Industry backs CVA plans despite risk of 'nightmare scenario'

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.’

Like this story? Spread the news by clicking below:

 del.icio.us     Digg this     reddit!