It has not gone unnoticed that 2018 was a year that high street retailers began to suffer from financial strain. Retailors as big as Mothercare, House of Fraser and Prezzo found themselves entering company voluntary agreements (CVAs) due to tough trading conditions.
‘The year of the CVA’
2018 was coined the ‘year of the CVA’ after some big companies entered into agreements with their creditors to help them trade. It was due to higher wages, rising business rates and the online competition that high street traders were losing customers.
In 2019, with Brexit looming and even more uncertainty ahead, it seems that this year the CVA may not be going away.
What is a CVA?
A CVA is a legally binding process for insolvent businesses and their creditors. It allows the business to keep trading but still pay back a portion of their debt to their creditors. This may involve selling assets to come up with capital too.
It is an agreed arrangement that is requested from the directors and then voted on by their creditors. It comes into play when 75% of their creditors agree. The company can then reduce their debts over time whilst still being allowed to remain a viable business.
How does it help a business?
A company voluntary agreement can help a business to address their financial difficulties and pay their debts off over time, offering many advantages. It removes pressure from the company and can be overall cheaper than going to court over debts. Creditors are typically happy because it means that they get their money and the company is happy as it allowed directors to maintain control of their business and gives them a chance to rebuild their sales and profits without having to go public over their debts.
How can a company enter into a CVA?
A director or directors will propose a CVA to their creditors. The proposal then needs to be passed by at least 75% of their creditors. The business will need to show their accurate financial reporting and demonstrate their ability to pay back the debts with cash flow forecasts.
Is there a risk?
Like with any loan repayment system, CVAs can pose a risk to both the creditors and the business. In the case that the business was to fail and go into liquidation, despite entering a CVA, it can leave creditors in a worse situation. In addition to this, whilst they receive some repayments, it may only be a portion of what they are owed which could affect their own cashflows.
For the business, it could mean losing key members of staff who may jump ship knowing that the company was in financial difficulty.
Who else does a CVA affect?
One of the main issues with CVAs is that landlords are not treated the same as other creditors. In fact, in some situations they will receive less rent or even no rent at all in the event that their tenant enters a CVA. In addition to this, businesses opt out of renting agreements and vacate properties on stores that are not performing as effectively to cut costs.
In the majority of cases, cutting costs is not a managed process so business make their own decisions on how to execute this; often leaving landlords worse off. One of the biggest cases was noted by House of Fraser in 2018 who closed down a number of stores due to rising rates. Whilst the landlords fought against it, ultimately the CVA was accepted.
What’s going to happen in the future?
The likelihood, as it stands is that due to increased uncertainty of the future of retail and trade stores, CVAs may be more common moving into 2019. More so, than 2018.
There may be a chance that alternatives will be discussed to pose less of a risk to those who it adversely affects. However, for the time being, it appears that a CVA can help both parties and is a cheaper process that allows business to keep trading and pay off their debts. It’s not the ideal solution for everyone involved, but it can be helping those struggling with debt that could still be a viable business and build it back.