We have seen a number of number of high street stores trying to restructure their businesses in recent times using a process known as a CVA. New Look, Carpetright, Mothercare, Prezzo, Byron Hamburgers and House of Fraser are amongst the well-known names that have used the process to try and reach an agreement with their creditors to reduce their cost base and turn around the loss-making parts of their businesses.
But what actually is a CVA? In its simplest form, it is an agreement with creditors that whilst things cannot continue in their current form, if the creditors agree to a number of proposals, some of which will usually include some debt forgiveness, then the company’s management believe that the future will be better, and most certainly give creditors a better outcome than if the company closed and entered Administration or Liquidation.
What those proposals actually include will be entirely dependent on the circumstances of the company in question. A regular feature of the recent high profile CVAs has been a proposal that the landlords of stores which are under-performing and that the management wish to close, accept a reduction in the amount that they would be entitled to receive under the terms of the lease in normal circumstances. For other stores which are on the borderline of closure, then a reduction of the rent payable is sought. Profitable stores landlords may be relatively unaffected. There may be little or no impact whatsoever on stock suppliers and other creditors, with payments to be made in full.
The concern that this gives the landlord community is the legal principle that for a CVA to be passed, it requires 75% in value of the creditors to vote in favour of it. Even if the landlords all vote no, then if they are outvoted, then they find the proposals enforced regardless. Whilst there are legal options available to any landlord that feels that they are being unfairly prejudiced by the CVA, these come at a cost themselves and as with all court action, a risk of losing the appeal.
Another criticism is that the CVA serves as nothing more than a sticking plaster on the company’s financial difficulties and does not address the more deep-seated issues that it may face. British Home Stores and JJB Sports are examples of where a CVA was agreed with creditors, but the businesses ended up in Administration anyway.
CVAs are a useful tool in the insolvency practitioner’s armoury. Used properly, they can strike the right balance between debt forgiveness and future prospects, and allow a struggling business to return to health, enabling continued trade between the company and its suppliers which is profitable for all involved.
The Restructuring and Recovery team at AAB have many years of experience in advising directors of distressed businesses, and are happy to meet with any director looking for advice for an initial meeting at no cost and with no obligation.
For more information contact Neil Dempsey, Restructuring & Recovery Director (firstname.lastname@example.org) or your usual AAB contact.