Neil Doncaster, the head honcho at the SPL, keeps telling anyone who listens that a company voluntary arrangement is the same thing as a newco. This is nonsense – but he persists with these remarks unchallenged. Anyway, we’ll keep this simple and ignore floating charges and rights in security.
Here is a scenario. Alpha Ltd is a company. It is owned by A and B who each have 50% of the shares. The company is run badly and owes vast sums of money to creditors. The company goes into administration.
(a) Scenario 1 – Alpha Ltd’s creditors are approached by the administrators for Alpha Ltd who indicate that someone is prepared to invest in Alpha Ltd. This investment – which will keep the business going – will see a financial investment but will only be made if the creditors agree a company voluntary arrangement. The CVA will give the creditors 5 pence in the pound on their debts. The creditors have it in their power to reject this, but may agree if the value they get on the CVA will be greater than they get if the company is liquidated.
If Alpha Ltd exits on a CVA A and B remain owners of the shares (except insofar as incidentally (and outwith the control of the creditors) there is a deal to transfer their shares to the investor. The investor could of course be one of the existing shareholders).. They can appoint directors. All of the assets of Alpha Ltd remain with Alpha Ltd. The same entity exists.
Now let’s consider scenario 2.
Scenario 2. This is the most common way to exit administration, the “newco” model. Typically it will be done quickly in the early days of administration- in order to preserve the value of the business, and in the best interests of the creditors (who the administrator is meant to be acting for). Anyway, in this model the investor in Alpha Ltd sets up a new company, Omega Ltd. Omega Ltd is owned by C – a new investor (or it could be set up by A and B – such things happen). It agrees with the administrators (who have had prior approval from the creditors – such things are required no matter what some journalists tell us) that the whole turnover of the business of Alpha Ltd is transferred to Omega Ltd – all assets, all contracts and rights (that are capable of being transferred – some rights cannot (eg contracts where particular parties were chosen for special reasons) and will die with Alpha Ltd). The liabilities of Alpha Ltd are left with Alpha Ltd. Omega Ltd doesn’t want them. The net effect is that the proceeds of the sale of the business assets goes to Alpha Ltd which will be liquidated and who then have to pay off the creditors, potentially pennies in the pound. Alpha Ltd will then be dissolved. Wound up. It will join the choir invisibule. IT will be an ex-company. No more. Expired. It will have gone to the great companies house graveyard in the filing cabinet.
Now using your skill and judgment can you spot the difference between these two scenarios?
And if you can spot the difference do you think you could drop a note to Neil Doncaster explaining it.