduced the CVA (creditors voluntary agreement), which must be either a proposal for 'a composition in satisfaction' of a company's debt or 'a scheme of arrangement of its affairs'. In other words, a CVA is a private deal between a company and its creditors, allowing the company to either compromise its debts or allow a longer time for repayment.

Although there are numerous legal requirements concerning the contents of a proposal or scheme, statute just provides a framework for entering into and implementing a CVA. It does not say what the deal is. That is a matter for the company and its creditors. The agreement of 75per cent of creditors (present, in person or by proxy, and voting at a meeting of creditors) is required for a CVA to take place.

Once in place, the CVA is binding upon all unsecured creditors who had notice of, and were entitled to vote at, the original meeting of creditors.

There is a safety net though whereby any creditor who has been unfairly prejudiced by the proposals may apply to the court.

A CVA can be a cost-effective, flexible way of rescuing a company and, although it is contained within the insolvency legislation, there are none of the usual reporting requirements associated with insolvency.

For example, there is no need for directors' conduct reports. Furthermore, there is no need to advertise a proposed deal or to notify Companies House of it, allowing the company a degree of privacy.

Initially, an insolvency practitioner, or nominee, reports to the court on the company's proposal and, in practice, the nominee will assist in the preparation of the proposal.

The proposal has to be supervised by a licensed insolvency practitioner - the supervisor - who is often the same person as the nominee. The supervisor will ensure that all creditors receive fair and equal treatment in proportion to their claims, but will usually leave the directors in charge of the day-to-day management of the company.

Certain creditors, notably fixed and floating chargeholders, are not bound by a CVA but their security remains in place. It is usual to discuss the proposal with the secured creditors who, in any case, may be required to fund the proposed rescue. The support of secured creditors is essential to a successful outcome.

One drawback of a CVA is that during the time a proposal is being drawn up, there is no protection from creditors' actions. This problem can be overcome by applying for an Administration Order.

Once in place, a CVA remains in place for a period of anywhere between 12 months and five years. When it is finally up and running, the company will have to settle all ongoing liabilities, for example, for new purchases.

Suppliers that trade with the company after approval of the CVA are entitled to exercise their usual remedies in the event of non-payment of new or post-CVA debts.

A major concern for companies is whether they can continue to trade in a CVA. In practice, suppliers do support companies, although credit terms may be tightened up to begin with. Credit insurers may reinstate cover for their suppliers after a few months.

The CVA can be an excellent method to allow for a reconstruction of a business. It is a procedure that cannot be ignored and should, in the appropriate circumstance, be supported.

Nitin Joshi is a partner at Pannell Kerr Forster, accountants and insolvency practitioners for the computer sector.