A business’s focus on its market and resources becomes more acute during a recession. In deciding whether or not a business should continue trading, directors have to consider why they want to trade, are they able to, do the numbers add up, and is it worth it?
Directors facing possible company insolvency should remain mindful of their duties and obligations and take extra care to properly document decisions made, to maintain the company’s records, and to submit HMRC and Companies House returns on time. Directors should not: incur further credit or issue cheques when there is little or no prospect of payment; take customer deposits when they know orders cannot be fulfilled; or attempt to pay certain creditors in preference to another.
In an ideal world it would be possible to secure the recovery and survival of all companies without recourse to formal recovery procedures. Sometimes, however, this cannot be avoided and this article considers two insolvency procedures which deal with such an acute challenge. They are Company Voluntary Arrangements (“CVAs”) and Pre-Packaged Administrations (“Pre-Packs”).
Company Voluntary Arrangements
A CVA is a legally binding agreement between a company and some or all of its creditors whereby the company makes a proposal to repay its liabilities. A CVA can be a quick, flexible way of saving a business and need not provide for full repayment of all liabilities, only more than could otherwise be expected were the company to enter liquidation. It can be designed to target particular problem areas but also have a more general application. Crucially, the nominee (an insolvency practitioner) provides an independent check of the proposal’s viability in reviewing and recommending it to the creditors and to the court.
Creditors should generally be supportive of a CVA proposal. Secured creditors retain their rights and are often left with a client in better financial shape. Unsecured creditors may also fare better since it is a pre-requisite that the CVA provides a better return to unsecured creditors than on liquidation. There may also be scope to preserve a relationship with the CVA company.
Management and ownership can remain unchanged and once the CVA is in place, management can focus on driving the business forward whilst the CVA supervisor (an insolvency practitioner) deals with historic creditors.
Pre-Packs
A Pre-Pack is the process of selling the business and assets of a company which is negotiated with a purchaser prior to the appointment of an Administrator and effected immediately on, or shortly after, the appointment. Pre-Packs are historically used where the value of a business is vulnerable to a trading insolvency process due to loss of customers, uncertainty of supply, loss of key employees, reduction in debtor recovery, lack of funding to trade in Administration, and a competitive environment.
Pre-Packs now account for approximately 30% of all Administrations. Often it is a director/shareholder who purchases the business back from an Administrator and this has led to criticism. However, regulation in this area is increasing and the Statement of Insolvency Practice 16, effective since 1 January 2009, prescribes specific guidance to ensure that Pre-Packs are conducted more openly. Detailed information about the sale and to show that a Pre-Pack is the best commercial solution must now be provided to creditors with notice of the Administrator’s appointment or soon after. Such disclosure requires the Administrator to keep a detailed record of the reasoning behind the decision to undertake the Pre-Pack and to show the source of their initial introduction, any prior involvement, and the alternatives considered together with the possible financial outcomes.
Pre-Packs can be done with speed which is vital in maintaining the business’s value otherwise at risk of diminishing as word spreads and staff, customers and creditors lose confidence. Pre-Packs can also safeguard jobs, achieve a better outcome for creditors, and may be the only alternative to liquidation in some circumstances.
The Current Climate
The latest recession differs in character from its predecessors and many more businesses have survived for longer in this downturn than in the past. Features of this downturn include the introduction of the Time To Pay Scheme, increasing flexibility from secured creditors and from landlords over rent terms, and a dogged determination by management to save business.
However, the pressure on companies to generate cash continues with limited options for improving performance. While funding remains more difficult to obtain than in pre credit crunch days how, in reality, will companies trade out of this difficult position?
Perhaps the reassurance of an increasingly transparent procedure will dispel historic criticism of Pre-Packs and propel this frequently misunderstood insolvency tool back into the limelight.
Enter also the revival of the CVA. Although in the recent past the CVA has been a comparatively little used procedure in corporate insolvency, recent times have shown the CVA to be a formidable rescue tool when used in the right circumstances as in the cases of JJB Sports, Focus (DIY) and Blacks Leisure.
Pitmans Insolvency and Restructuring Department covers the Thames Valley with bases in Reading and London. We are an experienced team dealing with all elements of Corporate and Personal Insolvency, Corporate Recovery, Refinancing and Restructuring assignments.
Nicola Kirk
nkirk@pitmans.com
+44 (0) 118 957 0226
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