Company Voluntary Arrangement (CVA) explained.

The CVA was introduced by the Insolvency Act 1986 as a flexible alternative to formal liquidation or receivership: a way for a company in financial difficulty to reach a binding compromise with its unsecured creditors and continue trading, rather than be wound up. The statutory framework is short. Sections 1 to 7B of the Act, supplemented by Part 2 of the Insolvency (England and Wales) Rules 2016, set out the entire procedure. There is no minimum or maximum payment percentage, no fixed duration, and very few constraints on what the proposal can contain.

Three actors run the procedure. The directors remain in control of the company throughout (this is the defining feature of a CVA, and what distinguishes it from administration or liquidation). The nominee is a licensed insolvency practitioner who reviews the directors' proposal, comments on its viability, files it at court, and convenes the creditors' decision procedure. If the proposal is approved, the nominee normally becomes the supervisor: monitoring the company's compliance with the agreed payments, reporting to creditors annually, and reporting failure if the company defaults.

A CVA only binds unsecured creditors. Secured creditors (typically the bank holding a debenture) and preferential creditors (HMRC for PAYE/NICs/VAT/CIS, employees for wages and holiday pay) must consent separately or be paid in full. In practice this means the bank is usually consulted before the proposal is filed, and HMRC is approached as a single very large unsecured creditor whose vote alone may decide the outcome.

The proposal is the central document of a CVA. It explains why the company is insolvent, what the directors believe the company can pay if creditors agree to the deal, and what each class of creditor receives. The minimum contents are set by rule 2.3 of the Insolvency Rules 2016 and include:

• An explanation of why the directors think a CVA is desirable and why creditors should accept it;
• A statement of the company's assets, with estimated values for the purpose of the CVA;
• A statement of the company's liabilities, distinguishing between secured, preferential, and unsecured;
• The nature and amount of the company's business;
• The proposed term of the arrangement and the source of the contributions (trading profits, asset realisations, a third-party contribution);
• The proposed dividend to each class of unsecured creditor (often expressed as pence in the pound);
• The treatment of any contracts the company wishes to modify or terminate (commonly commercial leases);
• The proposed identity and remuneration of the nominee and supervisor;
• An estimated comparison with the outcome on a liquidation, so creditors can assess whether the CVA is better than the alternative.

The nominee reviews the proposal and reports to the court within 28 days under section 2 of the Act, stating whether in the nominee's opinion a creditors' meeting should be convened to consider it. If yes, the meeting is convened (usually a virtual meeting or a deemed-consent procedure under the 2016 Rules). Creditors receive the proposal and the nominee's report at least 14 days before the decision date.

The vote on a CVA is a value-weighted vote of unsecured creditors. Each creditor's vote weighs in proportion to the value of its admitted claim, not as one creditor one vote. The thresholds are:

• Primary test (rule 15.34(3)). At least 75% of the total value of the unsecured creditors who actually respond to the decision procedure must vote in favour. Creditors who do not vote are excluded from both numerator and denominator.
• Connected-creditor test (rule 15.34(4)). The proposal is rejected, even if the 75% test is met, if more than 50% of the total value voting against came from creditors who are not connected to the company. The practical effect is that connected creditors (directors, shareholders, group companies, family members) cannot vote their own arrangement through if a majority by value of unconnected creditors is against it.

The connected-creditor test was strengthened in the 2016 Insolvency Rules in response to a perception that some CVAs were being approved on the back of large connected-creditor votes (typically a director loan account or an intra-group balance) over the objections of trade suppliers and landlords. The drafting bites in both directions: a CVA can also fail the connected-creditor test if the company has very large connected-creditor debts that creditors expect to be repaid in full while trade creditors are compromised.

A creditor who has not received notice of the meeting, or whose claim has been wrongly valued or rejected for voting purposes, may seek a declaration from the court. Most CVAs do not face procedural challenges of this kind, but the principal exception is the use of "expert valuations" of landlord claims for unexpired-term rent: landlords frequently object that the discount applied for voting purposes understates their loss.

Once the result of the creditors' decision is reported to the court, any creditor (whether or not they voted), and the nominee or supervisor, has 28 days to apply to the High Court to challenge the CVA. Section 6 of the Insolvency Act 1986 limits the grounds to two:

• Unfair prejudice. The CVA unfairly prejudices the interests of a creditor, member or contributory of the company. The classic case is a CVA that treats one creditor or class of creditors materially worse than others without a principled reason for the difference.
• Material irregularity. There has been a material irregularity at, or in relation to, the meeting that approved the CVA. Examples include creditors not given notice, claims wrongly valued for voting, or material information omitted from the proposal.

The court has wide remedies: it can revoke or suspend the approval, direct that a further meeting be summoned, or make other directions. Commercial disagreement with the terms of the CVA is not, on its own, grounds for challenge. The bar is high.

The dividend in a CVA varies widely by industry, by company, and by the alternative that creditors face. A few representative ranges:

• Retail and hospitality CVAs (2018 onwards). Typically segment creditors by category: continuing trade suppliers paid in full or near full to keep operations running; landlords on identified categories of underperforming sites compromised to 25p to 50p in the pound; landlords on closing sites compromised more heavily or terminated; pre-CVA HMRC arrears typically paid in full or near full.
• Distressed corporate CVAs. A single dividend across all unsecured creditors, commonly in the 10p to 30p range, paid over three to five years from trading contributions.
• Director-funded CVAs. A third-party contribution from a director or related party, with creditors typically offered 20p to 50p depending on the contribution size.

The proposal must include an "estimated outcome statement" comparing the CVA dividend with what creditors would receive on a liquidation. The CVA dividend is supposed to be materially better than the liquidation alternative; if not, creditors have no commercial reason to approve it. The estimated outcome on a liquidation often shows the trade tier recovering 1p to 3p in the pound (after costs, preferential creditors, and floating-charge holders), which is the baseline against which CVA dividends of 20p or 30p look attractive.

Industry studies and Insolvency Service data consistently show that a substantial proportion of approved UK CVAs do not run to completion. Published estimates of the failure rate vary by methodology and time horizon, but a range of 40% to 60% is widely cited. The dominant failure mode is the same one that drove the company into difficulty in the first place: trading conditions do not improve as projected, contribution payments are missed, the supervisor reports failure to creditors, and the company tips into liquidation or administration.

Other failure modes include:

• Successful section 6 challenge. The court revokes the approval, usually on unfair-prejudice grounds. Recent examples include Carraway Guildford (Nominee A) Ltd v Regis UK Ltd [2021] EWHC 1294 (Regis CVA set aside).
• Loss of secured-lender support. The bank withdraws facilities mid-CVA, leaving the company without working capital.
• Operational shock. The loss of a major contract, a key customer's insolvency, or a regulatory event that the proposal did not anticipate.
• Variation rejected. The company seeks creditor approval for a modified proposal and does not achieve the 75%/50%-unconnected thresholds a second time.

On failure, the supervisor reports to creditors and usually petitions for the company's compulsory winding up. Creditors revert to their pre-CVA position (less any sums received under the arrangement) and rank as unsecured creditors in the liquidation. The CVA dividend received in part-payment is normally retained by the creditor.

The modern wave of large retail and hospitality CVAs (2018 onwards) has produced a body of High Court case law on what is and is not permissible in a CVA proposal, particularly where commercial leases are compromised.

• Discovery (Northampton) Ltd v Debenhams Retail Ltd [2019] EWHC 2441 (Ch). Landlords challenged the Debenhams CVA on five grounds, including unfair prejudice in the differential treatment of compromised and uncompromised landlords. The challenge largely failed; the CVA was upheld. The judgment is the leading modern authority on the limits of rent-compromise CVAs.
• Lazari Properties 2 Ltd v New Look Retailers Ltd [2021] EWHC 1209 (Ch). Landlord challenges to the New Look CVA were dismissed; the court reaffirmed the Debenhams analysis. Differential treatment of landlords by site category was held permissible provided the differentiation was justified.
• Carraway Guildford (Nominee A) Ltd v Regis UK Ltd [2021] EWHC 1294 (Ch). The Regis CVA was set aside on unfair-prejudice grounds. The court held that the differential treatment of one category of landlord (where rent was reduced to nil while connected creditors and certain other classes were treated more favourably) was unjustified.
• Re Caffe Nero Group Ltd [2020] EWHC 3119 (Ch). The court refused to grant a moratorium under the new Part A1 regime in support of a CVA proposal where the secured creditor objected and the proposal did not adequately protect that creditor's position.

Together these cases say: rent compromise within a CVA is permissible; differential treatment of creditor classes is permissible if justified; a CVA that treats one class materially worse than others without a principled basis will be set aside as unfair prejudice; and the supporting Part A1 moratorium is not a free pass for the company over secured creditors.

What is a Company Voluntary Arrangement (CVA)?

A Company Voluntary Arrangement is a formal, legally-binding deal between an insolvent (or near-insolvent) UK company and its unsecured creditors to pay back a percentage of its debts over a period of time, usually three to five years. It is set out in Part I of the Insolvency Act 1986. The company continues trading throughout; existing management stays in place; a licensed insolvency practitioner (the supervisor) monitors compliance. If 75% by value of voting creditors approve the proposal (with an additional 50%-of-unconnected-creditors test), the CVA binds every unsecured creditor, including those who voted against and those who did not vote at all.

How does a CVA work?

The directors instruct a licensed insolvency practitioner (the nominee) to draft a proposal that sets out what the company owes, what it can realistically pay, how much each class of creditor will receive, and over what timeframe. The nominee files the proposal at court and convenes a creditors' decision procedure (usually a virtual meeting or a deemed-consent procedure under the Insolvency Rules 2016). Creditors vote on the proposal. If 75% by value vote in favour (with the additional 50%-of-unconnected test), the arrangement is approved and becomes binding. The nominee then becomes the supervisor and oversees the company's payments under the arrangement until it completes or fails.

How are CVAs approved?

A CVA is approved if 75% or more by value of the unsecured creditors who actually vote approve the proposal. A second test then applies under rule 15.34 of the Insolvency (England and Wales) Rules 2016: more than 50% of the value voting in favour must come from creditors who are not 'connected' to the company (directors, shareholders, group companies, family members). The second test exists to stop connected creditors voting their own arrangements through. If either test fails, the CVA is rejected. A creditor can also challenge an approved CVA in court within 28 days of the report of approval under section 6 of the Insolvency Act 1986.

Can creditors reject a CVA?

An individual creditor can vote against a CVA, but is bound by the outcome if 75% of voting creditors by value approve it. Approval is collective. A creditor who voted against can challenge the approval in the High Court within 28 days, but only on two grounds set out in section 6 of the Insolvency Act 1986: that the CVA unfairly prejudices the interests of a creditor or class of creditors, or that there has been some material irregularity at or in relation to the creditors' meeting. Disagreement with the commercial terms is not, on its own, grounds for challenge.

What does a CVA mean for creditors?

An unsecured creditor in a CVA usually receives a fraction of the original debt, paid in monthly or quarterly instalments over three to five years, in full and final settlement. The fraction varies widely: a typical retail CVA might offer 30p in the pound on landlord arrears and 100p on continuing trade suppliers; a distressed corporate CVA might offer 10p or less across the board. The creditor cannot pursue the company for the balance during the arrangement. If the company defaults, the supervisor may petition for the company's winding up, at which point creditors revert to their original position less any payments received under the CVA.

How long does a CVA last?

A typical CVA runs for three to five years, although the statute imposes no fixed maximum. The duration is set by the proposal itself and approved by the creditors' vote. Shorter CVAs (one to two years) are uncommon because the rationale is usually to spread restructured payments over enough time to make them affordable. Longer CVAs (over five years) are uncommon because the creditor risk of default rises over time. Most CVAs end one of three ways: successful completion (the company has paid what it promised), variation (the proposal is modified mid-term with fresh creditor approval), or termination on default (the supervisor reports failure to creditors).

What is the difference between a CVA and administration?

A CVA keeps the existing management in control and the company trading; the supervisor only monitors. Administration places the company under the control of an administrator (a licensed insolvency practitioner) who runs it for the benefit of creditors as a whole, often with the aim of selling the business as a going concern. A CVA binds only unsecured creditors; secured and preferential creditors must consent separately or be paid in full. Administration's statutory moratorium suspends all enforcement action by creditors; a CVA on its own has no automatic moratorium, although a separate Part A1 moratorium (introduced by CIGA 2020) can be used alongside it. Many large UK restructurings now combine the two: administration to effect the operational changes, then a CVA or scheme of arrangement to bind dissenting creditors.

How often do CVAs fail?

Industry studies and Insolvency Service data consistently show that a substantial proportion of UK CVAs fail before completion, often estimated at between 40% and 60% depending on the study and the time horizon. Failure most often follows the company's inability to meet the agreed contribution payments, typically because trading conditions deteriorate after approval. On failure, the supervisor reports to creditors and usually petitions for the company's compulsory winding up. Creditors then revert to their pre-CVA position (less any sums received under the arrangement) and rank as unsecured creditors in the liquidation.

Can a CVA reduce rent on commercial leases?

Yes, and this has been the most controversial use of CVAs in recent UK practice. Retail and hospitality CVAs since 2018 (Debenhams, House of Fraser, New Look, Regis, Caffè Nero and others) have routinely proposed reducing future rent on identified categories of leased premises, compromising landlords' contractual rent. Landlords have challenged several of these in the High Court. The Debenhams CVA was upheld in Discovery (Northampton) Ltd v Debenhams Retail Ltd [2019] EWHC 2441. The Regis UK CVA was set aside in Carraway Guildford (Nominee A) Ltd v Regis UK Ltd [2021] EWHC 1294 on grounds of unfair prejudice. The current judicial position is that rent compromise within a CVA is permissible, but the proposal must give compromised landlords a 'fair' deal compared with creditors who are not compromised.