I have heard that a CVA does not allow a moratorium until creditors approve the proposal?
CVA and Moratorium
Please note that this is a technical page but one that covers very important practical issues when implementing CVAs.
As experts we are often asked questions like these;
- Do we need to apply for a moratorium? How do we protect the company while the proposal is being prepared?
- Why don't insolvency practitioners use the moratorium? Can the company be wound up by creditors before the Arrangement is approved?
KSA Group specialise in building successful proposals, we know a fair bit about them having been responsible for hundreds of deals. We have never used the formal moratorium because in practice its too cumbersome for the company and much too risky for the nominee. We understand that very few moratoria have been applied for and this I think supports our view!
Here we present our views on the actual Formal Moratorium versus "de facto Informal CVA moratorium".
A Very Brief Guide to The (Formal) Moratorium
Under Schedule A1 Insolvency Act 1986 introduced by the Insolvency Act 2000.
IA 2000 introduced the provision for small companies (less than £5.7m turnover for example) in financial difficulty to make voluntary arrangements with their creditors by providing the option of a moratorium to give the firm's management time to put a rescue plan to the company's creditors.
Prior to IA 2000, the only means of providing an equivalent of this protection was for the company to enter into Administration and to set up the CVA after the Administration order was made. Usually this takes several weeks and is much more costly than a standalone proposal
The act says that the directors and nominated supervisor (nominee) need to file certain documents in court. To obtain a moratorium the directors of a company must file in the prescribed format:
- The proposal for the voluntary arrangement
- A statement of the company's affairs (SOFA)
- A statement that the company is eligible for a moratorium
- A statement from the nominee giving his consent to act and
- Critically a statement from the nominee that, in his opinion
- "The proposed voluntary arrangement has a reasonable prospect of being approved and implemented, and the company is likely to have sufficient funds available to it during the proposed moratorium period to enable it to carry on its business".
Further the nominee will summon meetings of members and creditors to consider the proposals.
This nominee's statement is the big issue here. After a few days of talking to a possible candidate for a CVA and preparing the proposal, will the nominee know enough information about the company and its prospects to actually make that statement (that the company is likely to have sufficient funds available to it during the proposed moratorium period to enable it to carry on its business)?
We believe that most nominee's are unlikely to want to take that risk of stating categorically that the company will be have sufficient cash available in the moratorium period. Without knowing accurately the statement of affairs, financial forecasts, debtors, stock, work in progress, balance sheet, orders and so forth they will be worried about putting themselves at risk.
This we believe is the reason why tiny numbers of moratoria have been applied for.
The De facto Informal Moratorium (This Does Work)!
KSA Group specialises in working with debtor companies and their creditors to organise a de facto moratorium. We are appointed by the client and then we talk to every unsecured creditor telling them of the Voluntary Arrangement plan. This buys time so that we can put together the proposals in fine detail.
Creditors are told that historic liabilities WILL NOT be paid for as the company has a serious cashflow problem. In the meantime the company is continuing to trade and wants to buy products or services.
Once appointed to assist the company, KSA Group follows a well worn and successful path.
During the production period we help the client buy goods and services by negotiating pro forma terms. Over a period of weeks the creditors supply on nil risk terms (cash upfront) and this allows them to keep cashflow going and also demonstrates that the company is viable if the proposal was approved.
This pre-CVA trust building is very important and shows that the directors are seriously trying to maximise creditors' interests, which is a legal requirement.
After 3-5 weeks the proposal is filed at court (see the detailed guide here) and the trade creditors generally support because they want to recover debts and also keep the customer trading with them on nil risk terms.
Due to the Covid Crisis the Government has enacted the Corporate Insolvency and Governance Act 2020 that allows a 20 day moratorium on action against companies affected by the pandemic. The moratorium will require an insolvency practitioner to state that they think the company can be rescued. Call us on 0800 9700539 if you want to talk about this.
What if a Creditor Starts Legal Actions?
In 1995, case law was reported that provides a very powerful argument. Re Dollar Land (Feltham) & Ors  BCC 740 reported that the court decided that a winding-up order should be rescinded if there was a real prospect that the proposals would be approved by the company's creditors. In other words let the majority decide.
We use this argument to STOP petitions being issued in the first place, saving the creditor money for costs and fees and also removing the risk of the petition against the client.
If a petition is already issued before we're appointed to assist, and a hearing date is due before we can file the meeting notice, we talk to the plaintiff to get them to stop their actions as above, or to prevent the advertisement of the petition. Usually the petitioner is the Crown (HMRC).
Most HMRC petitions are stopped or adjourned in this way so we can get on with the proposal production. This is a powerful approach that is built on common sense and a case that said "look is it equitable for one creditor to knock a company down when all the other creditors may agree a CVA"? Obviously not and we've defeated petitions in courts across the UK this way.
If the petitioner will not withdraw or threatens advertisement the company could use an application to Court to request a hearing adjournment and seek a Validation order from the Court saying that the hearing is adjourned and the company can progress the proposal to filing and creditors meeting.
The bank account is always frozen by the bank if the petition is advertised, so by obtaining the validation order the bank can then reopen the bank facilities.
So we believe that by careful discussions and complete honesty with creditors, using powerful case law and common sense we can effect a de facto moratorium that works in virtually every case.
Want to know more? Have a specific question about this page? Please call the UK's leading company voluntary arrangement experts on 08009700539.
Worried about poor cashflow? Feel you have got into a bit of a mess? Covid-19?, How to pay wages on pay day? For reassuring advice on a range of issues download our free Ultimate Guide For Worried Directors today. Or just call us on 0800 9700539
Please note that the guide includes updates due to Covid-19 For instance there have been some changes to insolvency legislation that limits creditors actions. A new 20 day moratorium for distressed businesses has also been introduced.