Company Voluntary Agreements could become retail sector lifeline

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?

What is a CVA?

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.

What about the creditors?

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.

What are the advantages and disadvantages of a CVA?

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?

1. A CVA can be combined with other forms of insolvency procedure, which means it can take advantage of some of their benefits that it does not have – for example, the automatic moratorium available with administration.  It can also stop the threat of a winding up petition;
2. A CVA is less formal than other insolvency procedures, with the Directors and shareholders remaining in control of the Company, and only requires court involvement if challenged.  This means that costs can be kept to a minimum, an attractive prospective for creditors;
3. At the time of writing, it is a useful tool in European cross-border insolvencies;
4. CVAs can improve cash flow quickly – onerous customer/supplier contracts can be terminated and staff can be removed with no redundancy payments in lieu of notice; and
5. A CVA is not publicly announced (unlike other forms of insolvency procedure) and the Directors do not have to tell customers that the company has a CVA in place, which has reputational merit.

As you would expect, there are also some disadvantages to a CVA:

1. CVAs are not binding on secured or preferential creditors.  This means, for example, that a retailer lender can still initiate an alternative and sometimes terminal insolvency procedure (e.g. liquidation);
2. While a CVA can be used in conjunction with another insolvency procedure, it will more likely than not result in increased costs which could ultimately have a negative impact on the business as a whole;
3. There is no automatic statutory moratorium, beyond the agreement reached in the CVA.  This leaves a company more vulnerable compared with administration;
4. Currently there are increasing calls that CVAs unfairly impact upon landlords.  This has the potential for CVAs to be challenged under the permitted heads of challenge (for example New Look and potentially Clarks), which again can have a detrimental impact on the business as a whole;

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.

If you have specific questions about CVAs or require legal advice on any aspect of commercial real estate, please contact our experts Anne Lawrie and Fiona McKinnon.

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