Company Voluntary Arrangements (CVAs) - Law - CVA with a moratorium
Schedule A1 - Insolvency Act 1986 - Paragraph 35 - Appointment of a CVA Moratorium committee
Why appoint a CVA creditors committee for any extended moratorium period?
Insolvency law is designed, in part, to protect the interests of creditors. However when a company is in financial difficulty and is to propose a Company Vountary Arrangement (CVA) and obtains a moratorium (freeze on enforcement actions by creditors) then throughout that moratorium period creditors do not have any say - their rights have been taken away from them for the period of the moratorium.
Clearly if the moratorium is to be extended at an adjourned meeting of creditors then the creditors must have a quid pro quo. Paragraph 35 of Schedule A1 to The Insolvency Act 1986 permits the creditors to establish a creditors committee at that first adjourned creditors meeting. That committee can have the functions set out by the creditors themselves. This safeguards the position - as the directors of the company are not able to carry on unhindered in the extended moratorium period as they will be subject to the oversight of both the Nominee and the creditors' committee.
The actual wording of Paragraph 35 of Schedule A1 to The Insolvency Act 1986 is reproduced below in bold.
Paragraph 35 - Schedule A1 - Insolvency Act 1986 - CVA's - Appointment of a CVA Creditors' committee
(1) A meeting summoned under paragraph 29 which resolves that the moratorium be extended (or further extended) may, with the consent of the nominee, resolve that a committee be established to exercise the functions conferred on it by the meeting.
(2) The meeting may not so resolve unless it has approved an estimate of the expenses to be incurred by the committee in the exercise of the proposed functions.
(3) Any expenses, not exceeding the amount of the estimate, incurred by the committee in the exercise of its functions shall be reimbursed by the nominee.
(4) The committee shall cease to exist when the moratorium comes to an end.
Directors of a company in financial trouble must expect creditors to appoint a creditors monitoring committee if the Company Voluntary Arrangement (CVA) proposal is not agreed at the first creditors meeting. Between the time of the first and second creditors meeting if the Company wishes the moratorium to continue then the creditors can impose a committee to monitor finances (along with the Nominee) in the extended moratorium period. For free plain english advice on this or any other insolvency topic please contact us.