CVA or Pre-pack? 

Increasingly, Company Voluntary Arrangements (CVAs) are being considered as viable alternatives to pre-pack administrations , particularly since the introduction of SIP (Statement of Insolvency Practice) 16 was introduced, which requires a higher degree of transparency for creditors in a pre-pack than previously.

April of 2009 witnessed the first time a listed company, the sports goods retailer JJB Sports, successfully use a CVA to avoid collapse. In June 09 AIM quoted caravan trader Discover Leisure used a CVA to restructure and in August 09 a CVA was used to save 8,000 jobs at privately owned retailer Focus DIY from being placed in jeopardy.

The main aims of a CVA are usually to restructure the financing of the company, renegotiate its debts and leasing arrangements and to reach payment agreements with creditors in satisfaction of their debts at an amount higher than would be achievable in an administration. This leaves the existing management team in place to properly focus on the running of the business with less of the previous time consuming distractions arising from creditor pressure.

The advantages to creditors are that the CVA arrangements are transparent, they have a chance to comment and vote upon, and to accept or reject, the proposals and have an opportunity to recover a higher dividend payment than would be likely should the company be placed in administration.

The Government's Insolvency Service has stated that it would like to see a greater use of CVA procedures being made for company restructurings and has made proposals in its recent consultation paper to help achieve this.

One of the proposals includes the extension of the current 28 day moratorium against creditor action to medium and/or large sized companies which is only presently available to small companies.

This would reduce one of the major risks in a CVA in that on announcement of the proposals creditors often take swift action to protect their assets and position, restrict credit, put up prices and reduce payment times, which only add to the company's short-term woes.

Pre-pack administrations have been popular due to their speed of implementation and relative certainty but have attracted much criticism. SIP 16 has introduced the requirement for the disclosure of 17 separate pieces of information prior to the pre-pack taking place in an attempt to reduce abuse of this insolvency procedure. Information required to be disclosed includes how the business was valued and why it was not marketed generally for sale.

"These disclosure requirements are being mooted as one of the reasons for the increase in CVAs as an alternative to pre-packs," commented Richard Wolff, head of Corporate Recovery and Insolvency at Manchester based JMW Solicitors. "However I like to think that advisers are keen to find equitable arrangements for all parties in a financial restructuring and as landlords and major creditors witness the successful implementation and results of other CVAs, this insolvency procedure is likely to gain greater acceptance."

For further information on Company Voluntary Arrangements, pre-pack administrations or on any other business recovery or insolvency issues, please contact us on 0345 872 6666 or complete our enquiry form and we will get back to you.


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