Pre pack administration vs company voluntary arrangement
When deciding on the best course of action for your insolvent company, choosing between pre pack administration versus Company Voluntary Arrangement (CVA) can be difficult without first identifying your objectives.
The decision will be influenced by your company’s underlying viability, existing and potential action by creditors, and the likelihood of being subject to investigation as a director.
Objectives of pre pack and CVA
A CVA provides the opportunity to renegotiate debts and current lease agreements to put the company on an improved financial footing. The release of cash previously needed to service debt is used to move the business forward, and directors remain in control of the company. A 28-day moratorium period stops any legal action, and offers the breathing space needed to prepare for negotiations with creditors.
The objectives when entering pre pack administration are to sell underlying business assets to a third party buyer or to existing directors. Negotiations are undertaken prior to an Insolvency Practitioner’s appointment, with the actual sale taking place soon after. A quick sale helps to preserve asset value and potentially save jobs.
Who stays in control?
Directors remain in control of operations, with a licensed Insolvency Practitioner (IP) being appointed to prepare and present a Statement of Affairs, and negotiate with creditors. The IP will administer the agreement and distribute payments, but directors remain in overall control of the company.
A degree of control is retained by directors during this process, but it is vital to ensure transparency when assets are valued, with a strong recommendation that professional valuers are brought in.
Begbies Traynor has vast experience of pre pack sales, and can provide professional guidance to ensure that all the requirements laid down in the Enterprise Act, 2002 are met.
What about investigations into directors’ conduct?
Your conduct as a director will not be investigated during a CVA. This fact alone can make it a more attractive proposition to directors when compared with a pre pack administration.
Pre pack administration involves company liquidation and winding-up. This process includes a report on the events leading up to insolvency, and the conduct of directors during this time. If you fear accusations of wrongful trading, a pre pack may not be the best option.
It is not uncommon for directors to attempt to trade their way out of difficulty in the genuine belief that the business will be saved, only for questions about their conduct to be asked later on.
Will your creditors have an influence on the proceedings?
Seventy-five per cent of creditors (by debt value) have to agree to the terms of a Company Voluntary Arrangement. The success of this option often relies not only on the negotiating powers of the Insolvency Practitioner, but also how proactive the practitioner is in dealing with creditors, some of whom may be intent on protecting their position once proposals are announced.
Creditors may be unaware that a sale of business assets is taking place, and because of this transparency is an issue with this option. It is a legal condition of pre pack that creditor interests are shown to have been maximised, however, and your IP is obliged to demonstrate that the best return for creditors has been achieved.
How much does each solution cost?
Company Voluntary Arrangements can be a cost-effective option, with an advanced payment only being required to arrange the creditors’ meeting. Other fees are added to the monthly repayment schedule, which releases much-needed cash to meet current company liabilities.
Purchasing business assets can be a significant financial undertaking for directors, often involving the use of personal funds. Assets must be purchased at fair market value to preserve the ethics of this option, and to ensure creditor interests are prioritised.
Is any debt written off?
Debts are consolidated into a single monthly repayment over an extended period of time, with the remaining debt being written off at the end of the term.
Funds generated from the sale of assets are distributed among creditors as far as possible. The remainder is written off, hence the importance of indisputable proof that this option offers the highest returns. A trading relationship might continue with the newly-formed company, albeit on a pro-forma invoice rather than a credit basis.
Will the company’s reputation be affected?
A Company Voluntary Arrangement is not publicly advertised, and there is no requirement to let customers know what is happening. The damage to directors’ reputations is reduced in this way.
With no disruption in trade, people will be largely unaware that a pre pack sale has taken place. If jobs have been saved, so will the company’s reputation to some extent. Disclosure of the valuation process can also address the perception that the pre pack system is unethical. fa