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New rules could make CVAs a more viable option, say Yorkshire insolvency practitioners

 

Changes to the insolvency rules which could make it easier for businesses to renegotiate their debts through a Company Voluntary Arrangement (CVA) have won the support of Yorkshire insolvency practitioners.

 

In a survey by the insolvency trade body R3, almost three-quarters of insolvency practitioners in the region said all companies trying to agree a CVA should be given protection against creditors. Currently only small companies can apply for a moratorium to protect them against creditor actions. CVAs public profile has risen following the CVA of Focus DIY last week and that of JJB earlier this year.

 

A Company Voluntary Arrangement (CVA) is where a company comes to an agreement with creditors to reorganise its debt. Currently only around 500 CVAs are completed annually.

 

One of the issues is that a CVA does not offer medium and large companies the same protection as Administration. During the process of agreeing the CVA, they are vulnerable to action from creditors and risk being wound up.

 

To overcome these problems, the government is proposing a 42-day moratorium period for all companies entering a CVA. Seventy-four per cent of insolvency practitioners in the survey felt it would be helpful for medium and large-sized businesses to be allowed a 28 day moratorium period, while 67 per cent backed the government's specific proposals.

 

When asked why so few CVAs were agreed, 60 per cent of insolvency practitioners felt company directors preferred to go into administration or even wind the company up altogether, although 80 per cent felt directors did not seek help soon enough to make a CVA a viable option.

 

Andy Wood, Yorkshire regional chair of R3 and partner in The P&A Partnership in Sheffield, said changes to the rules, as well as the recent examples set by Focus DIY and JJB, could encourage more companies to choose CVAs. CVAs are a good rescue tool, helping businesses which are profitable in the long-term overcome a period of financial difficulty, but the current rules deter many companies.

 

A safeguarding period, where both the company and the insolvency practitioner are protected from liability, may help to make the CVA a more viable option. In this recession, the more options we have to save companies and jobs, the better.

However, another reason so few CVAs are processed is that business owners leave it too late to seek help and it therefore becomes harder to persuade creditors that the company is in a fit state to be saved. Businesses need to take advice early if they want to benefit from this option.