A company that cannot pay its debts on the original terms does not have to choose between paying in full immediately and being wound up. A company voluntary arrangement (CVA) lets the company propose a new repayment plan to its creditors and keep trading while it works through it.
What a Company Voluntary Arrangement Actually Is
Under section 625 of the Insolvency Act, 2015, the directors of a company may propose to the company and its creditors a voluntary arrangement under which the company enters into a composition in satisfaction of its debts or a scheme for arranging its financial affairs. The proposal must provide for a supervisor to oversee its implementation, and only an authorised insolvency practitioner may be appointed to do so. Unlike administration, the Act does not hand the company to an administrator; the board proposes the arrangement and the supervisor supervises its implementation.
The proposal can also be made by an administrator if the company is under administration (section 625(4)), so the two procedures can be used in sequence: a company can use administration to stabilise its position and then put a company voluntary arrangement to creditors.
Getting a Company Voluntary Arrangement Approved
The proposal is put to a meeting of the company and a meeting of its creditors (sections 627 and 628). Under section 629(2), it is approved if a majority of the members present at the company meeting and a majority in number and value of each group of creditors present at the creditors’ meeting vote in favour. If the members do not approve but each group of creditors does, the creditors’ approval is sufficient.
Approval at the meetings is not the end of the process. Under section 629 an application is made to the Court, which may make an order approving the proposal, with or without modifications. The application deadline is thirty days after the meetings unless the Court extends it. Under section 630(1), the proposal takes effect as a voluntary arrangement on the day after the Court’s order, or a later date the order specifies.
Who Is Bound
Once it takes effect, a voluntary arrangement binds every member and every creditor, including secured and preferential creditors, who was entitled to vote at the relevant meeting, whether or not they attended or voted, and anyone who would have been entitled to vote had they received notice (section 630(2)). That binding effect is the whole point: it stops individual creditors from picking the company off one lawsuit at a time while the others wait. It also means a small trade creditor that ignores the process is still bound by the terms, so the time to engage is while the proposal is being voted on.
Who Cannot Use the Pre-Insolvency Moratorium
Part IXA of the Act separately provides a pre-insolvency moratorium that can be used to prepare a voluntary arrangement. Under section 639, a company licensed under section 5 of the Banking Act to carry on banking, financial or mortgage finance business, and a company registered under section 19 of the Insurance Act, is ineligible for it. Section 640 also makes companies already under administration or in liquidation ineligible. Banking, finance and insurance companies likewise cannot be placed in administration (section 529).
What a Company Voluntary Arrangement Does Not Do
A CVA restructures what the company owes; it does not erase why the company got into difficulty. Where the underlying business is not viable even on better repayment terms, a CVA usually just delays the harder conversation. It works best where the business itself is sound and the debt structure, not the operations, is the real problem.
The Proposal Process in Practice
In practice, the directors instruct an authorised insolvency practitioner to help prepare a proposal that sets out what creditors are owed, what is being offered instead, and why the business justifies the plan. Because the practitioner will be the supervisor if the proposal is approved, they will test whether it is workable before it goes to creditors. Creditors then vote at a meeting convened under section 627, the company meeting is held, and the Court application follows.
Challenging an Approved Arrangement
A creditor who voted against the proposal, or who was not given proper notice of the meeting, is not without recourse. Section 631 allows certain persons, including those entitled to vote at the meetings and the supervisor, to apply to the Court on two grounds: that the arrangement detrimentally affects the interests of a creditor, member or contributory, or that a material irregularity occurred at or in relation to either meeting. Strict time limits apply, so a challenge needs to be brought quickly rather than raised after the arrangement is underway. If the Court is satisfied as to a ground, it can revoke or suspend the approval decision or direct the supervisor to convene further meetings to consider a revised proposal.
What Happens If the Company Breaches the Arrangement
A CVA is only as good as the company’s ability to keep to it. Under section 635, an arrangement that ceases to have effect before it has been fully implemented in respect of everyone bound by it ends prematurely. The company is then usually back to the options it started with, administration or liquidation, with less goodwill from creditors who have already given it one restructured chance.
Company Voluntary Arrangement or Administration
The two serve different situations. A CVA suits a company whose operations are fundamentally sound and where directors retain enough creditor trust to keep running the business. Administration suits a company where the position is more uncertain and an independent administrator’s investigation, backed by the statutory moratorium, is worth the loss of day-to-day director control. Treating these as a strict either-or choice from day one can close off a path that would otherwise have worked.
How We Can Help
Clay & Associates Advocates advises companies and directors on proposing and negotiating company voluntary arrangements, and on whether a CVA is the right tool compared with the other options. See also our overview of the options before liquidation. Contact our Corporate & Commercial team to discuss a proposal.
Sources: Insolvency Act, 2015 (No. 18 of 2015), sections 529, 625, 627 to 631, 635, 639 and 640.
Frequently asked questions
Do all creditors have to agree to a company voluntary arrangement?
No. Once the required majorities approve it and it takes effect after the Court’s order, it binds everyone entitled to vote, including those who voted against it or did not vote (sections 629 and 630).
Do the directors lose control of the company during a CVA?
The Act does not replace the board with an administrator. The directors make the proposal and an authorised insolvency practitioner supervises its implementation (section 625).
Can a bank or insurer use the pre-insolvency moratorium?
No. Licensed banks, financial businesses and mortgage finance companies, and registered insurers, are ineligible (section 639).
Can a creditor challenge an approved arrangement?
Yes, on the grounds in section 631, namely detrimental effect on its interests or a material irregularity at the meetings, within the time limits that section sets.
