Why 2018 may turn out to be the Year of the CVA
May 4th, 2018
You can be a multinational conglomerate with stores in 20 countries, or a one shop trader in Neck End. When sales are falling, costs are rising and insolvency is beckoning, both have been known to reach for the relative comfort of the CVA.
The Company Voluntary Arrangement is essentially a deal between a company and its creditors to pay back some or all of those creditors over a period of time, in order to prevent it failing. Although the directors remain in control of the company and its continued trading, someone like me is appointed to ‘supervise’ the company to ensure it meets the terms of the CVA and to keep the creditors informed as to progress.
The aim is for the company to get back on an even keel, pay off its debts as best it can and eventually trade itself back to better times. This year, several large organisations and their advisers have turned to the CVA in a last-ditch attempt to stave off insolvency as ‘high streets’ around the world experience problems.
You may remember that last September on this blog page we looked at how Burslem had become the worst performing town in the UK when it comes to vacant shops, with nearly one in three sitting empty. On the same day, Toy ‘R’ Us filed for bankruptcy after it had failed to make its CVA work.
But the CVA – if appropriate to the circumstances and if set up correctly – CAN be the best way forward for both the directors and the creditors.
This is why several large companies including Jamie’s Italian, Prezzo and the fashion retailer New Look have gone down the CVA route this year. This month Carpetright announced plans to close up to 100 of its stores as part of its CVA. This year, the CVA seems fashionable for large corporates. Even House of Fraser has announced plans for a CVA here.
It is easy to see why. Retail is struggling in many places. In the United States, famous names such as Sears, Gap and J. C. Penney are looking at store closures. By April, more than 90 million square feet of space in the USA had been vacated. Back in the UK, stores are opening on UK high streets at their lowest rate in seven years.
A CVA is not right for every company facing difficulties and, apart from Toys ‘R’ Us, there have been some other spectacular corporate collapses in the retail sector after going down the CVA route including JJB Sports and BHS. But in the same way that any business, big or small, can run into trouble so can any business of any size make good use of a CVA.
In my experience, a CVA is an exceptional tool that can be used to restructure the debts of a viable company in order to avoid failure or formal insolvency. However, it is not suitable in all circumstances and advice is needed to determine if a CVA is appropriate, including using the CVA process in conjunction with other rescue procedures (such as the injection of equity or a change in the management team, for example).
So although a CVA is for anyone it is not for everyone. We have been successfully organising CVAs for companies, working closely with their accountants and directors, since Day 1 here at IPD so please give me a call if you have a situation that you would like to discuss.