Restructuring tools for companies
As the effect of the pandemic is stretching our economy the use of appropriate business restructuring tools will be required. Using existing legislation with the use of a Company Voluntary Arrangement (CVA) and the provisions within the new restructuring bill currently being considered by parliament, may be more readily used as a mechanism to formalize restructuring plans.
Scottish restructuring specialists, Dunedin Advisory Ltd, together with prominent legal practices offer some key messages.
Christine Convy CA, Founder and Director of Dunedin Advisory, believes “CVAs are a useful tool in post Covid business rescue” however does give a warning to practitioners and business owners to consider their format carefully. She states “It is essential that sufficient time is taken to scrutinize business plans and information to ensure the correct proposal is put in place. Fundamental to this are the following key components:
- The insolvency practitioner and professional advisors need to have trust in the management team skill and capability.
- The business needs to demonstrate a real chance of success.
- It must not be used as a method to buy some time with the inevitable liquidation of the business at a later stage which is not in any stakeholders interest.
- Where there are uncertainties particularly as the new post Covid norm is not known, flexible outcomes must be built into the proposal to avoid its unnecessary failure.”
Tim Cooper, Partner, Addleshaw Goddard and Chair of R3 in Scotland, recalls “The poor use of CVAs historically, being a sticking plaster solution to insolvency, and not addressing the reasons for the underlying business distress.” He believes “they are an excellent tool, if used properly. Case law across the UK demonstrates the Courts perceive them as a flexible process provided they are transparent.”
John Clarke, Partner, Wright Johnston Mackenzie, believes “It is always the case – but never more so than now – that anyone worried about their business should take advice sooner rather than later. The business recovery advisers have a number of ‘tools’ that they can deploy, and in the right circumstances CVAs are excellent. But, to maximise their value, they need to be used early in the recovery process.”
Why is this when it is such a useful component for restructure enabling different outcomes for various stakeholders?
Our culture in the UK shies away from any hint of insolvency and there is a proud stance to meet all commitments in full. We do not generally ask for financial support and debt forgiveness is often seen as failure.
Gillian Carty, Partner, Shepherd and Wedderburn, highlights “The restrictions now placed on enforcement generally are creating limitations on actions available to creditors in the recovery process. Legislation currently before parliament seeks to support a rescue culture with far reaching changes recognising the value of a moratorium to provide some time for companies to work through issues caused by the current Covid-19 crisis.” She confirms “the current insolvency act already provides a moratorium protection for SMEs as part of the CVA process which is a very flexible tool” and believes “now is the time to be imaginative in finding a workable solution that is not too costly for SMEs to consider and is a viable proposal for all stakeholders.”
Pamela Muir, Partner, Thorntons Law, states “The CVA process to restructure a viable business whilst addressing serious financial problems, should be ideal.” She contends “it has never been wholly acceptable to creditors, who quite rightly have their own financial concerns. Added to the starting attrition rate of CVAs, and their most inevitable failure “down the line”, it is not surprising the lack of use started out at a low level and then only declined.” Adding “trust is vital in a CVA process; trust in the proposal, trust in the management team which have to deliver it and trust in its prospects of success. CVAs might just have their moment!”
Christine Convy believes “Now is the time in Covid-19 where an imaginative and robust restructure is required for many businesses and the CVA can be put to good use. When government support runs out even healthy businesses will need to consider the wider stakeholder support to trade out of Covid-19. Never have we seen such a time where across most industries the sales pipeline has completely stopped, and for such a long period. Government needs to consider how to support business return to profitability with a variety of measures that can be introduced not least reducing tax rates and allowing longer time to pay.”
The excellent work carried out by qualified accountants and legal professionals supporting many businesses will be paramount in working alongside insolvency practitioners and business owners to establish a flexible, workable and cost-effective solution that has a true prospect of success.”