Company Voluntary Arrangements (CVAs) - Law - CVA with a moratorium
Schedule A1 - Insolvency Act 1986 - Paragraph 23 - Entering into Market contracts is not permitted in moratorium period
Unsurprisingly where a company has obtained the benefit of a moratorium (freeze on creditors enforcement actions) in the period leading up to a Company Voluntary Arrangement (CVA) creditors meeting the directors are not permitted to enter into market contracts or offer collateral security. The reasoning behind this is that the moratorium period is designed to give the company stability to trade in the period before the creditors consider the CVA proposal - If the company were to enter into market contracts or give collateral security in that same period the effect would be to undermine the equal treatment of all creditors and introduce possibly more risk. Paragraph 23 of Schedule A1 to The Insolvency Act 1986 prescribes that both the company and the directors may be punished for breaching these requirements.
The actual wording of Paragraph 23 of Schedule A1 to The Insolvency Act 1986 is reproduced below in bold.
23. (1) If the company enters into any transaction to which this paragraph applies—
(a) the company is liable to a fine, and
(b) if any officer of the company, without reasonable excuse, authorised or permitted the company to enter into the transaction, he is liable to imprisonment or a fine, or both.
(2) A company enters into a transaction to which this paragraph applies if it—
(a) enters into a market contract, . . .
(b) gives a transfer order,
(c) grants a market charge . . . or a system-charge, or
(d) provides any collateral security.
(3) The fact that a company enters into a transaction in contravention of this paragraph does not—
(a) make the transaction void, or
(b) make it to any extent unenforceable by or against the company.
(4) Where during the moratorium a company enters into a transaction to which this paragraph applies, nothing done by or in pursuance of the transaction is to be treated as done in contravention of paragraphs 12(1)(g), 14 or 16 to 22.
(5) Paragraph 20 does not apply in relation to any property which is subject to a market charge, . . . a system-charge or a collateral security charge.
(6) In this paragraph, “transfer order”, “collateral security” and “collateral security charge” have the same meanings as in the settlement finality regulations.
Directors may be punished by imprisonment or fined if, in a Company Voluntary Arrangement moratorium period, they influence the company to give collateral security or other market type transactions.