Company Voluntary Arrangement with a Moratorium

From 1st January 2003 Directors of a company that propose a Company Voluntary Arrangement (“CVA”) can gain the benefit of a freeze on all creditors enforcement actions - even before the creditors have an opportunity to consider the Company Voluntary Arrangement proposal that is to be made.

The freezing period is also called the period of the moratorium.

The breathing space provided by the freezing of actions by aggressive creditors enables the directors to work with their accountants, insolvency practitioners or other advisors, to prepare a plan for the future. This plan is then reflected in the Company Voluntary Arrangement (“CVA”) proposal.

The plan might involve:

• monthly payments to creditors over a period of months or years and/or

• a reduction in staff with the redundancy entitlements being first paid by the government and then repaid to the government by the company over a period and/or 

• the closure of an outlet and/or

• the dropping of a product or service etc. etc.

With power comes responsibility. Directors do not obtain the freeze on creditors actions arising from a CVA with a moratorium without having to exercise increased levels of responsibility in the period leading up to the day of the decision procedure. The objective of this insolvency law is to ensure that creditors are not abused in the moratorium or freezing period.

Directors may be fined, or for some of the following offences, imprisoned for defaults such as:

• not recording on every invoice, letterhead, order etc. the fact that a moratorium is in force,

• obtaining credit of more than £250 without informing the person from whom credit is taken that a moratorium is in force,

• disposing of company assets in circumstances which do not constitute the ordinary course of business of the company,

• paying certain pre moratorium creditors,

• without appropriate consent disposing of assets subject to hire purchase or other security.

It is not only the directors who have greater responsibility in the moratorium period - the Nominee also has to have a greater involvement in monitoring the company's activities.

As well as "reporting" to the court and to the creditors his opinion that the proposed voluntary arrangement has a reasonable chance of being approved and implemented the Nominee also has to investigate the forecast cash-flow and monitor the Company’s actual achievements in the moratorium period.  The nominee must check that:

"a company is likely to have sufficient funds during the moratorium to enable it to carry on its business".

This is an important extra duty of the Nominee - particularly when many businesses will need to trade "cash with order" during the moratorium period.

While the moratorium continues the Nominee must keep a watchful eye on developments. The Nominee must withdraw his consent to act if:

• the directors fail to provide him with any information he requests.

• he forms the opinion that the proposed arrangement no longer has a reasonable prospect of being approved and implemented or
  that the company will not have sufficient funds to enable it to carry on in business.

 
This eventuality could arise for instance if at the commencement of the moratorium it was considered that the company could raise finance from say factors or asset lenders, but part way through the moratorium no such offers of finance were obtained. In those circumstances the moratorium comes to an end and the Nominee must advise the court, the creditors  and the London Gazette, accordingly.

All this shows that a Nominee in respect of a Company Voluntary Arrangement must be independently minded as a result not only of professionalism but also as a result of direct statute law.

There are also special rules about publishing and disclosure of the moratorium.  These rules are comprehensive and include:

• the proposal and the Nominee's report must be filed with the court (before the moratorium can begin).

• advertisement in the London Gazette.

• one advertisement in a local newspaper.

• notification to the Registrar of Companies.

• notification to anybody who has issued a winding up petition or to anybody who has instructed bailiffs.

• advertising in the London Gazette, again, when the moratorium comes to an end.

• advertising in a local newspaper, again, when the moratorium comes to an end.

• notifying the Registrar of Companies when the moratorium comes to an end.

All of these disclosure requirements have the effect of ensuring that the existence of the moratorium becomes known to the business community in which the company operates so that there is little risk of the company taking credit when the company has the benefit of being able to prevent any creditor taking action against it.

The directors responsibility is to live up to each and every word of their Company Voluntary Arrangement proposal. Make sure therefore that you are happy with the wording of your company's proposal and that what is being proposed is realistically achievable.

It is the supervisors duty to enforce the "contract" made between the company and it's creditors.

The contract consists of two documents:

• the first is the proposal document itself which sets out the main terms of the contract

• the second document is the chairman's report on the decision procedure at which the proposal document was considered and voted upon by the creditors. In most cases the creditors will resolve to amend the proposal by making "modifications" to it and those modifications will be set out in the chairman’s report.

If you would like further information on Company Voluntary Arrangements (“CVAs”) with or without a moratorium, please contact Chris Parkman of Purnells on 01326 340579 or by emailing chris@purnells.co.uk.