In defence of CVAs and pre-packs: The UK’s insolvency regime might not be perfect, but it does minimise creditors’ losses and protects staff more than alternatives
When a company enters an insolvency procedure, it does so because its debts are unpayable or unsustainable. In all likelihood, creditors face losing money. There just isn’t enough to go around.
And, without intervention, the impact of the company’s insolvency extends far beyond just the creditors’ loss: jobs could go and suppliers might be losing a key customer, putting their own solvency – and more jobs – at risk.
The insolvency regime is there to ensure creditors’ losses and the knock-on effects of insolvency are minimised.
Since the 2002 Enterprise Act, the UK has sought to do this by emphasising business rescue. If a business can survive insolvency, it can continue to contribute to the economy, continue to create jobs, and repay debts it owes.
It’s an effective regime. In 2013-14, two-in-five of the businesses the insolvency profession worked with were rescued. That’s 230,000 jobs saved.
The insolvency profession completely understands the frustration of creditors, like landlords, suppliers, or employees, who do lose money or are made redundant.
But creditors should remember two things. Firstly, the insolvency practitioner, a highly regulated and qualified individual, acts as the creditors’ representative, not the insolvent company’s.
The more creditors engage with the insolvency practitioner, the more chance they have of seeing more of their money back.
There are numerous examples of CVAs where creditors are happy, including complex retail insolvencies. A CVA must be agreed by at least 75 per cent of creditors of the company.
It’s also important to remember the insolvency practitioner is still working for creditors in situations where insolvent businesses are sold to their original owners. Any sale has to be the best deal available and ignoring an original owners’ offer could mean less back for creditors.
Secondly, creditors take a risk when they trade or rent out property. Some trading is riskier than others: the bricks and mortar retail sector, for example, is still struggling to cope with the rise of online competitors. Regardless of how the insolvency regime works, commercial risk will remain.
Reforms to the insolvency regime are already under way. Since November 2015, to improve trust and transparency, a pool of independent business experts has been offering opinions on proposed ‘pre-pack’ sales to connected parties, such as original owners, on behalf of creditors. Reforms like this should be given a chance to bed in.
Further reforms can be made to improve the position of unsecured creditors in insolvencies. An example of this is the conflict between insolvency and employment law which causes problems with the way redundancy consultations are carried out. Urgent action is needed from government on this point.
Insolvencies are not perfect situations and some creditors are always likely to lose out.
But our insolvency regime, highly rated by the World Bank, is effective at rescuing businesses, rescuing jobs, and minimising the impact that failed businesses could otherwise have.