BusinessBusiness RecoveryIndustry backs CVA plans despite risk of ‘nightmare scenario’

Industry backs CVA plans despite risk of 'nightmare scenario'

A new consultation on changes to the insolvency regime gets support despite fears of a nightmare scenario in which management who aren’t particularly capable are able to borrow money and spend it all

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
added.

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.’

Related Articles

R3 calls for creditor 'breathing space' to help turn companies around

Accounting Standards R3 calls for creditor 'breathing space' to help turn companies around

2y Chris Warmoll, Writer
R3 cautiously welcomes advent of simpler bankruptcy regime

Business Recovery R3 cautiously welcomes advent of simpler bankruptcy regime

2y Chris Warmoll, Writer
Taking Stock: Spotting accounting flaws is child’s play

Audit Taking Stock: Spotting accounting flaws is child’s play

2y Taking Stock
Former Scots Tory party treasurer hit with bankruptcy restrictions

Business Recovery Former Scots Tory party treasurer hit with bankruptcy restrictions

2y Richard Crump, Writer
Administrations ‘flat-line’ as personal insolvencies hit low

Business Recovery Administrations ‘flat-line’ as personal insolvencies hit low

2y Richard Crump, Writer
Company and personal insolvencies sink to pre-recession lows

Business Recovery Company and personal insolvencies sink to pre-recession lows

3y Richard Crump, Writer
Bankruptcies hit lowest quarterly level in 15 years

Business Recovery Bankruptcies hit lowest quarterly level in 15 years

3y Richard Crump, Writer
PwC faces $1bn lawsuit over bad MF Global advice

Accounting Firms PwC faces $1bn lawsuit over bad MF Global advice

3y Richard Crump, Writer