Pre-pack changes may force insolvency rethink

INSOLVENCY PRACTITIONERS will increasingly need to draw on their imaginative side to rescue businesses.

Government plans to change how the popular pre-pack administration process operates are likely to make other processes more desirable.

The company voluntary arrangement (CVA) is the most likely to increase in popularity if pre-packs disappear. The problem with CVAs is that they hand more power to creditors than any other process. IPs will have to be creative if they want to gain creditor approval.

CVAs usually involve a repayment plan for a portion of debt owed to creditors – including landlords and the taxman – over a period of time, while allowing the business to continue trading. However, a CVA must be voted for by 75% or more, by value, of creditors to be approved.

It is because of this voting system, which gives unsecured creditors a greater say in the future of a business, that insolvency practitioners (IPs) are having to draw on their creativity to get the proposal through the door.

However, with popularity comes pressure to succeed. Recent successful CVAs to hit the headlines have been uniquely structured.

Sports retailer JJB’s arrangement saw landlords reduce rent fees but were given the opportunity to share in the success of the business’s future.

The Portsmouth FC proposal granted HM Revenue & Customs’ wish to investigate the books for fraudulent activity, by transferring the assets of the club to a new company and liquidating the original one.

The growing interest in CVAs stems from a variety of reasons, including government proposals to change pre-packs which could see them slowed down to pointlessness. The suggestions include allowing creditors three days to oppose the sale of a business in a pre-pack, compared to deals going through in just hours.

Also, recent changes through case law to rent and pension provisions have seen the cost of trading a business in administration spiral upwards.

This leaves the insolvency practitioner’s kit short of a few tools to help them continue to trade a viable business.

Unlike other insolvency processes CVAs have remained largely untouched by the court system and government red tape. No two proposals are alike and
practitioners can build and negotiate contracts to keep businesses alive.

CVA proposals that include the same management, same structure and basically the same number of sites will not gain the crucially important creditor approval, said Keith Steven, MD of insolvency and turnaround business KSA Group. The CVA needs to be more “fluid” than other types of insolvency to appease their demands, he added.

In most administrations the IP pays out the creditors first then the unsecured creditors. Although this is the same in a CVA, unsecured creditors such as the taxman can pull in a big proportion of the voting rights.

For off licence business Oddbins the CVA was opposed by unsecured creditors and ended up in administration. The Deloitte partners estimated unsecured creditors would most likely receive 21p for every pound owed in a CVA, compared to 13.6p in an administration. Unfortunately the CVA received just 68% of the vote needed and ended up in administration. 

Just because a business enters a CVA does not mean all its problems are solved.

Statistics compiled by Dr Sandra Frisby and Professor Adrian Walters from Nottingham Trent University, show that of all the CVAs to take place in 2006 just 10% were successful.

However, according to Keith Steven government statistics show that 65% of new companies are likely to fail after three years. So it is not possible to achieve a 100% success rate of CVAs or any business. 

Of the 10%, the average return to creditors was 37p for every pound owed over 26 months. In contrast, of the failed CVAs, which ended up in liquidation, 41% of unsecured creditors received nothing, although an average figure was not calculated.

Dr Frisby showcased the statistics at an Insolvency Practitioners Association conference and also highlighted that a further 13% were currently still in a CVA which started in 2006.

But, at the end of the day, creditors prefer 40p in the pound returns over five years than nothing explained Steven.

Despite an array of changes on the horizon for insolvency, CVAs are likely to remain untouched by regulation and case law. The decision of how they will be implemented will be largely left in the safest hands at the time – the insolvency practitioner – whose sole ambition should be to recover as much money as possible for the creditors.

But to gain approval will, under current rules, require a robust strategy that will please creditors.