Company Voluntary Arrangements “CVAs” – Not Just for Large Retailers
John Baalham, Specialist in Company Voluntary Arrangements, Looks at the Growth in CVAs
Company Voluntary Arrangements, or CVAs for short, have seen a huge rise in the last 12 months, mainly due to the recent economic uncertainty, including that with our European partners over the protracted Brexit talks. On top of this now we have the global issue of the Corona Virus (COVID-19) pandemic, which has hit UK businesses like a freight train.
In this article, John Baalham one of our CVA specialists looks in more detail at why this insolvency procedure, which was underused, has grown so much. We look at the benefits of using it; the implications for landlords; and why CVAs work for all types of business -not just big retail.
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The Rise of the Company Voluntary Arrangement
“I believe the CVA insolvency procedure has not been used enough until recently. It is a great insolvency tool at an Insolvency Practitioner’s disposal in the right circumstances. At Antony Batty & Company LLP we have been using this procedure to great effect and have successfully restructured and saved hundreds of businesses in financial distress often with impending winding up petition’s weeks away, sometimes only days.
CVA’s have become common place in the High Street with popular fashion stores such as Select and family favourite restaurants such as Pizza Express, Jamie’s Italian and Byron Burgers using them. More recently, there have been media reports that River Island, Pizza Hut and Yo Sushi have engaged insolvency Practitioners with a view of putting Company Voluntary Arrangement proposals to their respective creditors.”
Before we look at the reasons for the rise in the number of CVAs, it will be helpful to recap on what a CVA is and how it works.
CVAs – A Brief Summary
“Company Voluntary Arrangements allow a Company in financial difficulties, probably facing insolvency, to make a formal offer to their Creditors in the form of a proposal. This process is overseen by Licensed Insolvency Practitioners such as Antony Batty & Company, called the CVA Supervisor. The CVA proposal sets out the Company’s assets and liabilities and includes a detailed plan as to how the Company envisages paying those creditors back. In the main, CVA’s are based on the company paying monthly contributions from trading profits to the Supervisor, which are then paid out to creditors, who have proved their debts, as dividends.
The level of the overall dividend, which can be anywhere between 1p to 100p in the pound depends on the company’s projected profits. Crucially, however, the proposed dividend will only be set at a realistic level to ensure the CVA is both viable to the company and fair to the Creditors. The proposal also sets out the reasons behind the company’s financial difficulties and details a road map out of the situation. The CVA proposal will also explain the financial consequences to creditors both of accepting or rejecting the proposal. The outcome of a rejected proposal often ends with the company going into Liquidation or Administration.
The meeting to agree CVA proposals has two rounds of voting, the first must receive at least 75% of the vote (by value) from the unconnected creditors – who include suppliers and utility companies, for example – to be approved. Modifications can be made to the CVA proposals by creditors and these will either be accepted or rejected by the board of directors. These modifications will often impose a requirement for a minimum dividend. The second round of voting is specifically for the connected creditors and requires at least 50% of the vote, again by value, voting in favour of the proposals for it to be approved.”
Company Voluntary Arrangements and Landlords
“A Company Voluntary Arrangement allows the Company to give up under-performing shops/ premises or restaurant leases, which is why we see many high street retailers entering CVAs. The Company does this by offering either a heavily reduced rent to stay in the premises if the landlords approve the proposal, or if the landlords don’t accept the proposal, the Company can move out which leaves the landlord with empty premises earning no rent at all.
This may seem unfair for the landlord, but the landlord retains the right to re-entry and to forfeit the lease and this cannot be changed by a CVA. So, this effectively means that the landlord can either agree to the cut in rents or take the property back. Given the current economic climate, this is a risky proposition for a landlord to consider, as it is likely to be difficult finding another tenant. This risk is further compounded by the landlord’s requirement to meet on-going rates even if the premises remain empty.
If the landlord decides to take the property back, they can claim for a year’s loss of rental income and they can also claim a month’s rent as dilapidations if the premises must be made good.”
A Breathing Space – the main benefit of CVAs
“One of the key plus points of a CVA is that the directors remain in control of the business and its day to day management decisions. This is not the case for directors in either liquidation or administration procedures. There are also no investigations into the directors’ conduct to establish what went wrong. As such, no directors’ conduct report is filed with the Insolvency Service, removing the risk of an investigation that might lead to director disqualification.
The Company remains intact so there is no need to form a new company, change bank accounts or assign property lease, etc. A Company Voluntary Arrangement provides continuity.
Crucially, because a CVA is a legally binding agreement between the Company and its Creditors, it relieves the immediate threat of a winding-up petition against the company, because its liabilities become ring-fenced by the CVA. This allows the business to be restructured to reduce operational expenses, which might include making redundancies and disposing underperforming shops. Ultimately a CVA gives a financially distressed business the breathing space it needs to turn its fortunes around and become, once again, a successful business.”
The Final Word: CVAs are not just for large retail chains
“Given the significant rise in the use of CVAs over the last 12 months and the expectation that this is a sign of things to come, I believe that the CVA will continue to be an excellent tool to allow Companies to exit under-performing leases and/or reduce rent in the struggling High Street retail sector. However, the CVA procedure is not only there for the big retail chains, and it is one insolvency procedure that we believe will be of great use to many businesses affected by the Covid-19 lockdown.
At Antony Batty & Company LLP we have been CVA specialists for over 20 years with a lot of success with small and medium size businesses across an array of business sectors. Do not just take my word for it though, check out some of the testimonials our clients have provided.”
About the Author – John Baalham
John Baalham is one of our CVA specialists at Antony Batty & Company LLP and has been with the firm for over 9 years. If you are a business/ restaurant owner and you are experiencing financial difficulties, then please don’t hesitate to contact me or call me at our London office on 020 7831 1234 or alternatively by email at firstname.lastname@example.org.
You can also follow us on Twitter @abcinsolvency @abcbournemouth @abc_brentwood .