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The Graham Report: what about CVAs?

Provided by KSA Group


As the government raises the issue of veto power over pre-packs contingent on the failure of measures proposed by the Graham Report, Eric Walls, director of turnaround and insolvency at KSA group, wonders if the original review may have partially missed the mark in the first place.

Eric Walls
Director of turnaround and insolvency

Let’s put things in context: pre-pack administration sales represent a small percentage of the overall UK annual insolvency caseload. They are not the most complained-about process around, and they do not account for anywhere near a significant percentage of complaints received via the Complaints Gateway. The fact that the Insolvency Service’s SIP16 review and referral process has not resulted in a deluge of adverse disciplinary findings against practitioners can only support this view.

Yet for some considerable time, pre-packs have been the focus of attention from insolvency practitioners’ regulators, creditors of insolvent companies and – as this week’s developments show – Westminster. Everyone clearly seems to hate the process, but all recognise (even if grudgingly) that pre-packs are a useful “rescue” tool in the armoury of insolvency practitioners. The upshot has been that pre-packs have become possibly the most regulated and revisited process in insolvency.

The story so far

To recap: Vince Cable, Secretary of State for Business Innovation and Skills, commissioned an independent report into pre-packs, carried out by Teresa Graham CBE and with results published in June 2014.

The review found that pre-packs were indeed a useful tool, and argued that to ban them entirely would be counter-productive. Even so, the review did identify areas where the process could be “improved upon” to make it more transparent, better regulated, and impose a more uniform approach – all of which could make it more palatable to creditors.

In fairness, there’s a point here – while IPs undertaking a pre-pack will always work to secure continuance of business without risking the confidence of creditors, customers and employees, this process will by its very nature always lack a degree of transparency.

Let’s be realistic

While the Graham report proposed a number of changes, this somewhat personal “rant” will concentrate on two proposed measures which dealt specifically with pre-packs where a sale was to a connected party.

The two proposed measures, relating to any pre-pack sale to connected party purchasers, are:

• The purchaser should approach a pre-pack pool of independent, experienced business people to obtain an opinion on the proposed pre-pack.
• The purchaser should complete a viability review stating how the purchaser will survive for a twelve month period from the review and stating what the purchaser will do differently from the insolvent company.

On the face of it, both of these measures seem laudable and sensible.

However – and looking at the second point first – it could well be argued that in any event a purchaser should have a business plan covering off most of these points. Furthermore, surely such a plan would be needed in order to secure funding going forward? In practice, IPs know this is just not the case.

Funding for businesses in a pre-pack situation has, in my opinion, never been so readily available. Asset-Based Lenders, Invoice Finance providers, “one-off transaction” funders, risk capital investors, crowd funders: all are offering funds in abundance. My experience is that because of the nature of these organisations, they are less-risk averse than the clearing banks and traditional lenders that would provide ongoing funding to businesses in days of yore.

This is certainly not meant as a criticism – it is no bad thing. But these types of funder may well not require business plans. They look at the security available, both in respect of the business and the individuals involved, and they want to move quickly: often an essential quality in a possible pre-pack scenario. Any delay could lead to a loss of contracts or customers, an implosion of the business, loss of jobs, and the loss of creditor returns.

If a viability report is required, this could lead to a delay in the whole process. Consider: who would prepare the report? What would it need to detail? Would it need to be independently reviewed by anyone – for example by the administrator looking to affect a quick sale? The latter would do little to bolster transparency, in my opinion. Does it need to be reviewed by creditors? My own experience is that it is difficult to get creditors to engage in an insolvency process at the best of times, and I believe asking them to review a viability study could only serve to increase costs.

Pool of experts

Turning now to the first of the proposed measures detailed above, I am afraid I – like many – simply cannot see how this can work in practice. Some questions off the top of my head:

• Will the pools be regionally based?
• How many people will the pools consist of, and how many will need to vote “yes” in respect of a proposed pre-pack for it to pass?
• Who will create the pool, or assess if the people applying are experienced enough?
• Exactly what opinion will the pool be asked for in respect of a proposed sale?
• Who will monitor the pool’s performance?
• How difficult will it be to get hold of the members of the pool urgently?
• Most importantly how will it be funded? Let’s face it: creditors are the ones who will end up paying for the process.

These are just some of the practical issues that occur to me straight away. I am sure someone once said that the best decision taken by a committee is taken by a committee of three, where two of them are on holiday.

But facetious as this may sound, there’s a point: surely one of the best people to give an opinion on a proposed pre-pack would be an insolvency practitioner who has experience in dealing with many different sizes of business and in many different markets?

In summary, while these two proposed measures have their merits, practical concerns may well render them “unworkable”.

But what about CVAs?

On a positive note, one thing that does occur to me (as perhaps it would, bearing in mind that my own firm has always championed the use of CVAs where possible) is the potential for more focus on CVAs to aid the situation the review was conducted to address.

After all, a good CVA proposal will include or will provide for:

• A summary of what has gone wrong in the company/business
• The measures taken by the directors to rectify those issues
• Details of new procedures put in place to try and ensure the problems previously encountered do not re-occur
• Summaries of cost-cutting measures adopted
• Trading forecasts for the coming years
• Sources of new funding or confirmation of how current funding is to be dealt with
• Where appropriate, details of any valuations in respect of the company’s major assets, and as to whether those assets will likely be retained and used, or disposed of
• The chance for creditors to actually have their say in the process and confirm if they find the CVA acceptable before it actually happens
• A chance for creditors to receive a percentage of their money back – usually higher than in administration or liquidation – and to retain a customer if they so wish

I’m sure I am being somewhat biased here, but does the above not cover all of the major complaints raised about pre-packs, and the concerns raised in the Graham Report? If, as I suspect, it does, it’s surprising the report failed to mention CVAs in any meaningful manner.

I of course appreciate that not all struggling companies are in a position to propose a CVA, and that the pre-pack is an important process which undoubtedly has its place. Also, the majority of the measures proposed in the Graham report deal mainly with pre-sale marketing, valuations and reporting to creditors, and seem both relatively easy to implement and unlikely to delay the pre-pack process unreasonably.

They should also assist in creating a more uniform approach to pre-packs which should boost creditors’ confidence in the process.

However, as I have said, I can see the two proposals geared at connected party sales being considerably more troublesome to implement and adhere to. We shall see.


Eric Walls is a Licensed Insolvency Practitioner and Director of Turnaround and Insolvency at KSA Group Ltd. He has over 25 years’ experience of restructuring and assisting distressed businesses. KSA Group specialises in rescuing and restructuring companies and offers help and advice to distressed businesses, directors, lenders and creditors through its website www.companyrescue.co.uk