CVAs fail to save half of struggling businesses

Retail, as a sector, has long been under pressure from increased competition from online retailers, which has resulted in reduced footfall on the high street, affecting many companies, including many well-known names.

Between 2016 and 2019, 13 of 23 company voluntary arrangements (CVAs), which are used by UK businesses to reduce their debts, saw their group going into administration, while other companies that did not agree a CVA ended up seeking investors to buy the business.

What is a CVA?

A CVA is a process under the Insolvency Act 1986 which enables a company to make proposals to its unsecured creditors to compromise their claims, provided 75% of those creditors, by value, vote to approve it.

If there are “connected creditors” comprising that 75% who wish to approve the CVA, there is then a second round of voting and the CVA will only be approved if 50% of the unconnected creditors vote in favour of it.

Within the CVA proposal, the company will set out the consequences of the CVA not being approved. This is normally that the company will enter into administration or be wound up, with the result that there would be a much worse outcome for creditors than if the CVA were to be approved.

Why do companies choose the CVA process?

CVAs have become popular in recent years, particularly as they are a flexible restructuring tool that allows the business to continue to trade and allows the directors to remain in control of the business. CVAs have been used extensively in the retail sector where the principal issue is the need to restructure the business’ liability to pay rent.

In short, for a CVA to work, the proposals the company makes to its creditors within the CVA need to be viable, realistic and achievable. For that to occur, the directors of the business need to understand the reasons why the company has insolvency issues and what steps and changes the business needs to make to tackle those problems.

Why do CVAs sometimes fail?

Quite often the underlying problems which have caused financial distress for the business remain.

If the company continues to have difficulty in trading after the approval of a CVA, then two things are likely to happen: first, the company will struggle to make the required financial contributions under the arrangement, and second, it will incur new additional post-arrangement creditors that it may be unable to pay.

Invariably in that situation, either the creditors will need to agree to vary the terms of the CVA, or creditor pressure (particularly from secured lenders) will result in the failure of the CVA and the appointment of an administrator.

Should you have any queries arising out of this Keynote, please do not hesitate to contact Stephen Young using the details below.