It is often argued that banks’ and lenders’ impatience gets in the way of attempts to restructure and turn around businesses that might otherwise have a chance of survival.
This short-term thinking means that they are wary about agreeing to the use of Company Voluntary Arrangements (CVAs) to allow for the survival of insolvent businesses in a way that will benefit them as well as other stakeholders.
Clearly, banks and some creditors are dubious about the merits of CVAs, as in the current case of UK Toys R Us, whose creditors are due to vote on a proposed CVA this coming Thursday, December 21. If approved 26 stores will be closed and up to 800 employees made redundant. The rest of the business, however, will be saved and all creditors will be better off.
The Toys R Us situation is complex, and questions are being asked about the state of its pension fund, in particular by the Government’s Pensions Protection Fund (PPF) who are threatening to reject it, unless the company pays £9 million into the company pension fund. This might raise questions about preference, but I am sure the lawyers will deal with that. There are also questions about the tripling the remuneration for 2014 to 2016 for its former boss and an alleged waiver of loans to a company in the British Virgin Islands.
The other side of the argument is that CVAs allow businesses to implement plans for restructuring their finances and reorganising their operations to become viable without pressure from creditors. In turn CVAs result in fewer business collapsing and the preservation of more jobs.
This was the argument put by both the EU and the UK in 2016 in proposing the introduction of a three-month moratorium to allow insolvent companies to put together plans for restructuring as part of a review of current insolvency arrangements.
A similar argument was put earlier this month by Harold Tillman, former British Fashion Council chairman, when he called for US Chapter 11-style laws to give companies some breathing space.
The question is, would such protection result in both struggling and Zombie companies being restructured in a way that will benefit the economy?