Company Voluntary Arrangement: A Rescue Option Available To Companies Facing Financial Distress

A Company Voluntary arrangement (hereinafter “CVA”) is a rescue option available to insolvent companies. It is provided for in the Insolvency Act, 2015 (Part ix) and is considered one of the remedies available to companies in financial distress. A CVA allows the company to make a proposal to the creditors on how it intends to pay its debts subject to their approval avoiding liquidation. A case in point is Uchumi Supermarkets Limited of which we shall do a case study in our subsequent article on this rescue option.

We have, however, not seen this remedy being utilized by companies as much and as opposed to the other insolvency procedures perhaps due to a lack of understanding of the procedure/process through which the company avails itself this remedy, as well as its advantages and the challenges its likely to present once resorted to by a company. Through this article we shall address this and offer a better understanding of this rescue option.

Persons eligible to make a proposal under CVA

•  The directors of a company,
• An Administrator (if the company is under administration) or
• A liquidator (if the company is in liquidation)

In this article we shall cover the procedure where the proposal is by the directors and not the administrator or liquidator.

THE PROCEDURE

The Act allows the company through its directors to make a proposal to its creditors for a voluntary arrangement under which the company enters into a composition in satisfaction of its debts or a scheme for arranging its financial affairs for their approval. Proposals may contain information on restructuring debt, repayment terms, conversion of debt to equity, and/or making other financial adjustments.

According to the Act the proposal passes when:

a) a majority of the members present and three quarters (3/4) majority in value of creditors each class approve; or

b) approved by a three quarters (3/4) majority in value of creditors of each class.

The creditors can either approve the proposal as is or with modification. Once approved, the court adopts the same and it takes effect and is binding on all parties that is: members, creditors (both secured and/or preferential), whether present or represented. An aggrieved creditor is however, allowed to challenge the same in court on the ground that that it unfairly affects their interests or that there was a material irregularity in relation to the meetings

A CVA is managed by an insolvency practitioner that is selected by the directors at the point of making the proposal. However, the creditors can during the meeting replace the directors’ proposed insolvency practitioner as part of the proposed modifications to the proposal. Once approved, a moratorium comes into place and prevents any debt recovery proceedings or action against the company unless with the approval of the Court. Upon taking effect, the supervisor becomes responsible for implementing the arrangement in the interests of the company and its creditors and monitoring compliance by the company with the terms of the arrangement.

Significance of Company Voluntary arrangements

• Allows breathing space to revive cashflow and give the company a chance to survive and thrive in the future.
• Helps companies restructure their debts by proposing a compromise between the company and its creditors.
• Offers the company an opportunity to address issues and challenges causing the financial distress including managerial and operational challenges to bring the company back to profitability.

What are the advantages of a CVA?

1. The control of the company remains in the hands of existing directors who understand the business and/or the company best. As such with professional guidance it affords the company a better chance of a turnaround as compared to other insolvency processes where the insolvency practitioner who has no understanding of the business, takes control of the company.

2. Compared to other insolvency procedures, costs for setting up the CVA and managing it are significantly lower. This in turn has the effect of improving cashflow to the company.

3. Legal actions by the creditors are kept at bay. This is to mean that the company is shielded from enforcement action by creditors giving it a breathing space to revive the business and improve the cash flows to remain a going concern.

4. A CVA avoids company liquidation and, therefore, requires no investigation of directors’ conduct leading up to insolvency. Accusations of wrongful trading or improper practices are avoided, and directors can focus on turning the company around.

What challenges should be expected when proposing or managing a CVA?

1. A CVA affects a company’s credit rating making it difficult to secure credit from new suppliers. This naturally has a negative effect on the company’s good faith.

2. Convincing stakeholders together with creditors to a CVA can be difficult;

3. The CVA agreements run for a long period of time to allow the company address its financial challenges and improve its cash flows- this may be between three and five years. For stakeholders this may seem like a long period.

4. Any default in the CVA agreement can lead to legal actions against the company and the directors by the creditors.

CONCLUSION

In conclusion, a CVA is a rescue option that companies in financial distress can opt for to avoid liquidation. It presents many advantages but in opting for it companies need to have in mind the challenges the process of approval of the CVA and its management presents, and put in place measures to avoid the same. Also, companies need to make reasonable proposals convincing creditors to approve the same.

HOW CAN WE HELP?

The Debt Recovery Restructuring and Insolvency team at CM Advocates LLP prides itself in having a wide variety of resources, skills, and expertise on all matters insolvency and debt restructuring. We are practical and innovative in our approach and offer quick turnaround timelines. We will be delighted to receive your feedback and inquiries and offer our services in this and any other of our practice areas.

Contributors:

Caroline Kendi – Senior Associate

Esther Kiarie- Associate