When initially introduced

Because the essential problem of insolvent companies is excessive indebtedness, the Insolvency Act 1986 sections 1 to 7 contain a procedure for companies to ask creditors to reduce the debt they are owed, in the hope that the company may survive. For instance, directors might propose that each creditor accepts 80 per cent of the money owed to each, and to spread repayments out over five years, in return for a commitment to restructure the business' affairs under a new marketing strategy. Under chapter 11 of the US Bankruptcy Code this kind of debt restructuring is usual, and the so-called "cram down" procedure allows a court to approve a plan over the wishes of creditors if they will receive a value equivalent to what they are owed.[86] However, under UK law, the procedure remains predominantly voluntary, except for small companies. A company's directors may instigate a voluntary arrangement with creditors, or if already appointed, an administrator or liquidator can also propose it.[87] Importantly, secured and preferential creditors' entitlements cannot be reduced without their consent.[88] The procedure takes place under the supervision of an insolvency practitioner, to whom the directors will submit a report on the company's finances and a proposal for reducing the debt.

When initially introduced, the CVA procedure was not frequently used because a single creditor could veto the plan, and seek to collect their debts. This changed slightly with the Enterprise Act 2002. Under a new section 1A of the Insolvency Act 1986, small companies may apply for a moratorium on debt collection if it has any two of (1) a turnover under £6.5m (2) under £3.26m on its balance sheet, or (3) fewer than 50 employees.[89] After an arrangement is proposed creditors will have the opportunity to vote on the proposal, and if 75 per cent approve the plan it will bind all creditors.[90] For larger companies, voluntary arrangements remain considerably under-used, particularly given the ability of administrators to be appointed out of court. Still, compared to the individual voluntary arrangement available for people in bankruptcy, company voluntary arrangements are rare.
Administration