How do we collect debt from a company in a Voluntary Arrangement
Unfortunately, with the challenging trading conditions in which many companies are finding themselves, the use of procedures such as company voluntary arrangements is likely to become increasingly common. This is not good news for creditors who will find themselves with unpaid accounts.
If a company is struggling to pay its debt, it may be at risk of becoming insolvent and going into liquidation. One method of avoiding liquidation is Company Voluntary Arrangement (CVA). A CVA can be used to formally reschedule the company’s debts allowing the business to avoid liquidation (or winding up) and continue to trade. The arrangement involves the company’s creditors accepting a reduced sum in settlement of their outstanding debt which is then payable in instalments normally over a 3-5 year period. Once the company voluntary arrangement is completed, any outstanding debt is written off. This leaves the company in a position where it is debt free and can continue to trade without the burden of its legacy debt.
Obviously the company voluntary arrangement helps the business struggling with debt as it remains solvent and in a position to trade on into the future. Creditors also benefit as they will be paid a portion of the debt they are owed which will normally be greater than that which they would receive if the company was liquidated. Creditors also have the ability to continue to maintain trade with the company, albeit that this may well be on a cash basis moving forward.
For a Company Voluntary Arrangement to be in place, an insolvency practitioner must produce a proposal of the arrangement for all of the creditors to review. A creditor’s meeting is held where each creditor is able to cast their vote for or against the proposal. If 75% of the value of the creditors who vote agree to the proposal, then it becomes legally binding on all of the creditors whether they voted yes or not. This means that none of the company’s creditors will receive full payment of their debt, and none of the creditors are allowed to take any further action against the company to try and recover any more of their debt.
Insolvency Service figures for Q2 2009 show an increasing number of companies facing insolvency and that liquidations rose by 40% over the same quarter in 2008. It is therefore increasingly likely that businesses will face bad debts because their customers go into liquidation, a company voluntary arrangement or administration.
— Can you challenge the Company Voluntary Arrangement?
If one of your customer’s enters into a company voluntary arrangement but you believe that you were not made aware of the creditor’s meeting and therefore did not have a chance to vote, there is unfortunately very little that you can do. The insolvency practitioner is duty bound to make all reasonable efforts to contact all of the company’s creditors. However, they will generally operate on the “proof of posting is proof of delivery” rule. As such, if they believe they sent notice to all known creditors, this will generally be seen as enough of a reasonable attempt to contact all creditors.
It is possible for a creditor to challenge a Company Voluntary Arrangement. For this, they would have to show their interests had been unfairly prejudiced or there had been some material irregularity at the creditor’s meeting. In reality, unless the aggrieved creditor’s vote, if it had been cast, would have resulted in a different outcome of the creditor’s meeting, the challenge is unlikely to succeed. In general, the only time when a debt would not be bound into an agreed CVA is if it was incurred by the company after the CVA was approved. The creditor in question is then at liberty to take legal action against the company to recover their debt in the normal way.
Unfortunately, with the difficult trading conditions in which many companies are finding themselves, the use of procedures such as company voluntary arrangements is likely to become increasingly common. This is bad news for creditors who will find themselves with unpaid accounts. However, a reduced return within the parameters of a company voluntary arrangement is arguably better than the zero return which is the likely outcome for creditors if a company is put into liquidation.
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Derek Cooper is Managing Director of Cooper Matthews Limited
More details about Voluntary Arrangement options at company-voluntary-arrangement
Derek’s experience of both corporate insolvency and business management puts him in a position to be able to understand the challenges facing businesses in today’s economic environment.
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