Forget the Chinese Year of The Dog – 2018 is the Year of the CVA
2018 has been reported in insolvency news sources as the year of the CVA (Company Voluntary Arrangement) and in particular the Landlord CVA. The news has been full of established high-street names using CVAs to help streamline their businesses by looking at their leasehold commitments, closing some premises and trying to get rent reductions for others.
Brands that have recently taken this route include Byron Hamburgers, Jamie’s Italian, Prezzo and Carluccio’s. But it’s not all about the restaurant trade, retailers New Look, Mothercare, Carpetright, House of Fraser and The Original Factory Shop have also proposed CVAs.
While they can be a successful solution they don’t always work. Both BHS and Toys R Us had CVAs approved only to enter into administration a short time later.
How does a Landlord CVA work?
A multi-site company will look at all the sites it operates from assessing them in terms of profitability and levels of rent. It will look to close any loss-making sites. It will then seek rent reductions from the landlords to help make the remaining sites more viable. The landlords often agree on the basis that having some money coming in is better than having an empty building. Other changes could be that rent is collected in smaller, more regular payments to make them more manageable for the tenant company.
The increase in CVAs has raised objections from landlords and other more stable rival retailers. Many landlords have complained that CVAs have been proposed where the company is not necessarily on the verge of collapse but has instead been used just to bolster profits for shareholders. As a result, The British Property Federation has requested the government carry out a full review of the use of CVAs.
A further Landlord objection is how the CVAs are agreed. A company looking for a landlord CVA needs a 75% positive vote from all the creditors involved with the business. However, it is potentially unfair if only the Landlord will suffer from the CVA.
The objection from fellow retailers is a recent phenomenon with rival retailers arguing that a Landlord CVA gives the struggling company an advantage over those managing to meet their rent liabilities. The fashion retailer, Next (a FTSE 100 company) has reportedly negotiated in certain cases that its leases contain a provision that if a CVA rent reduction is granted to a neighbour it should also be granted to Next.
CVAs also work better where they are part of a complete restructuring process not just looking to reduce rent liabilities and often fail if they are not accompanied by investment.
R3 (the trade association for the UK’s insolvency, restructuring, advisory and turnaround professionals) has recently commissioned research on the success and failure of CVAs and the report made a number of recommendations, including:
- CVAs should be capped at three years – CVAs typically last five years, but, the research shows, long CVAs increase pressure on the struggling company, increase the risk of failure, and do not guarantee better creditor returns.
- A pre-insolvency moratorium should be introduced – companies which used an existing, limited pre-CVA moratorium from creditor enforcement action, or which used the moratorium provided by administration, tended to have a higher chance of completing their CVA. The pre-CVA moratorium should be expanded to all sizes of companies, simplified and should be available for use ahead of any insolvency procedure. The moratorium would give companies more time to plan a CVA free from creditor pressure.
- Directors’ and insolvency practitioners’ duties should be more clearly defined – directors should be required to address financial distress at an earlier stage than now, while the insolvency practitioner’s role in a CVA should be clarified and reporting enhanced. Consideration could be given to extending the existing system of insolvency fee estimates to CVAs.
- Public sector creditors should have to explain why they won’t support a CVA – the research found HMRC was the most likely creditor to oppose a CVA but that it provided little feedback on its reasons for doing so. This prevents an effective negotiation – and sometimes leads to a company’s administration or liquidation, which can undermine returns to creditors, including the taxpayer.
- Standard CVA terms and conditions should be introduced – standard terms would improve the consistency of CVAs, reduce costs, and help build knowledge among stakeholders about how the process works.
With very mixed success rates and the increased objections raised it is likely that there will be some regulatory or legislative changes before long but until this happens it is likely that the CVA trend will stay with us.
If you would like advice on how a CVA may help your business, please do get in touch