How successful are Voluntary Administrations at saving a company?…..not very!
Voluntary Administrations, or “VAs”, were introduced in the early 1990s as a new insolvency law designed to save a company. How successful have VAs been?…..Not at all!!! So let’s have a look at how often a VA saves a company and then examine why they have been so spectacularly unsuccessful in achieving the stated aim.
What is a successful VA?
That’s a tough one! Firstly, accept that in all corporate insolvencies creditors will loose money and most shareholder value is destroyed. So all insolvency legislation, and struggling insolvency practitioners, can do, is reduce the losses and perhaps make some stakeholders less unhappy! If a company can be saved then the legislation tells us that the appropriate path is to enter Voluntary Administration “with a view to executing a Deed of Company Arrangement”, or a DOCA. A DOCA is simply a deal agreed between a company and its creditors. If the legislation were working as it was intended, then we would expect to see a reasonable proportion of insolvent companies choosing VAs over other types of insolvency appointments and a reasonable number of companies entering VA going on to successfully execute a DOCA.
The raw statistics
I’ve compiled details of company failures for the year ended June 2011 and looked at the role of VAs. Here is the data from the 9,829 companies that hit the wall in that year:
- only 15% of corporate insolvencies were VAs;
- of those VAs, 33% successfully executed a DOCA;
- resulting in a net 5% of insolvent companies successfully executing a DOCA.
In my book that is a Fail. Yes, I’ll accept that most insolvent companies can not be saved, but a ratio of 1-in-6 choosing to try for a restructuring is too low. And, yes, some companies that enter VA should have their proposals for a DOCA rejected, but a success rate of 1-in-3 companies entering VA going on to execute a DOCA is again too low.
What’s gone wrong?
I could bang my drum for a few hours on this topic but I’ll restrict myself somewhat by raising just two points:
- If a company is trading, then a VA is difficult and needs constant attention from the appointee – hence the Administrator’s fees are high making VAs unsuitable for small companies;
- Most medium to large companies will have a Secured Creditor, being a Bank – there is very little incentive for a Secured Creditor to leave a company in the hands of an Administrator and a lot of good reasons to take control by the appointment of a Receiver, who only has to look after the Secured Creditor.
So there are good reasons why VAs are not well suited for small….medium and …. large companies. Not a lot of wriggle room there!
But it is not all doom-and-gloom. I’ll outline in a follow up blog when a VA is a useful process.