Everyday seems to bring more news headlines which highlight the numerous challenges being faced by many sectors as a result of reduced consumer spending, rising overheads and the weaker pound. Once an absolute last-resort, many organisations are now turning to CVA’s as a way of both managing outstanding debt and negotiating a way forward to ensure the survival of their business.
A Company Voluntary Agreement (CVA) is a formal insolvency procedure in which a company proposes revised repayment terms to one or more creditors with the help of an appointed insolvency practitioner. It is negotiated on behalf of the organisation in difficulty with its creditors to enable them to initially reduce their debt and overheads and then shrink their overall on-going costs. To achieve this 75% of creditors, by value, need to agree to a reduction in, or write-off of the debt owed to them. In addition agreement may need to be sought from the PPF (Pension Protection Fund) if the organisation concerned has debts which affect its pension scheme.
For the organisation securing agreement to a CVA – recently Byron Burger, Prezzo, Jamie’s Italian, Poundworld, Carpetright, and New Look have all gone down this route – it means a way out of an (arguably) unsustainable situation, business survival at least in the short term, and the probable requirement to examine and even restructure its business operations in the future. Indeed most companies successfully negotiating a CVA will need to demonstrate a clear understanding of the issues that have caused their problems and a transparent action plan to address these in the future. They will also likely require access to new funding and working capital.
For the insolvent company’s creditors it means reduced revenues both for the existing outstanding debt and possibly on-going for the future. Using a CVA should give unsecured creditors a better financial return than they would achieve in alternative insolvency procedures.The directors remain in control of the business which continues to operate as normal, subject to the terms of the CVA and under the supervision of an insolvency practitioner.
Increasingly however retail landlords in particular are coming under pressure from CVAs which allow retail tenants in difficulty to offload underperforming units and reduce rents. Whilst a CVA ensures continuity of tenant and some revenue, albeit reduced, many landlords feel increasingly vulnerable that agreements they originally made in good faith are being torn up and revised to their detriment. Frequently they find they are unable to resist as typically the proportion of the total debt owed is not big enough to allow them to outright reject a CVA proposal. Latest reports now suggest some landlords are planning to group together to put pressure on plans for future CVA arrangements to ensure that they are only used as an emergency option. The latest news surrounding the future of beleaguered House of Fraser hints at its landlords now being prepared to even reject plans for a CVA which could force the chain into administration.
Many landlords also believe CVAs are creating an unfair playing field for those tenants who are paying the market rate, however the alternative may well be an empty property that is hard to re-let and an on-going rates responsibility. Apparently fashion chain Next now plans to insert a “CVA clause” into its future lease agreements to enable the reduction of its own rents if any of its landlords’ other tenants, or its properties in close proximity, agree a CVA.
Recently published research, produced by the University of Wolverhampton and Aston University, which was commissioned by insolvency and restructuring trade body R3 and supported by the ICAEW, suggests reforms should be made to improve the effectiveness of CVA’s. It recommends a cap on CVA lengths, more time for companies to plan a CVA, clearer roles for directors and CVA supervisors, more engagement from public sector creditors, and the introduction of standard terms.
CVA’s allow creditors to at least have a voice in the insolvency process. They are flexible and can be adapted to different circumstances and frequently enable more money to be returned to creditors than in other insolvent circumstances such as administration and liquidation.
ReSolve’s experience confirms that taking the right advice, at the right time and developing a strong business plan with the guidance of a respected insolvency practitioner maximises an organisations chances of long term survival. The difference between businesses that survive and thrive and those that fail is how well they manage difficulties.
If you or any of your clients are facing difficulties and considering a CVA arrangement ReSolve has the expertise to advise, manage and deliver a successful resolution. Please contact us to discuss options without charge or obligation.