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Pre-pack administrations and company voluntary arrangements (CVAs) offer directors and business owners useful restructuring options

Post lockdown, many directors will restructure their companies using insolvency procedures, most likely administration or a company voluntary arrangement (CVA).

The Government recently introduced a moratorium facility, which offers 20 to 40 days of protection from creditors. But a director who opts for this will undoubtedly find themselves considering a CVA or administration once the moratorium ends.

Why? Because depending on what you’re trying to achieve, administration and a CVA both offer excellent possibilities for restructuring.

A CVA is great if you’re going to continue trading and moving the business forward with the support of creditors.

However, a pre-pack administration is more appropriate if you’ve lost the support of creditors and want to start again. This is because a pre-pack allows a director to:

  • Cut ties with creditors
  • Buy back the useful parts of the company
  • Start trading again with a clean slate.

CVA vs Administration

With a CVA you’re shedding weight so you can travel lighter and further. You can shave 50% to 60% (or even more) off the value of your debt, and repay the balance over 5 years.

And all this can be done completely interest-free, providing you with an opportunity to be more competitive, lean and profitable.

A major difference between the procedures is that creditors in a pre-pack administration may end up with nothing. Directors can lose the creditors in a pre-pack, and strike a deal with the administrator to buy back the assets.

The administrator may require a personal guarantee, but the director can pay in instalments over many months. Effectively, the assets are transferred from the insolvent company into a new 1.

The new company starts trading immediately under a new name, and the cash generated is used to:

  • Improve the business
  • Pay the administrator for facilitating the pre-pack

Independent support

It’s essential that you seek professional advice before placing a company into any of the aforementioned insolvency procedures.

This support should come from an independent specialist rather than a lawyer or insolvency practitioner (IP). A lawyer is only likely to refer you to an IP who cannot provide independent advice in this situation.

For example, an IP is more likely to recommend a pre-pack administration over a CVA simply because a pre-pack will earn them more fees.

Furthermore, an IP will counsel the director before the company is placed into a procedure. But the IP also has a duty to protect the company’s creditors, which creates conflict of interest issues.

As the old saying goes: ‘No one can serve 2 masters.’ And that’s why it’s crucial you utilise the services of an independent expert to provide advice that’s in your best interest.

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