Bosses urged to tackle debts instead of using administrations

R3, the insolvency practitioners’ trade body, is promoting the use of company
voluntary arrangements (CVA) ahead of a Government review of their
effectiveness that will be launched on June 15 and against the background of
growing concern over the growth in pre-packaged administrations.

Lord Bilimoria is the latest high profile entrepreneur to use a pre-pack after
placing his beer company Cobra into administration. He bought it back in a
joint venture with US brewer Molson Coors.

Lord Bilimoria, who has become chairman of the new company, had pursued a CVA
to rescue the loss-making business but could not secure the support of one
of its largest trade creditors, Wells & Young’s, which brews Cobra under
licence.

A CVA sees the directors of a company that is in financial difficulties
negotiate with creditors how much the company can afford to pay back and
agree a repayment plan.

R3’s vice president Steven Law, from Ipswich-based chartered accountants
Ensors, said that trying to reach an agreement with creditors over how much
the company can pay back was a far more “moral” approach to
business than dumping a company’s liabilities through a pre-arranged
administration

“It’s the moral option. You are saving the company and almost without
doubt you are getting the creditors more pence in the pound than they would
get from a liquidation,” he said. “Liquidation is often 0p in the
£1. CVAs tend to be 25p in the £1 upwards.”

However, Mr Law acknowledged that CVAs would not appeal to everyone.

“I think they are a pretty tough option for the directors to chose. It’s
far easier for directors to say throw in the towel and start again,” he
said. “You have to be a certain type of individual to want to save the
company. It’s hard to work for three to five years basically for the benefit
of the creditors.”

But he said that prepackaged administrations had their disadvantages for
directors. This form of insolvency sees the company’s directors agree a
price for the business with the administrator prior to his appointment. The
process can save jobs but often leaves unsecured creditors like landlords
and trade suppliers out in the cold.

“It’s an easy option but there’s no certainty of outcome. With a CVA the
directors have far more control over the process,” said Mr Law.

The Government has indicated that it is keen to see more companies use the CVA
as a way of rescuing companies in their current form. The Insolvency Service
will launch a consultation on proposals to improve CVAs on June 15.

Use of CVAs has remained relatively flat, with 470 conducted in 1998, peaking
at 726 in 2003. In the first quarter of the year there were 156 CVAs.



Other recent high profile CVAs include JJB Sports. However, an attempt by shoe
chain Stylo to do the same was blocked by the retailer’s landlords, which
would not accept the new terms.

The British Property Federation has called for stricter controls on the way
insolvencies are managed. Francis Salway, chief executive of Land Securities
and president of the BPF, said: “A CVA designed to assist with the
survival of a business that would otherwise fail would generally be welcomed
by landlords. It is clearly in our interests for our tenants to survive,
thus reducing any potential exposure to empty rates. However, we need to
ensure that such practices are only entered into when a firm is at the point
of insolvency and not before.”

DH Doherty and Son

Felixtowe-based haulier DH Doherty and Son is the poster boy of company
voluntary arrangement enthusiast, having just paid back its creditors 100p
in the £1 a year earlier than planned.

The small company had run into difficulties in 2004 as it took on too many
loss making contracts and was hit by spiralling fuel costs.

Owner Daniel Doherty and his partner John Macpherson took advice from Mark
Smyth from their local Business Link, who contacted HM Revenue &
Customs, the main creditor, to see if they were prepared to give the
business time to pay their tax bills.

HMRC agreed and Steven Law from Ensors was appointed as the supervisor of the
CVA.

In February 2005 the creditors accepted the CVA unanimously (75pc in favour is
required), with a five-year deal to repay £150,000, giving all creditors
full repayment.

Mr Smyth, who now works as a part-time finance director for the company, said
the CVA had enabled the company to stabilise its cash position and introduce
better management procedures.

“What I am seeing more recently is a lot more companies that find it
easier to do a pre-pack. But what struck me about these guys was that they
were determined to pay everyone and not go down owing money,” he said.

“They are chuffed that they have paid back the money early and are now
trading profitably,” he added.