R3 Press Release - 'CVAs and Pre-Packs not Interchangeable'

Article reproduced on behalf of R3, the Association of Business Recovery Professionals. AiB seeks to provide information on the insolvency industry and representative bodies but does does not necessarily endorse the content or opinions presented herewith.

Please note that CVA (Company Voluntary Agreement) and pre-pack policy responsibility lies with the UK Insolvency Service and is not the remit of Accountant in Bankruptcy.

Press release from R3, 06 October 2009:

With the Government considering adopting legislation to increase the use of Company Voluntary Arrangements (CVAs), CVAs have been seen as a 'positive insolvency tool' in cases such as JJB Sports and Focus DIY. However, their increasing usage is not necessarily designed to phase out pre-packs.

"CVAs and pre-packs are not interchangeable and apply in two very different sets of circumstances", explains R3 President Peter Sargent. "A CVA comes into effect earlier than a pre-pack in an attempt to stave off a sale of the business entirely.

"When the time needed to put together and vote on a CVA is not available to distressed businesses, a rapid sale through a pre-pack will prevent value seeping away and ensure better returns to creditors. Speed is crucial where the chief value of the assets resides in its staff. However, pre-packs and CVAs are merely two of several options for distressed businesses and nor are pre-packs by any means an Insolvency Practitioner's 'tool of choice'."

In a study by R3 earlier this year, of the 89 pre-pack cases identified in the month of April 2009, 5,478 jobs were at risk, but the pre-pack meant that 4,846 jobs (88%) were saved. Contrary to perceptions, not all pre-packs are 'phoenixes', in the same survey 60% of pre-packs went to the previous business owners while 40% found different owners.

Insolvency Practitioners stated that the top four reasons for utilising a pre-pack in the above cases were (in order of highest response): the sale needed to be fast; it was the best chance of saving the workforce; it was the only alternative to liquidation and there was marginally more returns to creditors.

"Preserving value and jobs are priorities and if a business ceases to trade there are no winners. This survey shows nearly 90% of jobs at risk were saved in a pre-pack, a much higher figure than the 60% under other administrations. Pre-packs are valuable in the right circumstances when speed is vital, buyers are scarce and jobs need to be saved."

Notes

• R3 is the trade body for Insolvency Professionals, and is made up of 97% of the UK's Insolvency Practitioners from all over the UK.

• R3 comments on a wide variety of personal and corporate insolvency issues. Please contact the press office, or see www.r3.org.uk for further information.