Formal and Informal Arrangements Flashcards
What are the main options for arrangements for companies in financial distress?
- Informal agreements
- Pre-insolvency moratorium
- Company voluntary arrangement
- Restructuring plan
What is the purpose of informal agreements?
- Avoid costs and consequences of formal insolvency
- Flexible but requires unanimous creditor agreements
What are the possible creditor concessions?
- Granting new security to lenders
- Replacing directors / staff
- Selling assets / subsidiaries
- Cutting costs via redundancies or closures
- Issuing shares to creditors (debt-for-equity swap)
What is a pre-insolvency moratorium?
A licensed insolvency practitioner applies restrictions against creditors so that they cannot wind up or bring proceedings against the company for a flexible period
What is the duration of a pre-insolvency moratorium?
20 business days, extendable to a maximum of 1 year
What happens to debts during moratorium?
They are deferred
What debts are not deferred under moratorium?
- Monitor’s fees
- Wages & rent
- Loans under financial contracts
What does moratorium allow the company to do?
Remain solvent whilst trying to figure out a rescue plan
What is a Company Voluntary Arrangement?
A compromise between company and unsecured creditors
What is the CVA process?
1) Directors draft proposal
2) Insolvency Practitioner reviews and reports to court
3) Creditors and shareholders vote for approval
When do creditors and shareholders vote for approval?
Within 14-28 days of the proposal
What does CVA approval require?
1) 75% of unsecured creditors by value
2) 50% of unconnected creditors must not oppose
3) Simple majority of shareholders
Does a CVA bind unsecured creditors?
Yes, even dissenters
Does a CVA bind secured creditors?
Not without their consent
What are the advantages of a CVA?
- No court approval
- Directors stay in control
- More beneficial for trade creditors than liquidation
What are the limitations of CVA?
- Does not bind secured creditors
- Vulnerable to legal challenge (unfair prejudice, material irregularity)
What is a restructuring plan?
Used by company to restructure liability
What is the approval process of a restructuring plan?
1) Creditors and shareholders divided into classes
2) 75% needed in each class
3) Court must sanction plan to make it binding
What is the unique features of a restructuring plan?
1) Binds ALL creditors
2) Cross-class cram down (court can enforce on dissenting)
3) Court can exclude classes from voting if they hae no economic interest in the company
Who can initiate CVA?
Directors, liquidator, administrator
Who can initiate restructuring plan?
Company, creditor, member, liquidator, administrator
What is the approval needed for CVA?
75% unsecured, simple majority shareholders
What is the approval needed for restructuring?
75% per class
Who does CVA bind?
Only unsecured creditors
Who does restructuring plan bind?
All creditors
What is court involvement in CVA?
No court approval needed
What is court involvement in restructuring plan?
Requires court sanction
What are advantages of CVA?
Quicker, cheaper, directors retain control
What are advantages of restructuring plan?
Binds all creditors, allows cram down
What are disadvantages of CVA?
Secured creditors not bound
What are disadvantages of restructuring plan?
Costly, time-consuming, complex
