A sorry tale supports the case for proposed changes to insolvency regulation

stressed businessman 2 Huffington PostWe were recently involved in helping an insolvent construction company with their restructuring, which was necessary for them to survive.

All had been going according to plan, with the directors, shareholders and most creditors on board in support of a CVA proposal that would have helped the business to survive.

Or so we thought.

Having finalised the CVA proposal it was being reviewed by one insolvency practitioner (IP) who was expecting to act as Nominee and Supervisor when another IP turned up at the company offices having an hour earlier been appointed Administrator without notice being served on the company.

Unknown to the directors, it transpired that one of three shareholders, who incidentally had shortly beforehand resigned as a director and was also a creditor, had independently sought advice from an IP with the inevitable results. We deduced that not only had the IP advised the shareholder/creditor that an Administrator should be appointed but also had advised them not to reveal this to the company’s directors or the proposed Nominee.

We can only presume that the IP concerned saw an opportunity to get himself appointed without first checking what might be in the best interests of creditors.

What the IP/Administrator clearly did not understand was the nature of debt in construction companies, where there are usually very few recoverable fixed assets and debt is normally based on applications for payment and certificates as project related payments. Construction project debt is complicated due to the set-off nature of debt when a company is unable to complete a project. The IP’s staff had to ask the directors to explain applications and certificates.

The case for imposing proposed changes to insolvency regulation

So, an opportunity for a consensual restructuring that was acceptable to nearly all those involved was lost, and there was arguably a conflict of interest in that the IP’s own interest was in their fee, they had a duty to look after the party that appointed them, but as Administrator their main duty is to act in the best interests of all creditors.

While one of the outcomes of Administration is a CVA, the practice of most IPs is to use it for the purposes of a better realisation. Cynics might argue that this offers scope for maximising the IP’s fees.

Despite the clear benefit that a CVA offered to creditors on the example cited above, it will be no surprise that the Administration pursued a better realisation purpose, without the better realisation being achieved.

All of which supports the Insolvency Service’s current proposal for a three-month moratorium against enforcement or legal action by creditors and allows time for rescue plans to be prepared and considered by creditors.

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