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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 Liquidation, Pre-Packs & Phoenix Rescue, Restructuring & Recovery Turnaround

Pre-packs under scrutiny again?

Baker Tilly’s purchase of the debt-laden accountancy firm RMS Tenon has put the use of pre-pack administration under the spotlight again. It follows other recent high profile pre-packs such as Dreams and Gatecrasher and the debate about Hibu as publisher of Yellow Pages.
While a pre-pack may be a useful tool for saving a struggling business by “selling” its business and assets to a new company immediately upon appointment of an Administrator, the consequences to unsecured creditors and shareholders can be catastrophic as it normally involves writing-off most of their debt and all the investors’ equity. The only beneficiaries are normally banks and other secured creditors who control the process through their appointed insolvency practitioners.
In the case of RMS Tenon, which had more than £80.4 million of debt, unsecured creditors and investors are reportedly furious that their entire debt and shareholdings have been wiped out, the more so because Lloyds TSB, its only secured lender, allegedly forced the sale by refusing to grant a covenant waiver while at the same time agreeing to finance Baker Tilly’s purchase of the assets of RMS Tenon.
While the sale has safeguarded the jobs of around 2,300 RMS Tenon staff, and this is surely to be welcomed in the current economic climate, there are plenty who will once again question pre-pack administration. It may be legal, but is it an acceptable and ethical method of rescuing a business in distress? There are other restructuring options that offer a better outcome for creditors and shareholders, such as Schemes of Arrangement and Company Voluntary Arrangement for instance. But all too often these are not pursued.
As the UK economy proceeds along its halting path to recovery the last thing that is needed is short-term and self-interested behaviour by secured creditors.