Lexis®PSL announces variations to R3 standard form COVID-19 CVA proposal for administration exits and debt waivers

Lexis®PSL announces variations to R3 standard form COVID-19 CVA proposal for administration exits and debt waivers

R3’s standard form COVID-19 CVA proposal

This form is intended to save time and costs, and therefore make CVAs more accessible to the SME market (see News Analysis: R3 announces new standard form COVID-19 CVA proposal and standard conditions).

R3 said it was impossible to create a template CVA to tackle all variations that may be necessary in a CVA. R3’s standard form CVA proposal has therefore been drafted to fit the following criteria:

 •              A directors’ proposal—the vast majority of CVAs are proposed by a company’s directors and so R3’s standard form CVA proposal is drafted for this situation, rather than for proposals made by an administrator or liquidator

•              A delayed payment in full—R3’s standard form CVA proposal provides for a breathing space period followed by a delayed payment of 100% of the company’s debts. It is designed for use by companies whose businesses have been hit by coronavirus and which need some time to get their businesses fully operational. Creditors with pre-CVA debts are consequently prevented from enforcing their debts against the company while the CVA is in operation. Trading costs incurred during the CVA are to be paid out of new trading income. Continuation of the business will permit regular contributions to be made to the supervisor out of operational cash flow

R3’s standard form CVA proposal is supported by standard conditions. These are based to a large extent on the popular and well-used R3 standard conditions for individual voluntary arrangements used by consumers, with amendments appropriate for companies. They are incorporated into R3’s standard form CVA proposal by inclusion in Appendix 1.

The creation of R3’s standard form CVA proposal and standard conditions was orchestrated by Stewart Perry and Professor Peter Walton, both members of R3’s General Technical Committee. Both documents are a free resource available on R3’s website (as well as on Lexis®PSL R&I).

 Lexis®PSL’s amendments to Appendix 2

R3 anticipates that any agreed amendments to the standard will appear in Appendix 2 to make it easier for creditors with multiple debtors to compare their proposals.

Lexis®PSL R&I has drafted two variants to Appendix 2:

 Appendix 2: Amendments to R3 Standard Form COVID-19 CVA proposal for exit from administration: to deal with the position where the debtor company is exiting from administration, so the CVA proposal is made by the administrators (rather than the directors, as appears in the R3 standard form)

Front page: replace heading with: ‘IN THE MATTER OF [INSERT COMPANY NAME] (‘COMPANY’) (in administration)’.

Replace ‘[name of company]’ with ‘[name of company] (in administration)’.

Introduction: replace ‘This proposal (Proposal) of the directors’ with ‘This proposal (Proposal) of the [Joint] Administrators’.

Clause 1: at the bottom add:

The Administrators [insert names]
[The Administration Order] [The administration order dated [insert date] made in respect of the Company]  
The Administrators’ fees £[insert amount] detailed at Appendix 7  

Clause 3.2: add ‘and administration’ after the words ‘winding-up’.

Clause 3.5: at the very start add: ‘Following heavy trading losses and the appointment of the Administrators on [insert date] as administrators of the Company, the Company needs to implement the proposals set out in the statement of proposals below, failing which the Administrators must report the position to the court and a winding-up order may be made.’

Clause 3.5: add ‘or administration’ after the word ‘liquidation’.

[Add new Clause 4.15: ‘At the expiration of 28 days from the date of the statutory meeting of the company and qualifying decision making procedure of the creditors approving the terms of the voluntary arrangement, the Administrators will apply to the Court for the Administration Order to be discharged and their release.’]

Clause 9.8: add ‘or administration’ after ‘winding-up’

Clause 10.2: add new ‘Clause 10.2.1 Administrators’ fees and expenses’, then renumber existing 10.2.1 onwards

new ‘Clause 19: Administrators’ comments: The Administrators have commented that:

19.1 The values attributed to the assets are unlikely to be achieved if the proposals are not implemented;

19.2 So far as known to the Administrators, the estimate of the prescribed part available under IA 1986, s 176A for the satisfaction of unsecured creditors is as set out in Appendix 4.

19.3 The Administrators’ estimate of the value of the Company’s net property under IA 1986, s 176A (6) on [insert date] is as set out in Appendix 4.

19.4 The Administrators [do OR do not] propose to make an application to court under s 176A (5) IA 1986 [for the following reasons [insert reasons]].

19.5 The Administrators refer to Appendix 8 for the nature and amount of the Company’s preferential creditors.

[insert name] and [insert name]

Joint Administrators

[insert Company name] Limited

Statement of proposals made by the Administrators

Appendix 4: at the end add ‘and administration’

Add new ‘Appendix 7: Administrators’ remuneration and expenses’

Add new ‘Appendix 8: Preferential creditors’

Appendix 2: Amendments to R3 Standard Form COVID-19 CVA proposal for a debt waiver: to deal with a debt waiver (rather than an amend and extend appearing in the R3 standard form)

Clause 3.5: replace 2nd sentence with ‘The Proposal, if accepted, is likely to result in a total Dividend of [insert amount, less than 100] pence in the pound to Creditors’.

Clause 3.5: add new 4th sentence ‘The returns to Creditors would be significantly lower if the Company is placed into liquidation than if the CVA is approved.’

Clause 3.5: replace 5th sentence with ‘The Arrangement is to be a scheme of arrangement whereby full payment of Debts is waived.’

Clause 4.4.2: replace 1st sentence with: ‘The amount of the monthly instalments shall be the Supervisor’s estimate of the total amount required to pay in total [insert % less than 100]% of those distributions listed in clauses 10.2.1 to 10.2.5 divided by the number of months in the Payment Period’.

Clause 4.4.2 Add to the end of 2nd sentence: [‘if the actual recoveries are better (ie through a windfall, acquisition of assets or profit or income of the Company) or worse than expected’ OR ‘. Save as set out, there will be no further payments in respect of a windfall, acquisition of assets or profit or income of the Company in each case acquired or received by the Company after the date of this document’].

Clause 4.4.3: delete and replace with ‘Future, contingent or unascertained debts may be compromised by the Proposal. Rule 15.31(3) of the Insolvency (England and Wales) Rules 2016 applies and the chair will value such claims for voting purposes at £1, unless a higher value is agreed’.

Clause 4.4.3, Example 1: replace ‘equal instalments’ with ‘pro rata instalments’.

Clause 4.4.3, Example 2: replace ‘equal instalments’ with ‘pro rata instalments’.

Clause 4.4.3, Example 3: replace ‘equal instalments” with ‘pro rata instalments’.

Clause 4.4.3, Example 4: replace end of last sentence with ‘BankCo is not entitled to receive any payment during the Breathing Space Period and pro rata instalments during the Payment Period’.

Clause 4.7: delete the part in parentheses: ‘(not including Future Debts)’.

Clause 4.13: delete the last words: ‘save for Future Debts (which shall remain payable pursuant to their terms).’

Clause 10.2.5 delete ‘after applying the provisions in clause 4.4.3’.

Clause 10.4: add ‘and if there is sufficient surplus)’ after ‘(if the Interest Rate is greater than 0%’.

Other useful links

The following documents are available on R3’s website:

 •              R3 Standard Form COVID 19 CVA PROPOSAL (Version 1. September 2020. England and Wales)

•              Standard Conditions for CVAs (Version 1)

•              Explanatory Note for insolvency practitioners

•              Explanatory note for Media

The documents are also available here within Lexis®PSL R&I (reproduced with kind permission of R3):

 •              R3 Standard Form COVID-19 CVA Proposal

•              COVID-19 Standard Conditions for Company Voluntary Arrangements


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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.