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Company Voluntary Arrangements - What to know

26 September 2014

What is a CVA?

A CVA is an arrangement entered into between a pharmacy and its creditors to settle its debts through agreed repayments, often for a proportion of the total indebtedness owed.

Notice of a meeting to consider the CVA proposal should be given to all known creditors of the pharmacy and this would almost certainly include a landlord.

At least 14 days notice of the meeting must be given. At lease 75% (by value) of the pharmacy’s creditors attending the meeting are required to vote in favour for the CVA to be approved (if the requisite majority of 75% is reached).

Who will be bound by the CVA?

The terms of the CVA will bind all unsecured creditors who were entitled to receive notice of the meeting called to consider the CVA proposal. Therefore, the CVA will bind:

  • creditors that voted against the CVA
  • creditors who attended the meeting but who did not vote
  • creditors that did not attend the creditors meeting, and
  • creditors who did not receive notice of the creditors meeting, despite being entitled to be notified.

Therefore, any unsecured creditor who was entitled to receive notice of the meeting will be bound by the CVA, irrespective of whether they received notice, attended or voted in favour of the proposals.

However, creditors who do not receive notice of the proposals can apply for relief for any undue prejudice caused (as discussed below).

It should be noted however that secured creditors will not be bound by the terms of the CVA.

Unsecured creditors will be prevented from taking any steps against the pharmacy that are prohibited by the CVA immediately following approval.

Effect of the CVA – Issues for Landlords

Once the landlord of a pharmacy is bound by the terms of a CVA, he will be unable to take any action in relation to rent arrears. In addition, landlords will be prevented from taking any step against the company to recover any debt that falls within the scope of the CVA.

For pharmacies that qualify as “small companies” there is also the possibility of obtaining an interim moratorium on legal proceedings against the pharmacy for up to 28 days prior to approval of the CVA proposals.

However, in reality it is often simpler and cheaper to put the pharmacy into administration (by filing a Notice of Appointment at court) in order to obtain the benefit of a moratorium on action against the pharmacy while the CVA proposal is finalised.

Accordingly, landlords could be prevented from taking any enforcement action against a pharmacy tenant while a moratorium is in place without leave of the Court, which will provide welcome protection for pharmacies that are struggling with their financial commitments.

The landlord of any pharmacy that is unable to pay its rent may have recourse to a guarantor to recover sums due under the lease.

It is common in commercial guarantees and authorised guarantee agreements to express that the guarantor’s liability will be unaffected by the compromise of the principle debt, including through entry into a CVA. 

The guarantor could therefore remain liable for payment of sums due under the lease even though a pharmacy has entered into a CVA. 

It is possible for a guarantee to release a guarantor from its obligations if the CVA amounts to a satisfaction of the debt due to the landlord.

However, it is clear that the courts will view a CVA which has the effect of releasing a guarantor from all liability due under the lease with scepticism, particularly in circumstances where there is unfair prejudice to the landlord in doing so unless appropriate value is provided.

Grounds for Challenge

A creditor who is unfairly prejudiced by the terms of the CVA can bring a challenge within 28 days of approval. There are two grounds of challenge available, namely, “material irregularity” in the conduct of the meeting to approve the CVA and “unfair prejudice”.

“Unfair prejudice” is an avenue that landlords may want to explore where the CVA has compromised the landlord’s right of recourse against a guarantor under the lease without offering adequate compensation for the compromise of that right.

The courts have been particularly sympathetic towards landlords in these circumstances, so any pharmacy seeking to release a guarantor from liability under a CVA should be mindful that adequate compensation is provided.

Benefits of CVAs for Pharmacies

The clear benefit of entering into a CVA is to allow a pharmacy to compromise its debts and come to an arrangement with its creditors, including its landlord, to provide an opportunity to trade out of financial difficulty without the threat of legal action in relation to outstanding debts.

However, pharmacists should be aware that the CVA will not bind the pharmacy’s secured creditors and therefore the effectiveness of a CVA will depend on the extent of the pharmacy’s existing charges.

This article was written by Tim Jenkins.

For more information please contact Tim on +44 (0)1483 252529 or tim.jenkins@crsblaw.com.