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Updated: 6th March 2020

Company Voluntary Arrangements (CVAs) – the process that enables companies to settle debts by paying only a proportion of the amount owed to creditors – have been in the spotlight this year with the well-publicised difficulties facing the retail sector.

Critics – particularly landlords – have voiced concerns that CVAs are increasingly being abused to circumvent leasehold liabilities relating to unprofitable trading locations.

House of Fraser – before being bought out of administration – was another high-profile high street name to opt for a CVA, much to the dismay of its landlords. In a joint statement, they said: “CVAs were designed as a means to rescue a business, not simply a tool to shed undesirable leases for the benefit of equity shareholders.”

Landlords feel as though they’re stuck between a rock and a hard place whilst, in their defence, companies are merely using the legal framework available to them – so what is the future for CVAs?

Jon Munnery, partner at RBR Advisory, shares his thoughts on the decline of the British high street, the rise of CVAs – and where we’re heading next.

“CVAs have hit the headlines recently with some big name store closures – House of Fraser, Poundworld, Carpetright, and Mothercare.” says Jon.

“They were introduced with the Insolvency Act in 1986, and traditionally they’ve not been used as often as liquidation or administration. But they’re becoming much more common, especially in retail.

“There’s been a bit of bad press over the years – CVAs don’t have a huge success rate. R3 (the Association of Business Recovery Professionals) found that only 18.5% of CVAs they studied end up being successful. But CVAs aren’t necessarily bad, it’s just sometimes companies aren’t given the right advice.

“It’s so important to get the advisory piece right first, so proper measures are put in place to get the business back on track. Insolvency advisors must ensure the CVA is managed successfully. They have a duty to the body of creditors who need to approve the CVA. And if the CVA is approved, they need to supervise the new overall approach for running the company.

“Whereas standard CVAs look to bind all unsecured creditors equally, in the case of retail CVAs, landlords are clearly disadvantaged. As long as 75% of creditors agree to the CVA – and with many being paid in full, they will – landlords, as a minority, are forced to accept the CVA. This may mean having to accept lower rents or be left with empty units through store closures. We’re seeing one class of creditor being compromised and railroaded by other creditors who are being paid in full. It’s not a fair process.

“And today, shareholders and equity are seeing opportunities with CVAs – there used to be a stigma with them, but that’s gone. With the House of Fraser CVA, share transaction was going on in the background to try and extract value from the CVA – and when the Mothercare CVA was announced, the share price went up. It makes sense, because with CVAs what you’re doing is taking a business and cutting out lots of its legacy liabilities.

“CVAs have hit the headlines recently with some big name store closures – House of Fraser, Poundworld, Carpetright, and Mothercare.”

So what’s next?

“More and more landlords are realising the impact CVAs are having on future leases and future funding. The British Property Federation has come up with a standard process they’d like to see rolled out, and R3 has suggested a standard CVA template. There’s talk of changes to the law, but that will take time. I think the main thing will be some sort of examination of the treatment of voting rights in front of the courts. That’s where everyone in this industry would like some more guidance.

“CVAs will stick around – they’re effective when they’re used in the right way, but we need to shift the balance so that those creditors who are taking the pain are properly compensated for it.”

Jon Munnery is a partner at RBR Advisory, part of Begbies Traynor Group. He specialises in advising large companies in financial distress on potential turnaround and restructuring strategies.

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