What is a CVA?
A CVA is a proposal made by a company to its unsecured creditors for an arrangement in satisfaction of its debts. Once approved, a CVA is binding on all creditors. A company proposing a CVA often does so with the intention of saving the company and avoiding administration or liquidation. Whilst a CVA might be proposed with good intentions often the terms of a CVA leave a lot of creditors – particularly landlords – unhappy due to the way in which the company seeks to restructure the debts that it owe. This can, and in House of Fraser’s case did, result in a challenge to the CVA.
There are already reports that Debenhams may be proposing a CVA and given the current difficulties high street chains are experiencing, there may well be more CVAs and more potential challenges to follow.
Time limit for challenging a CVA
Challenges to CVAs are not particularly common but any aggrieved creditors considering whether to challenge a CVA ought to bear in mind that they have to act fast as they only have 28 days from the date of approval of the CVA to raise court proceedings challenging the CVA or if they weren’t given notice of the creditors’ meeting, within 28 days of the day on which they became aware of the decision to approve the CVA.
Grounds for challenging a CVA
There are only 2 grounds on which creditors can challenge a CVA:
1. The arrangement unfairly prejudices the interests of a creditor; or
2. There has been a material irregularity at or in relation to either the decision procedure or the meeting at which the arrangement was approved.
Quite often, creditors seeking to challenge a CVA look to do so on both grounds. Whether or not there is unfair prejudice or a material irregularity is dependent on the specific facts of each case and each CVA. If the challenge is upheld by the court then they may revoke or suspend the CVA and could order that further meetings of creditors are called to reconsider the proposals.
That said, any creditors considering challenging a CVA may find themselves stuck between a rock and a hard place as, as much as the terms of the CVA may be unfavourable the creditors will still likely do better as a result of a CVA than if the company entered administration or liquidation. There’s also the potential PR backlash of challenging a proposal that’s trying to save the company and, in the high profile high street chain situations, numerous jobs.
If you’re considering challenging a CVA and require advice on whether you have grounds to do so then please get in touch for tailored advice.