Industry backs CVA plans despite risk of ‘nightmare scenario’

canary wharf

The government seems stuck between a rock and a hard place in efforts to keep
companies out of administration after rolling out a new consultation on changes
to the insolvency regime.

The dilemma facing business mandarins is this: they want to allow companies
to get access to vital restructuring funds by giving emergency lenders ‘super
priority’ status, meaning they will get paid back first.

But they must weigh this up against the threat of dodgy directors taking the
cash and spending it, disadvantaging both the secured creditors and the lenders
as well.

The plans include extending the small companies’ ‘moratorium’, which
ring-fences companies from creditors, to medium and large businesses.

After spearheading the JJB company voluntary arrangement, giving the sports
chain financial breathing space from creditors while restructuring takes place,
KPMG experts are fully behind the idea of making it easier to rescue companies.

But they also warn that creditors should be protected form the ‘nightmare
scenario’ of bad companies wasting their cash on unrealistic rescue plans.

Richard Heis, restructuring partner at the Big Four firm, said: ‘CVAs are
absolutely the right way to go. I think we see [the government’s plans] as very
positive, as the CVA’s possibilities in the past have been underused and an
extension of protection to larger companies will help with that.’

But there is a balance to strike between encouraging rescue finance on the
one hand, and putting off banks from lending in the first place because of fears
of super-priority.

‘The nightmare scenario is management who aren’t particularly capable and
whose plans are not sensible going to borrow money and spending it all,’ Heis

Insolvency representatives R3 backed the government’s plans but also
red-flagged the super-priority funding idea.

R3’s vice-president Steven Law said: ‘Rescue funding for struggling business
is vital, but it has to be done very carefully because, if you allow
‘leap-frogging’ over existing secured creditors, you undermine confidence in the
entire bank lending system.

‘This may cause banks and other lenders to demand greater security or charge
higher interest rates on normal business lending.’

But the government’s plans have a welcome focus on extending the role of
company voluntary arrangements as a rescue tool. A CVA, unlike an
administration, means the company remains under the control of its management,
causing less disruption to the day-to-day operational running of the business
and therefore making it a much more effective tool in achieving corporate
rescues, Heis says.

‘Clearly what you need out of this is a check and balance to make sure good
management get the help they need, but bad management aren’t allowed to
frustrate their creditors or waste their money.

‘We’ve got to draw the line somewhere in favour of letting companies being
able to restructure themselves.’

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