Why Are Retailers Turning To Company Voluntary Arrangements?

Published April 2018

Company Voluntary Arrangements (“CVAs”) have, over the last few years, become an increasingly popular insolvency tool with retailers and restaurant groups trying to solve financial difficulties.  According to the Retail Gazette, 10 retailers or restaurant groups have launched a CVA or entered Administration this year.

CVAs have been around since 1986 and allow management to put a proposal to a company’s creditors and shareholders as to how existing financial difficulties (polite speak for “they are insolvent”) are going to be overcome whilst the company continues to trade.  Inevitably, but not necessarily, it involves creditors compromising their claims as part of the proposal to go forward.

Retailers facing financial difficulties generally have two options available to them, Administration or CVA.  The former will usually mean the eventual failure of the company with at best its business and assets being sold to a third party(ies), whereas the latter allows the company to continue to trade within its existing legal entity.

If successful, a CVA will produce a far better outcome for landlords, suppliers, employees, shareholders and management than Administration, which is why a properly constructed CVA proposal is likely to be approved by the required majority of over 75% by value of creditors voting.  Each stakeholder group have their own reasons for supporting a CVA;

  • Landlords - Even at a reduced rent it is better than having empty premises,
  • Suppliers  - They believe they will receive a better return than Administration and they still have a customer to sell to, albeit probably on pro forma or Cash on Delivery;
  • Employees - Although there are likely to be job loses, the majority have a good chance of keeping their jobs;
  • Shareholders - Their shares continue to have some worth which hopefully will recover lost value in time,
  • Management -  at least some of them will keep their jobs and have the opportunity to get it right the second time.

But why now have CVAs become so popular?  The answer to this question goes back several years as margins have been squeezed, online completion increasing and management failing to react quickly enough to the changing retailing environment.  Couple this with increasing business rates and rising employment costs and it is not difficult to see that those who have not been able to adapt have built up increasing financial pressures that are unsustainable.

Saddled with long term expensive shops and stores, with leases extending well into the future, a CVA allows a retailer or restaurateur to reach a compromise, with what may be many landlords, as to how they are to be treated and crucially allows the return of unprofitable units to give the remaining a fighting chance of survival.

Any management team contemplating a CVA however needs to fully understand and have explained to them that a CVA on its own is not a solution.  The need for a CVA in the first place must be as a result of management decisions or actions in the past.  To simply continue with the same management team doing the same things as the past will result in any CVA failing.  The crucial questions to answer when considering any CVA is “What’s new and/or what will be different in the future?

Cash flow pressures during the period of the CVA should not be underestimated by the management team.  Although retail and restaurants are in a much stronger position to generate immediate positive cash flow compared to, say, an engineering business, suppliers will not be prepared to extend credit and part of any CVA proposal is that financial contributions will need to be paid into the Arrangement for the benefit of creditors and others bound by the Arrangement.    

If you would like further information about CVAs and how they can be a solution to retailers and restaurateurs facing financial pressures, then please do not hesitate to contact either Tony Mitchell or Phil Ballard on 024 7655 3700 or visit our website at www.cranfieldbusinessrecovery.co.uk

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