Ailing firms 'cannot rely on law for help'

COMPANIES have been warned not to rely on new insolvency legislation to rescue them when they are about to go bust.

The government is planning to extend the time companies can remain protected from creditors while negotiating a company voluntary agreement (CVA) which is a "debtor-friendly process" similar to the US-style "chapter 11" where companies can continue trading while being protected from creditors.

Currently, small firms can get the extra time, but larger firms cannot and the government is looking to extend it to bigger companies.

"This would mean that going into administration is not the only option when seeking protection from creditors and could see the use of CVAs increase significantly," said Blair Nimmo, head of restructuring at KPMG in Scotland. "It would certainly bring about a shift in the 'centre of gravity' of corporate rescue and would see CVAs become a key restructuring option for distressed UK companies."

But they will not be suitable for all companies, particularly those that fail to persuade creditors they will stand by their agreement, he said.

"People should not go away thinking that liquidation, receivership and administration no longer exist and suddenly we have a panacea for all ills. That is not the case," he said.

"The vast majority of cases will still not be appropriate for a CVA, but in certain cases they will be. The CVA has to create proposals that can make the future of that company viable."

The warning comes as McTavish Ramsay, a Dundee-headquartered door manufacturer, has successfully applied to the court to enter into a company voluntary arrangement with its creditors.

The firm's creditors must agree to the arrangement – which will see them receive less than they are owed but will save 100 jobs – at a meeting on 26 February.

Under the terms of the three-year CVA, which will be supervised by Nimmo and his KPMG colleague Neil Armour, it is envisaged that McTavish Ramsay will provide a "materially higher return" to creditors than if the company failed.

Ian Stillie, McTavish Ramsay's executive chairman who was appointed in December last year, said: "We have a good underlying business here and a CVA is the right solution since we explicitly ruled out a pre-pack administration or a phoenix arrangement where the returns to creditors would have been significantly less and possibly zero."

CVAs have already been used to stave off insolvency by a number of firms, including JJB Sports and Edinburgh restaurant Oloroso.

According to Nimmo, CVAs are "substantially quicker" than the American system. "Chapter 11 can be very expensive and very slow, where CVA can be a relatively quick and inexpensive process," he said.