The recent Company Voluntary Arrangement (CVA) of fashion chain, New Look, Carpetright apparently also looking to follow suit and House of Fraser and Mothercare reporting problems, the retail landscape is heading for further unrest.
What is a CVA?
How do CVAs work and what is the benefit of a CVA against administration? How can it help embattled companies and retailers in particular?
Essentially a CVA is an agreement between a company and its creditors to freeze their debts with repayment to be made over an extended period, commonly up to five years. The key feature of a CVA is that it is a formal process under the Insolvency Act and Rules which means that all creditors are bound by its terms. Dissenting creditors are unable to upset the plan, provided a requisite majority vote in favour.
Whilst the plan under the CVA is supervised by an Insolvency Practitioner (IP) the directors remain in control of the company and it is able to continue to operate normally and generate income for the benefit of its creditors. The company usually will be required to make regular payments into a pot controlled by the IP who will make distributions to the creditors when there is enough in the pot to make it cost effective to do so.
While a CVA allows the company the breathing space it needs to reorder its finances and allows a return to be made to creditors, the outcome in an administration in most cases is less positive. The administrator displaces the directors and becomes responsible for the day to day affairs of the company. In many instances whilst the business may survive in some form through a sale by the administrator, the company may not. The additional costs of an administration and the existence of prior ranking creditors with security mean that the ordinary unsecured creditors often receive little or no return.
What is the process associated with a CVA?
The legislation which deals with CVAs is relatively short which allows a high degree of flexibility with the process so it can be moulded to fit the circumstances of a particular company, but there are also safeguards built in and creditors have the comfort of an independent person supervising the plan.
The big issue for retailers such as New Look is being locked in to property leases with terms which in some cases are unsustainable in the current market. The reports on the New Look CVA indicate that some 60 stores will close with around 1,000 staff being made redundant. The CVA allows for the termination costs under leases and staff redundancy costs to be dealt with in the CVA.
Whilst a CVA is an excellent procedure in the right circumstances, it is not a panacea for all business problems. It is important that the business is able to demonstrate that the problems of the past will not be repeated and that it will be able to generate sufficient cash to provide a return to its creditors. Trading in a CVA can be tough with suppliers likely to restrict credit terms and with markets so unpredictable projections showing future profits may become out of date very quickly.
It will be interesting to see whether or not the retailers currently looking to restructure through a CVA will last the course.
If you would like any further information relating to CVAs, please contact Wilkins Kennedy’s insolvency team at your earliest opportunity, to talk through your options and find a solution.