R3 announces new standard form COVID-19 CVA proposal and standard conditions

R3 announces new standard form COVID-19 CVA proposal and standard conditions

What are CVAs?

CVAs are the only consensual restructuring process contained in the Insolvency Act 1986 (IA 1986).

In summary, CVAs enable debtor companies to propose a way forward with their unsecured creditors, and if 75% or more by value of those creditors agree, the solution can bind a dissenting 25%. As an additional protection, the CVA is not approved if more than half of the company's unconnected creditors vote against it.

The terms of a proposal cannot bind a secured creditor unless it expressly agrees, and there are also protections for preferential creditors. Usually the terms of a CVA allow the debtor company to pay a smaller sum in full and final satisfaction of its debts (a ‘debt composition’), but their terms can be virtually anything (see Practice Note: The CVA proposal and procedure—the position under the Insolvency (England and Wales) Rules 2016 and Checklist of contents for a CVA proposal).

When should R3’s standard form be used?

Research carried out on behalf of R3 and the Institute of Chartered Accountants in England and Wales (ICAEW) in 2018 recommended the introduction of a standard form CVA for use by distressed SME companies. Coronavirus has made that need more urgent. Where its use is appropriate, R3’s standard form CVA proposal is intended to save time and costs, and therefore make CVAs more accessible to the SME market. It is intended to encourage a responsible approach to the payment of corporate debts.

R3’s standard form CVA proposal is designed for use by companies whose businesses have been hit by coronavirus and which need some time to get their businesses fully operational. The terms provide for a (delayed) payment of 100% of the company’s debts. It therefore creates a moratorium period when pre-CVA debts will not be paid and those creditors with pre-CVA debts are consequently prevented from enforcing their debts against the company whilst the CVA is in operation.

It is intended that R3’s standard form CVA proposal will be amended to

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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.