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Tuesday, 12 May 2009

CVA's - even Alistair Darling likes them and wants to see more, announces more policing of Pre-pack Administrations

In the recent budget Darling mentioned that the CVA moratorium facility, currently only available to small companies, may be made available for all companies medium or large. Passing comment that the Government wants to see further the rescue culture develop further with priority funding for CVA's and administrations.

Darlings report contains these interesting sections:

The Government will work to ensure that the regulations and procedures for dealing
with troubled companies work to facilitate company rescues whenever they are appropriate,
that the maximum economic value is rescued from companies that get into difficulties, and
that the knock-on effects of company insolvencies on their creditors are minimised. Budget
2009 announces that the Insolvency Service will consult on:

Providing for new funding lent to companies in Company Voluntary
Arrangement (CVA) or administration to have absolute priority status, to
allow firms in difficulties to access the funding they need to get back on track;

Extending the moratorium on creditor action against small companies trying
to agree a Company Voluntary Arrangement to medium and large companies,
so giving them breathing space to try to reach agreement with creditors.

The first is designed to allow "Debtor in possession" type funding for companies in CVA, this is new to the UK he thinks. Well I am not so sure, I was a director of a company that specilasied in funding for CVA's back in 1999. However any rules changes that provide for funding into CVA rescues we are all for. Will it allow new money to haircut old? If so not much new there apart from perhaps power to force dilution such as debtor in possession in the USA.

Secondly the use of the CVA moratorium has very limited indeed, because the risk to the nominee has been deemed to be too great, we will recommend to the Service that the risk element of the moratorium be relaxed to allow greater uptake. Personally speaking the moratorium for CVA's could be very powerful to protect companies from aggressive creditors during the difficult period pre CVA approval.

Graham Horne has issued a press release from the Insolvency Service as below;

"However we want to consult on whether some targeted changes to corporate insolvency law could improve the rescue culture even further, thus saving jobs and providing better returns to creditors.

The Chancellor of the Exchequer announced today during the Budget speech that The Insolvency Service will start a consultation exercise in June. This will propose changes aimed at giving struggling large and medium sized companies a breathing space while they seek to reach legally binding agreements with their creditors, without first having to place their companies into administration.

Small companies facing financial difficulty are currently able to obtain a moratorium on creditor action while seeking agreement with their creditors to deal with their debts. While an agreement is being pursued, the existing management stays in place. The proposals would give viable large and medium sized companies the same opportunity for a moratorium while trying to come to an agreement with creditors.

The Insolvency Service will also consult on changes that would help give all companies access to additional funds to get back on their feet. Under the proposals new money lent to companies in Company Voluntary Arrangements or administration would be given priority. This could make it more attractive to lend to such companies allowing them to access extra funding when they need it most.

The overall aim of these proposed measures is to ensure that company rescues are encouraged to take place whenever they are appropriate and that the knock-on effects of company insolvencies on their creditors are minimised.

The Chancellor also announced that The Insolvency Service will be publishing this summer the first of a series of regular reports on its monitoring of the operation of pre-pack sales. The Statement of Insolvency Practice 16 issued earlier this year requires administrators to provide creditors with detailed reports explaining their decisions for a pre-pack administration as soon as they are appointed. Scrutiny of these reports by The Insolvency Service is designed to ensure that creditors are not being treated unfairly through the abuse of pre-pack sales".

So the good news is Government wants to encourage more company voluntary arrangements better funding for CVA's and is likely to look carefully at abuse in pre-pack administrations, perhaps CVA will become the rescue method choice for more practitioners and struggling companies?

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