A Voluntary Arrangement (“VA”) is a flexible and commercially driven restructuring tool which allows a company in financial difficulty to compromise its liabilities through a binding arrangement with creditors.
Initiation of a VA
A VA may only be initiated by the company’s directors (it cannot be initiated by a creditor) who will be required to submit a proposal and a Statement of Affairs to a Nominee which they shall appoint.
The Insolvency Regulations 2022 set out a detailed list of information which must be provided within the proposal seeking to ensure that creditors are adequately informed prior to voting. A CVA proposal must include, inter alia:
- An estimate of the value of the assets (including secured and excluded assets)
- The nature and extent of liabilities and the proposed method of compromise;
- Details of guarantees;
- The proposed duration of the CVA; and
- The manner in which the business will be conducted during the arrangement.
The Moratorium: Temporary Protection
The Nominee may apply to the Court for a moratorium (subject to specific exceptions), which gives temporary protection from creditor enforcement action while the proposal is considered; inter alia, whilst the moratorium is in force:
- No petition may be presented for winding up and no winding order can be made;
- No resolution can be passed for the voluntary winding up of the company;
- No meetings of the company may be called except with the consent of the Nominee or the leave of the court;
- No Administrative Receiver of the company may be appointed;
- A landlord to whom rent is owed cannot exercise any right of forfeiture.
Creditors’ Approval
For a voluntary arrangement to take effect, it must be approved by at least 75% in value of the creditors present and voting on the resolution at a duly convened meeting of creditors, which is convened by the Nominee. If approved, the arrangement will bind all the debtor’s creditors who were entitled to vote (other than secured and preferential creditors). Thus, no proposal can be approved which affects the rights of secured or preferential creditors, unless they expressly consent.
If the shareholders’ meeting and meeting of creditors differ on the arrangements approved (in case modifications are made), an application may be made to the court by any aggrieved person to determine which of the proposed arrangements is to be the approved arrangement.
Role and Powers of the Supervisor
If the arrangement is approved, a Supervisor, who must be on the DIFC’s approved list of Insolvency Practitioners, is appointed to implement the arrangement (failing such appointment, the Nominee acts as Supervisor).
The Supervisor must be put in possession of the assets included in the VA (and in control of excluded assets) and:
- Realises and distributes assets in accordance with the arrangement;
- Discharges guarantees and expenses properly incurred;
- Maintains detailed accounts of receipts and payments which must be submitted to the Registrar, the court and other stakeholders annually; and
- May apply to court for directions.
Not more than 28 days after final completion of the VA, the Supervisor shall notify shareholders and creditors and report to them on the implementation, together with details of any departure from the proposals as originally took effect.
Conclusion
In practice, the success of VA’s will be characterised by emphasis on early engagement with creditors and reliance on credible financial forecasts and transparent disclosure.
VAs provide a powerful, court-supervised restructuring tool for companies experiencing financial distress, where there is a viable underlying business. By combining creditor consent, professional oversight and judicial supervision, the DIFC VA regime offers a pragmatic alternative to liquidation.
Chris is a Chartered Accountant, member of the ICAEW and on the list of approved Insolvency Practitioners of the DIFC and ADGM. He is also a UK, Cyprus and Romania licensed Insolvency Practitioner.
Marios is on the list of approved Insolvency Practitioners of the DIFC and ADGM and a licensed Insolvency Practitioner in Cyprus.
