As published in the Birmingham Post, 24th February 2011
Corporate Insolvency
Corporate insolvency numbers for the last quarter of 2010 (year on year) were down by an unprecedented 25%. This is indicative of the market place, low interest rates and financial institutions which, in the main, have floating charge security and have been prepared to do what they can to avoid an insolvency process which may lead to a closure of the business and the crystallisation of a loss.
By comparison in the last quarter there were 642 administrations and 170 company voluntary arrangements ("CVA's"). These statistics show that the administration process is much preferred mainly because secured creditors determine the process in contrast only a small percentage of CVA's work through successfully.
The decision for any IP when advising directors is lead by an understanding of the factual matrix of the business and taking into account the stakeholders interests in determining which insolvency process should follow.
Company Voluntary Arrangements
CVA's were introduced by the Insolvency Act 1986 to enable a company in financial difficulties to agree a scheme of arrangement with its creditors. Historically, CVA's were used as an exit route from administration. However, through various amendments to the Insolvency Act an automatic moratorium was introduced which applies to small companies to allow the procedure to be used on a stand-alone basis. However, as the statistics show the use of the CVA process is considerably less than that of other insolvency routes.
Despite this the CVA has certain qualities that make it a useful procedure to follow in certain circumstances. It is not a court driven process (although a report to court when commencing the procedure is required), it is flexible, can be agreed relatively quickly, control can remain with the directors, profitable elements of a business can stay intact and the value of the business protected.
CVA's have remained unpopular despite these positive attributes, mainly because secured (and preferential) creditors cannot be bound by a CVA proposal unless they agree. It is rare for any secured creditor not to insist on a condition in the CVA proposal that it is at liberty to enforce its security whenever it chooses, despite the success of the arrangement.
Nevertheless, there have been a number of high profile CVA's, for example Powerhouse, Stylo, JJB, Focus and Blacks. These have been predominantly in the retail sector where the companies were able to retain profitable sites and close the others.
As the statistics show there are considerably more administrations than CVA's. This is largely due to the attraction of the out of court route, the dominance of the market by the security holders (namely the financial institutions) and the ease with which pre-pack administrations can be entered into.
Administrations
Administrations are particularly useful for selling a business with assets and preserving, at least some, employment rights. However, the considerable disadvantage is that it destroys the value of the business. This is where a CVA has an advantage; it is able to preserve a profitable element of a business and preserve stakeholder value. In this current climate for CVA to be successful it is imperative that the directors have an aggressive cashflow forecast, short term business plan that it is able to meet and in excess of 75% of the value of the creditors agreeing to the proposal. As a result CVA's do have a propensity to fail often due to matters outside the control of directors, for example, namely bad debts and poor cashflow.
The reality of the current climate is that for the majority of the businesses that are facing financial hardship, control vests with the secured creditors. With forbearance from lenders businesses have been able to continue to trade and manage their unsecured creditors on a daily basis. This can result in businesses trading on credit and eroding what value there is in the business. When there is a point of no return security holders are faced with a decision to make, instinct takes over and their primary impulse is to protect their security as best they can. In such instances they proceed with the best course available to them with a view to maximising the value of their security but without regard to the unsecured creditors. It is likely that, should there be an increase in insolvency's over the next year, there will certainly be an increase in administrations but the jury is out as to whether there will be any significant increase in CVAs.
Where there are no secured creditors, CVAs remain a flexible and quick procedure where businesses are able to agree with their creditors an arrangement for a period of time. If the circumstances allow, a CVA may well be more beneficial. However, the reality of the current climate is that CVAs are often unviable and companies will be forced either into administration, or if there is no viable business, liquidation.
For more information contact Sydney Mitchell on 0808 166 8827 or fill out our online enquiry form.
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