Clarks, New Look and Jigsaw – what do these well-known and established high street names all have in common? Within the last few months, each has launched their company voluntary agreement (or CVA) proposal.
In recent months, this typically lesser known insolvency option has certainly become one of the bigger retail stories, attracting a nationwide audience beyond retail, insolvency and property professionals. But what is a CVA and what are the advantages and disadvantages, as more and more retail companies appear to be turning to this type of agreement?
A CVA is a voluntary and consensual insolvency procedure and is considered the best rescue tool for a company that is viable going forward, but is burdened by historic debt. The Directors of a company are able to trade out of their current financial problems, provided that they have addressed the problems that caused the debt in the first place.
Landlords – there is no specific framework for a company or its licensed insolvency practitioner to follow when implementing a CVA. In the retail market, however, companies tend towards agreeing lease compromises, for example, agreeing changes to rent, term and dilapidations. This is because the cost of leasing their various retail units is one of their biggest liabilities.
It is these lease compromises that gather the most public attention, comment and debate – with the most visible aspect of a CVA often being the closure of stores while the company as a whole continues to trade.
Other creditors – while the focus for retailers has primarily been on their bricks and mortar estates, as the use of CVAs has increased over the years, questions have also arisen in respect of other common creditors. For example, The Insolvency Service has previously issued guidance that all non-domestic tax for the year that a CVA commences is a debt for the purposes of a CVA, even if there were no arrears of non-domestic tax at the point a CVA becomes binding. Pension schemes also have an interest in a CVA agreement and so should be considered in any CVA proposal.
As touched on above, the main advantage of a CVA is that it can help a retailer avoid terminal insolvency, often by compromising and terminating lease agreements – and so it can appeal to a creditor as a solution for the repayment of outstanding debt. However, what are the other advantages?
As you would expect, there are also some disadvantages to a CVA:
Ultimately while CVAs can reduce liabilities, they don’t offer a solution for managing operational change, directing overall profitability or the injection of perhaps much needed new capital.
There is certainly a lot of debate being generated around CVAs and their effectiveness, with former household names such as Mothercare and Debenhams being cited as examples of CVAs that just don’t work. However, it is important to remember the CVA success stories such as Homebase, which ended its CVA early after managing to improve its profitability as a result of its CVA.