R3 publishes new standard form COVID-19 CVA for SMEs

Introduction

This note provides a brief summary of the standard form company voluntary arrangement (CVA) recently published by R3, the trade association for insolvency and restructuring professionals - see link here.

The free resource, drafted in consultation with a broad range of insolvency professionals, is directed at small and medium sized enterprises (SMEs) experiencing financial difficulties due to the Covid-19 pandemic. The aim is for such company to return to profitability without the need to implement another form of insolvency process, such as administration or liquidation.

Overview

R3 has published (1) a standard form CVA proposal of the directors of the relevant company and (2) a set of standard conditions for a CVA, appended to the proposals in Appendix 1. The proposal and conditions together form the arrangement and are to be read together with the CVA provisions set out in the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016.  R3 intend to prepare different versions of the standard form proposal and conditions to reflect the jurisdiction-specific rules and legislation in Scotland and Northern Ireland.

The conditions are based upon the existing standard conditions drafted by R3 for individual voluntary arrangements. Any agreed amendments to the standard conditions will appear in Appendix 2 to make it easier for creditors with multiple debtors to compare their proposals.

The documents are not intended to be a templates nor should they override specific professional advice. Rather, they are intended to provide a foundation for proposals to be developed by the directors of the relevant company, saving time and costs and thereby making CVAs more accessible to the SME market.

It should be noted that other individuals have the ability to propose a CVA, such as an administrator or liquidator appointed to the relevant company - the R3 template does not cater for this scenario.

Key features

Key features of the new standard form CVA include:

• a breathing space period to allow the company time to restructure without fear of creditor action (such as six months); and

• a delayed period (for example twelve months) for full payment of company's debts in line with the CVA (and to commence only once the breathing space period has elapsed).

Proposed time periods have not been set - rather the company and its creditors may negotiate between themselves.

The standard also includes Covid-specific provisions to assist SMEs, such as: 

• an additional introductory period (of a maximum of three months) for companies that have yet to resume trading as a result of the outbreak;

• the ability to suspend payments if the business is located in a local lock-down area; and

• the ability to seek further decisions if more significant changes become necessary due to the Covid-19 pandemic.

As well as the conditions, the appendices to the proposals include statutory information that every company is obliged to provide. In addition, an explanatory note on how the company has been impacted by Covid-19 and details of whether any employees have been furloughed are to be included in Appendix 5.

Binding of creditors

To become effective, a majority of three-quarters or more in value of creditors must vote in favour of the CVA proposal. However, the arrangement will not be effective if those voting against it included more than half of the total value of creditors who are not connected with the company. 

If the proposal is approved, it will bind all unsecured creditors, whether or not they received notice of the relevant decision procedure to approve it (and regardless of whether they voted for or against it or did not vote at all). As with all CVAs, the proposal is not intended to capture and bind the rights of secured creditors to enforce their security nor is it intended to affect the priorities of preferential creditors (except with the agreement of the relevant creditor).

Conclusion

We welcome this R3 initiative, which should hopefully go some way to reducing the cost and streamlining the process of putting a CVA in place for SME companies.

This is not a one size fits all solution by any means and will not be appropriate for every company. However, the R3 CVA looks to be a sensible and deliverable option for those SME companies that have the support of their secured creditors and are confident of their ability to return to profitability in the medium term once the current Covid crisis abates.

The R3 CVA will also provide creditors of those companies with a route to repayment in full, avoiding the value destruction which may come from an uncontrolled insolvency.

It should be remembered that HMRC will fall into the definition of a “Secondary Preferential Creditor” for certain debts (such as employees’ National Insurance Contributions, PAYE as well as VAT) upon the restoration of the crown preference from 1 December 2020. The standard provides for the repayment of such Preferential Creditors in full.