CVAs gain higher profile.
There has been plenty of comment around the subject of Company Voluntary Arrangements (CVAs) in the industry this week following outdoor retailer Blacks Leisure Group Plcs announcement that it is proposing a CVA. By Helen Dickinson
Although they have existed for over 20 years, it wasn’t until JJB’s CVA earlier this year that this comparatively unknown insolvency procedure gained a higher profile, particularly within the retail sector.
Since then, my colleagues in restructuring at KPMG have worked on a number of CVA appointments and it seems likely there will be more in the coming months as an alternative to conventional administration.
Any insolvency procedure is going to be unpopular because of the inevitable result of a loss to creditors and the loss of jobs of those employed by the failed business. However, there is quite a mix of views on the subject of CVAs.
The point of a CVA is to enable a company and its creditors to come to a compromise agreement, therefore avoiding administration or liquidation. It provides a company with some breathing space to allow it to reorganise or restructure its funding and/or operations with as little disruption to day-to-day trading as possible, and with the control of the company usually staying with the existing management.
In a nutshell, under a CVA the existing directors and management aim to reach an arrangement with creditors to restructure the business and put in place a plan to pay off its debts. This may involve a partial write-off of debt, rescheduling of payments or renegotiation of contracts such as property leases. If enough creditors can be persuaded that this is a better outcome than full administration, then the proposal will be successful.It is therefore important to point out that the large majority of these procedures save thousands of jobs and rescue the viable part of the business.
There is a suggestion that a CVA in some way gives an underperforming business a competitive advantage. However, a CVA gives all stakeholders the opportunity to discuss the best compromise in an open and collaborative manner. By contrast, a company that goes into administration leaves landlords and trade creditors in a worse position, with this group having little say in the process.
Make no mistake though; a CVA is not an easy option. The process currently offers no moratorium against creditor action – which an administration would – while it is being negotiated. A disgruntled or predatory creditor can launch legal proceedings to the disadvantage of other creditors, and to the detriment of attempts to rescue the company, which goes some way to explaining why companies have understandably been reluctant to follow the CVA route in the past.
But the results can herald a dramatic turnaround of a business. For example in the case of JJB the company was experiencing trading difficulties with a shortage of working capital, excessive debt and some recent acquisitions which had turned out to be heavily loss-making. Over 100 of JJB’s stores had already closed, and the rental obligations on these properties were impacting severely on its trading performance.
While getting agreement to go down the CVA route without the protection of a moratorium was a struggle, the major stakeholders agreed that the stigma of an administration order would be more likely to result in the company collapsing.
The CVA option was vindicated in October when the company reached an agreement to raise £100 million in a share placing to pay down debt and finance its turnaround strategy.
When a company enters administration or liquidation there can be serious and damaging consequences: the company can quickly lose its value, while job losses and store closures are often an unfortunate inevitability. And from a creditor’s perspective, the amount of money that can be recovered from a company in administration or liquidation is almost invariably less than what can be recovered from a company trading on through a CVA.
On the other hand, a CVA is designed specifically to allow all parties to negotiate a compromise agreement to try to resolve the company’s difficulties. It can avoid the cost and trauma of administration. And, providing the underlying business has a prospect of trading successfully in the future, it can preserve jobs, allow trade creditors to receive some or all of what is owed to them and allow banks to recover at least part of their lending.
While the short term outlook for retail in the lead up to the crucial trading period is good, the longer term outlook is much less rosy and will undoubtedly give rise to more casualties in the year ahead. The last recession showed us just how far reaching the implications of widespread job losses and company failures can be. An insolvency process which involves the wider creditor group in discussing the best way forward for a struggling business surely provides worthwhile benefits.
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