Company Voluntary Arrangements (CVAs) - Law - CVA with a moratorium
Schedule A1 - Insolvency Act 1986 - Paragraph 40 - Challenge of directors' actions in the CVA moratorium period
Challenges to directors' actions in the CVA moratorium period
From previous web pages it will be recalled that one type of Company Voluntary Arrangement (CVA) involves a moratorium (a freeze on creditors enforcement actions) for the entire period ahead of the CVA meetings to consider the CVA proposal. The law ensures that directors of the company cannot engage in unfairly prejudicial behaviour in the moratorium period through the provisions set out in Paragraph 40 of Schedule A1 to The Insolvency Act 1986. That Paragraph provides that any creditor or member of the company can challenge the directors' actions by applying to Court in the moratorium period for the Court to make whatever Order the Court considers appropriate.
The actual wording of Paragraph 40 of Schedule A1 to The Insolvency Act 1986 is reproduced below in bold.
Paragraph 40 - Schedule A1 - Insolvency Act 1986 - Challenges to actions of directors in a CVA moratorium period
(1) This paragraph applies in relation to acts or omissions of the directors of a company during a moratorium.
(2) A creditor or member of the company may apply to the court for an order under this paragraph on the ground—
(a) that the company’s affairs, business and property are being or have been managed by the directors in a manner which is unfairly prejudicial to the interests of its creditors or members generally, or of some part of its creditors or members (including at least the petitioner), or
(b) that any actual or proposed act or omission of the directors is or would be so prejudicial.
(3) An application for an order under this paragraph may be made during or after the moratorium.
(4) On an application for an order under this paragraph the court may—
(a) make such order as it thinks fit for giving relief in respect of the matters complained of,
(b) adjourn the hearing conditionally or unconditionally, or
(c) make an interim order or any other order that it thinks fit.
(5) An order under this paragraph may in particular—
(a) regulate the management by the directors of the company’s affairs, business and property during the remainder of the moratorium,
(b) require the directors to refrain from doing or continuing an act complained of by the petitioner, or to do an act which the petitioner has complained they have omitted to do,
(c) require the summoning of a meeting of creditors or members for the purpose of considering such matters as the court may direct,
(d) bring the moratorium to an end and make such consequential provision as the court thinks fit.
(6) In making an order under this paragraph the court shall have regard to the need to safeguard the interests of persons who have dealt with the company in good faith and for value.
[(7)Sub-paragraph (8) applies where—
[(a)the appointment of an administrator has effect in relation to the company and that appointment was in pursuance of—
(i) an administration application made, or
(ii) a notice of intention to appoint filed,
before the moratorium came into force, or]
(b) the company is being wound up in pursuance of a petition presented before the moratorium came into force.
(8) No application for an order under this paragraph may be made by a creditor or member of the company; but such an application may be made instead by the administrator or (as the case may be) the liquidator.]
Directors of a company that have prepared a CVA proposal and have called a creditors meeting to consider that proposal cannot engage in unfairly prejudicial behaviour in the moratorium period ahead of the creditors meeting - without risk of a creditor or member making a challenge application to Court regarding the prejudicial behaviour complained of.