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Banks, Lenders & Investors Debt Collection & Credit Management General Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

The proposed revisions to SIP 3 do not adequately address the issue of IPs being both poacher and gamekeeper

A CVA (Company Voluntary Arrangement) is an agreement that allows an insolvent company to survive with the consent of 75% of unsecured creditors to reschedule and possibly write down debt to a level that is affordable.
As such it can be a useful vehicle for both creditors and the business concerned, offering the creditors the chance of a better return on their money than they would perhaps expect from the company being wound up.
A CVA essentially involves a proposal to creditors by the company directors, sponsorship of the proposal by an Insolvency Practitioner (IP) as Nominee, and upon approval monitoring by an IP as Supervisor. The preparation of the proposal is often done by or at least with the assistance of an Adviser who has experience of CVAs.
There are a number of issues with IPs drafting CVA proposals which may be the reason that so many fail, approximately 70% I am given to understand. One major issue is the lack of fundamental change to effect a turnaround of the company. This is understandable given that IPs can rarely justify their hourly rate approach to charging for sorting out the causal factors that contributed to the insolvency. 
Another issue is the inherent conflict of interests between the Adviser who acts on behalf of the company, and the Supervisor who represents creditors. The Adviser drafts the terms which include a proposed basis for the Supervisor’s fees and also whether the Supervisor benefits from a failure of the CVA. I have seen examples of uncapped Supervisors’ fees being far greater than estimated, leaving insufficient funds to pay a fixed percentage dividend to creditors such that the CVA failed, despite the contributions being paid into the CVA as projected in the proposal as drafted by the same IP as Adviser.
The above reasons alone are sufficient to challenge the revised proposals to Statement of Insolvency Practice 3 as set out in SIP 3.2.
I would suggest that an IP can be either an Adviser or Supervisor, but never both for the same company.

Categories
Banks, Lenders & Investors General Insolvency Rescue, Restructuring & Recovery Turnaround

Zombies are not dead

We hear a lot about the dead weight of zombie companies and how they should be put out of their misery.
But we take a slightly different view.  Yes a zombie company is regarded as one that is limping along only servicing interest on its debt, unable to fund growth.
However, a zombie status does not mean that a business is necessarily a failure and that the best thing creditors can do is to take the money and run.
Often, the reason a company has reached this point is that it has pursued aggressive growth based on debt during the so-called “good times” pre 2008 but the trading climate since then has changed out of all recognition.
All companies are at the mercy of market forces at all times, but we make the point that it does not necessarily follow that the services or products a business is offering are in themselves a bad idea.
What is needed is for the directors and management to recognise that there is a problem sooner rather than later.
Then they should get in expert help to assess the situation and advise them of their options and if necessary help implement changes to secure the future of their business.
A turnaround advisor is on the company’s side unlike the insolvency practitioner who, if appointed, works for creditors.
The turnaround advisor has an interest in helping the company survive and be prepared, including having adequate finance available, for growth when it comes.

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General Insolvency Liquidation, Pre-Packs & Phoenix Personal Guarantees Rescue, Restructuring & Recovery Turnaround

Guide to Pre-Pack Administration from K2 Business Rescue

Pre-pack Administration is a tool for saving struggling businesses that are in severe financial difficulties but are potentially sound. Pre-packs allow the business idea to be preserved, retaining customers, suppliers and goodwill, without all the start-up costs normally associated with a new business.
Essentially it means “selling” the business to a new company immediately upon appointment of an Administrator, the preparation for sale being carried out prior to appointment.  The sale requires additional scrutiny if the directors and shareholders of the new company are the same as in the previous company to prevent any abuse.
Insolvency practitioners use pre-pack administrations to achieve the swift sale of a business where it is not appropriate for them to trade the business as a company in administration. This way the business can continue to trade without disruption.
Reasons for not trading a company in administration include avoiding the administrators’ costs and the risks of trading a company in administration. It is often argued that key stakeholders such as customers, staff or suppliers will not remain loyal to a company in administration.
A pre-pack is only one form of administration. In normal administrations there are a number of possible outcomes including return of the company to the control of the directors, such as following a restructuring or a Company Voluntary Arrangement, or the administrator can sell the business and assets ahead of liquidation. In the pre-pack form assets are sold immediately on appointment of the administrator, who does not then trade the company.
Pre-packs also have huge advantages in allowing the new company to trade without the burden of the previous company’s debt, almost without disruption keeping valued staff and equipment, contracts, relationships and customers. 
While a pre-pack is often regarded as controversial because the creditors are faced with a done deal, the counter argument is that a swift sale of the business assets is the best opportunity to preserve value and therefore ensure the best possible return for the creditors who might otherwise get nothing or very little.
However, to prevent abuse, especially as the creditors do not get a chance to object, before a company can use this method it must show it has taken advice from an insolvency practitioner who must ensure the business and assets are independently valued and not sold below their value.