A company voluntary arrangement can be an extremely useful business restructuring tool for a company that is essentially viable but is concerned about current outstanding creditors and not being able to meet these immediately. However, what happens if the company voluntary arrangement fails and what are the options open to a company?
The “failure” of a company voluntary arrangement will usually happen when one of the terms of the proposal and arrangement is breached. In essence a company voluntary arrangement is a contract between a company and its creditors and the breach of contract will usually bring the company voluntary arrangement to an end unless it has been modified by agreement with the creditors.
- to establish whether a company voluntary arrangement has actually failed, it is very helpful if the arrangement itself clearly sets out what events will cause a failure of the contract.
- the arrangement should also say what should happen if the arrangement terms have been breached, for example should the supervisor immediately terminate the arrangement if one of the terms has been breached, or should the supervisor try to move the arrangement and the company into an administration or winding up if there has been a breach.
- it is also important that the arrangement details what should happen to the assets that are part of the arrangement if the company voluntary arrangement does fail.
It therefore very much pays for the company voluntary arrangement to be very clear on what failure it is, when the company voluntary arrangement should be terminated and what happens at that point.
For example, in most company voluntary arrangements HMRC will be included as a creditor and they often have standard terms that they want to be included in the arrangement which suggest what terms when breached will cause the failure of the CVA and whether there is an opportunity for breach of terms to be rectified within a certain period of time which will mean that the voluntary arrangement doesn’t fail if that is the case.
It is therefore very important that a company voluntary arrangement terms are as clear as possible as to when a failure will take place and what happens to the creditors and the assets at that time. If it isn’t clear then it will be up to the court to interpret what the creditors and the company were probably intending at the time, which takes up time and money and may not be accurate.
Effect of the end of a company voluntary arrangement on the assets
During the life of the CVA, all assets under the CVA are held on trust for the creditors that are bound by it. Whether this continued if the CVA fails is not so clear. If the voluntary arrangement itself says that the trust also fails then the trust will fail, but if it is silent then courts generally suggest that the trust for the assets continues.
Some company voluntary arrangements state that if the terms of the company voluntary arrangement are breached that the supervisor should petition for a winding up of the company. This may only be under certain specific circumstances rather than a minor breach.
At Francis Wilks & Jones we frequently act on behalf of companies and creditors with regards to company voluntary arrangements. As can be seen from the above, it is imperative that the agreement is as watertight as possible and is set out to cover every eventuality so that both the company and the creditors of the company are fully aware of when the CVA might terminate, what happens if it does, and what happens to the creditors and the assets of the company. If you would like to discuss this further with regard to your own company’s position then contact one of our friendly expert team today.