Section 5 of The Insolvency Act 1986 - Company Voluntary Arrangements (CVAs)

The effect of approval of a CVA proposal at shareholders' and creditors' meetings

 

 

 

Section 5 of The Insolvency Act addresses the effect of the approval of a CVA and answers the question: "who is bound by the company voluntary arrangement (CVA) proposal (after approval at a creditors meeting?") The failure to list all creditors in a CVA may be a relativlely common occurrence when the records of a company are not completely up to date at the time a CVA proposal is prepared.

 

Surprisingly, such creditors who do not even receive notice of the meeting are still bound by the other creditors' decision to approve the CVA. [Section 5 (2) (b) (ii)]. You might imagine that if you were such a creditor you may not be very happy that your hands are apparently tied and subject to the CVA terms when you have not had a chance to vote on the Company Voluntary Arrangement. If you are in such a position you may consider applying to Court under the provisions of Section 6 of The Insolvency Act 1986 - but beware the 28 day time limit.

 

Section 5 of The Insolvency Act 1986 is also the section that provides a judge with the power to orderly dispose of existing winding up or administration questions should the company concerned have been in liquidation or administration immediately before the CVA was approved.

 

 

The actual wording of Section 5 of The Insolvency Act 1986 is shown below in bold.


5, Effect of Approval

(1) This section applies where a decision approving a voluntary arrangement has effect under section 4A.]

 

(2) The . . . voluntary arrangement —

(a) takes effect as if made by the company at the creditors’ meeting, and

[(b) binds every person who in accordance with the rules—

(i) was entitled to vote at that meeting (whether or not he was present or represented at it), or

(ii) would have been so entitled if he had had notice of it, as if he were a party to the voluntary arrangement]


(2A) If—

(a) when the arrangement ceases to have effect any amount payable under the arrangement to a person bound by virtue of subsection (2)(b)(ii) has not been paid, and

(b) the arrangement did not come to an end prematurely,

the company shall at that time become liable to pay to that person the amount payable under the arrangement.]


(3) Subject as follows, if the company is being wound up or [is in administration], the court may do one or both of the following, namely—

(a) by order stay or sist all proceedings in the winding up or [provide for the appointment of the administrator to cease to have effect];

(b) give such directions with respect to the conduct of the winding up or the administration as it thinks appropriate for facilitating the implementation of the . . . voluntary arrangement.


(4) The court shall not make an order under subsection (3)(a)—

(a)at any time before the end of the period of 28 days beginning with the first day on which each of the reports required by section 4(6) has been made to the court, or

(b) at any time when an application under the next section or an appeal in respect of such an application is pending, or at any time in the period within which such an appeal may be brought.


[(5) Where the company is in energy administration, the court shall not make an order or give a direction under subsection (3) unless—

(a) the court has given the Secretary of State or the Gas and Electricity Markets Authority a reasonable opportunity of making representations to it about the proposed order or direction; and

(b) the order or direction is consistent with the objective of the energy administration.


(6) In subsection (5) “in energy administration” and “objective of the energy administration” are to be construed in accordance with Schedule B1 to this Act, as applied by Part 1 of Schedule 20 to the Energy Act 2004.]

 

From Section 5 of The Insolvency Act 1986 it is apparent that a Company Voluntary Arrangement (CVA) while "approved" at the CVA creditors' meeting is still open to challenge for a set period if you, as a creditor, have not been notified of the CVA creditors' meeting.