Where the business requires a formal insolvency procedure, the main choices are company voluntary arrangements (or “CVA”s) or administration - usually a pre-pack administration. How do these work?
A CVA is an agreement between a company and its creditors, which, if approved by 75% of creditors by value, binds all creditors. They can be used for a range of deals - paying debts over a period of time, paying a proportion only of debts or more elaborate compromises.
CVAs are particularly helpful in the retail sector where companies are likely to have a large leasehold property portfolio and see the burden of ongoing rent (and possibly arrears) as a major difficulty for the struggling retail business. In a typical retail CVA, properties are categorised by importance and different proposals made for each category: ranging from rent haircuts, changes to payment terms, and early termination of the lease.
Other benefits of a CVA are:
- It allows a company to continue to trade and reduce debt, incentivising creditors to support the CVA, especially if they can get a good return or an uplift over the term of the CVA.
- It allows the directors to continue to control the company.
- It allows time for restructuring making the company more attractive to investors, suppliers and creditors.
A downside of CVAs is that there is no automatic moratorium procedure to prevent creditors from taking action unless combined with some other procedure - such as administration or the new restructuring plan introduced by the Corporate Insolvency and Governance Act 2020. Landlords are also increasingly hostile - meaning that the proposal may well need to include a generous fund for bonus payments if the rescue succeeds and the company may need to anticipate expensive legal challenges.
A poorly thought through CVA may just be a sticking plaster, prolonging the life of a company that will inevitably fail.
A pre-pack is a sale of a business negotiated and agreed in advance of the appointment of administrators and executed as soon as possible after their appointment. The procedure avoids the professional costs and damage to the business caused by an extended period of trading by the administrators.
A pre-pack keeps a business trading and can save jobs (although increasingly in retail pre-packs the buyer will not take the bulk of the physical shops - leading to job losses).
Because a pre-pack is negotiated pre-administration, the company’s financial status can be kept out of the public eye, preserving the value of the business, retaining staff, suppliers and customers.
Pre-packs are often viewed with suspicion: unsecured creditors only find out about the sale after the event and previous owners can buy the business back free from onerous liabilities. However, the introduction of the mandatory disclosure requirement of the SIP 16 regulation has improved transparency and requires administrators to carefully consider whether a pre-pack is the best option for creditors.
A pre-pack is often the only way to save the reputation and goodwill of a retailer.