Management
CVAs: An alternative to pre-packs |
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| Management | |
| Written by Matthew Wild, Partner, Baker Tilly Restructuring and Recovery LLP | |
| Tuesday, 01 June 2010 | |
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Is it now the time for the CVA to take centre stage as a restructuring procedure?
In the recent past, the CVA has been the least used procedure in corporate insolvency, however, the latest recession has characteristics quite different to its predecessors. In addition, 200,000 companies have benefited from the Government’s Time To Pay (TTP) scheme deferring around £5 billion in VAT, PAYE/NIC and other taxes. Couple the above with landlords becoming more flexible over rent terms and a ‘war spirit’ in the business-to-business community and it is possible to see how businesses have survived in a downturn for longer than in the past. However, what none of this satisfactorily takes into account is how businesses will in reality trade out of these difficult positions. In particular, with the TTP scheme being limited anecdotally to 6 to 12 months, it is not clear how a business could improve its performance to the extent that it can pay not only its ongoing liabilities on a timely basis, but also generate cash to pay off arrears over such a short period. It is unlikely that businesses will be able to borrow to do this, as secured lenders are reticent to tie up the additional capital involved in additional lending to riskier businesses. Even to provide a loan under the Government sponsored Enterprise Finance Guarantee Scheme, the lender is required to conclude positively as to the viability of a business – which may be difficult in this environment. Company Voluntary Arrangement: The answer?Partly this lies in the rise of the pre-Anpackaged Administration. This has often historically taken the form of director/shareholder purchasing the business back from an Administrator, leaving legacy creditors with little or no return. However, the spotlight of regulation has recently been trained on this area which has meant that generally such sales must be conducted on a more open basis, meaning there is no guarantee that directors initiating such a process will end up as the purchasers. Funding of purchases from Administration are also more difficult than in pre-credit crunch days. Perhaps then it is time for the renaissance of the (Company Voluntary Arrangement) CVA. Always the most flexible tool in the kit, CVAs can be constructed in such a way as to deal with problem areas, such as onerous leases and pension deficits, but also gave a more general application. The role of the nominee** is crucial. He will use his professional judgement to best ensure a proposal is viable (a crucial missing link in the TTP arrangements previously discussed). Secured creditors might be expected to welcome a CVA proposal. Secured creditors’ rights cannot be altered by a CVA and most often a secured creditor will end up banking a client in better financial shape as a result of a CVA. Generally, relative to the alternatives, unsecured creditors should be supportive. One of the few prerequisites of a CVA is that it provides a better return to unsecured creditors than a liquidation. In addition, it may be possible to preserve an ongoing trading relationship with the CVA company, even if only on a cash basis at the outset. Management and ownership can remain unchanged and provided the secured creditor remains supportive, guarantees would not get called. And, once the CVA is in place, legacy creditors are dealt with by the CVA supervisor – leaving management to drive the business forward for the benefit of all. * Crown preference was abolished for corporate insolvency cases as at 15 September 2003. Until that date, amounts of unpaid PAYE accrued in the twelve months prior to insolvency and unpaid VAT in the six months prior to insolvency ranked ahead of secured lenders in respect of realisations from floating charge assets (equipment, stock, debtors and other non-fixed charge assets). This meant that floating charge holders were disadvantaged by a business continuing to trade without paying ongoing crown payments. ** the nominee reviews the directors’ proposal and recommends it to the creditors and the court. This provides an independent check on its feasibility.
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