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 become fit for purpose for the various different companies that may employ it. Therefore, depending upon individual circumstances, a company may find it necessary to amend the proposal to allow for a debt composition, either immediately or as the CVA progresses and the company is more able to assess the impact of trading in the ‘new normal’. The use of R3’s standard form CVA proposal is subject to R3’s disclaimer.

It is 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 can also be used in conjunction with the new moratorium for businesses as introduced by the Corporate Insolvency and Governance Act 2020 (see Practice Note: Corporate Insolvency and Governance Act 2020—moratorium). The benefits of a moratorium are usually seen to be to enable a company sufficient time to put together a feasible rescue plan such as a CVA. If R3’s standard form CVA proposal is adopted, there may be no need to file first for a moratorium.

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. 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.

R3 say that their standard form CVA proposal is not a panacea. The introduction of the standard form CVA proposal is not intended to replace the professional advice and judgement of insolvency practitioners and lawyers who may be advising companies, but simply forms part of their arsenal of available tools to assist their clients. At best, this should be considered a foundation upon which the appropriate CVA can be based. R3 recommend members and professionals to familiarise themselves with the explanatory note before reading the standard form CVA proposal and standard conditions. Parties may also wish to listen to episode 4 of the R3 Podcast, which can be found here.

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 (as well as on LexisPSL Restructuring & Insolvency).

 Timeline for a CVA using R3’s standard form CVA proposal

R3’s standard form CVA proposal recognises the inherent flexibility of a CVA with its inclusion of clauses on its first page with blanks which require completion. Not all of the clauses will be appropriate in each case. It recognises that businesses may or may not yet be operational following an interruption due to coronavirus. If the CVA proposal is made before the company’s business has re-started, the standard form CVA proposal provides for an introductory period of up to three months during which the business remains inactive.

If no introductory period is required (or it has elapsed) R3’s standard form CVA proposal contains a breathing space period which provides a payment break in relation to debts owed prior to the approval of the CVA. The length of the breathing space period is set by completing the blank on the first page. New debts incurred in the ordinary course of business during the CVA will be paid during the breathing space period but CVA debts (those owed prior to the commencement of the CVA) will not be payable during the breathing space period. The breathing space period may last, for example, for six months during which time the company’s business is intended to return to normal profitable day-to-day trading (and to the extent necessary to rebuild a working capital buffer).

Once the breathing space period has elapsed, the company will begin to pay back its debts in the payment period. R3’s standard form CVA proposal assumes that the company will be in a position to repay 100% of its debt but this may require amendment in a particular case. Such amendment may be needed either prior to commencement of the CVA or as a variation part way through the CVA. R3’s standard form CVA proposal suggests an indicative payment period of 12 months but a longer or shorter period may be more appropriate on the facts of a particular case. Monthly payments will be made by the company to the supervisor (a regulated insolvency practitioner overseeing the debtor company's compliance with the CVA) to distribute amongst the creditors according to their respective entitlements.

Once the introductory period, breathing space period and payment period have elapsed, there will be a final completion period of three months to enable any final formalities and payments to be completed.

Research has shown that CVAs with proposed long durations (for example, up to five years) do not tend to lead to an optimum outcome and so R3’s standard form CVA proposal envisages a total period for the CVA of between 18 months and 24 months using these indicative time periods.

 Position of HMRC

HMRC will often be a major creditor. Companies proposing a CVA need to be aware that their tax compliance record will be an important factor in gaining the approval of HMRC. It will be advisable to explain a company’s compliance record, and where there have been problems, what the company is doing to rectify those issues under the CVA. It may also be advisable to include a credible estimate of corporation tax in R3’s standard form CVA proposal’s financial information section. Companies need to be aware that HMRC may wish to add modifications to R3’s standard form CVA proposal in particular cases.

In addition, it is important to be aware of the insolvency guidance issued by HMRC on 26 June 2020 in relation to voluntary arrangements. All notifications of a CVA are to be directed to: Debt Management—EISC, HMRC, BX9 1SH, Tel: 0300 322 9251 (email: eisc.cva@hmrc.gov.uk).

It should be noted that from 1 December 2020, HMRC will become a secondary preferential creditor in insolvencies for certain debts, eg VAT, pay as you earn and employee National Insurance Contributions (see: LNB News 15/09/2020 27).

 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 Company Voluntary Arrangements (Version 1)
  • Explanatory Note for insolvency practitioners
  • Explanatory note for Media

R3 is also preparing different versions of the Standard Form and the Standard Conditions for Scottish and Northern Irish CVAs to reflect the jurisdiction-specific rules and legislation.

The documents are also available here within LexisPSL (reproduced with kind permission of R3):

 •              R3 Standard Form COVID-19 CVA Proposal

•              COVID-19 Standard Conditions for Company Voluntary Arrangements

LexisPSL Restructuring & Insolvency is also preparing variants of Appendix 2 to deal with: (i) an exit from administration, and (ii) a debt waiver.

Latest Articles:
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.