COVID-19, insolvency update and Company Voluntary Arrangements

A CVA is a contractual agreement which a company enters into with creditors, under which a company agrees to pay back, over a period of time, a percentage of the money that it owes to its creditors.  It is often seen as a much more attractive option to a company than a conventional liquidation because it enables to the company to continue to trade, uninterrupted as long as the payments due under the agreement are made.

Key to any CVA is the approval of at least 75% of the creditors of the company concerned, agreeing to the proposal.  It must be at least 75% in value rather than number of creditors.

CVA’s are prepared with the input of a qualified insolvency professional, and once approved by the board, the proposal is notified to all creditors following which a meeting of creditors and shareholders takes place and the CVA proposal is voted on.

The High Court has held a meeting of a scheme of arrangement in respect of a company voluntary administration (“CVA”) does not need to be held physically in person, but could be through a webinar or conference call – this is because having carefully considered the wording of Part 26 of The Companies Act 2006, it felt on the facts, that the requirements were met through such remote attendance.

This recent ruling has not been the only response to the current COVID-19 pandemic.  The legislative had announced relaxation in respect of the offence of wrongful trading in the Insolvency Act 1986 in a genuine attempt to avoid the potential personal liability consequences of directors who try and trade a company through this particularly difficult time. Whilst well intended, directors need to be aware that the other offences, including misfeasance, remain unsuspended and this in no way means that a board should not take professional advice, meet regularly and carefully document all decision making when in financially difficult positions.

In addition, HMRC has issued guidance to the stance it is taking as a creditor in a CVA,  which includes using winding up or bankruptcy petitions in the event of default until 1 July this year.

In addition, HMRC will defer 3 months of contributions that they would otherwise be entitled to under a CVA and it is likely that this will be reviewed depending on the extent of lock down and the impact of COVID-19.

Support form HMRC, the legislative and the pragmatic view of the Courts in respect of the difficulties of complying with insolvency process must be welcomed at such times as these, but care must be taken by a board to protect themselves in respect of retrospective analysis of conduct by wider stakeholders including employees.