Company Voluntary Arrangements
The proposed consultation shows a commitment to supporting business rescue by considering giving ‘absolute priority status’ to funding lent to companies in a Company Voluntary Arrangement1 (CVA) or administration.
R3 president Nick O’Reilly said: “Lack of available credit is the biggest barrier to rescue procedures in the current economic climate so considering ways of encouraging funding is a step in the right direction. In particular, CVAs are often jeopardised by lack of funding after the agreement has been made.
“We will wait with interest to see what the Insolvency Service envisage doing, as it sounds as though they are considering a super-priority funding system which they currently use in the US. The US system means that the priority funding is available to struggling companies, but that this fund is then first in the hierarchy of creditors, ahead of secured creditors such as banks. This system is unlikely to work without being adapted, as the UK system of corporate lending is very different, however it could be that they are looking into a ‘watered down’ version. We welcome the public debate on this matter that the consultation will bring.”
The consultation also went further to encourage CVAs by extending the moratorium against creditor action for those to medium and large companies. “One of the major advantages for medium and larger companies of administration is that it involves the granting of an instant protection against creditors, which gives them breathing space to reach an agreement with creditors. If introduced for CVAs, this will mean that the moratorium affects both procedures.
“CVAs are an excellent rescue tool, helping companies which are profitable in the long-term overcome a period of financial difficulty. Once the CVA has been agreed and the company's liabilities restructured, more of money generated by the company can be used as working capital rather than paying old debt. However, at this stage, CVAs are not widely utilised with around 500 being completely annually”
The budget also included an announcement that the insolvency service will be seeking to prevent creditors from being treated unfairly through abuse of pre-pack sales, and will publish a report in June 2009 on the operation of the first six months of the regime monitoring pre-pack sales and will then publish further follow-up reports on an annual basis.
“R3 welcomes more reporting on the work that our members do with pre-pack administrations to give more public confidence in the procedure. We believe that pre-packs are a valuable rescue tool, helping to rescue companies for which the only alternative might be liquidation. We do not believe that the system is open to systematic abuse.”