What is a CVA? Company Voluntary Arrangements explained

We may have seen many high street stores trying to restructure their businesses in recent times using a process known as Company Voluntary Arrangements or CVA. New Look, Carpetright, Mothercare, Prezzo, Byron Hamburgers, and House of Fraser are amongst the well-known brands that have used this procedure to try and reach an agreement with their creditors to reduce costs and turn around the loss-making parts of their businesses.

What is a Company Voluntary Arrangement (CVA)? Everything you need to know

In its simplest form, a CVA is an agreement with creditors that looks for ways to secure the future of a business. These plans usually include some form of debt forgiveness and arrangements around loan interest. Beyond the security of the business itself, CVAs also aim to give creditors a better outcome than they would otherwise get from a total closure.

What these proposals actually include will be entirely dependent on the circumstances of the company in question. A regular feature of recent high-profile CVAs has been a proposal that landlords of stores facing closure accept a reduction in the amount that they would be entitled to under the regular terms of the lease. For other stores on the brink of closure, a reduction in payable rent can also be sought. These arrangements aim to have little or no impact on suppliers and other creditors.

The biggest concerns creditors have

One of the biggest concerns around Company Voluntary Arrangements for landlords is the principle that they can be outvoted by other creditors. In order for a CVA to pass, it requries 75% of the credit value to vote in favour – even if all landlords vote against the proposition. Whilst there are legal options available to any landlord that feels that they are being unfairly prejudiced by the CVA, these come at a cost themselves and as with all court action, a risk of losing the appeal.

Another criticism is that the CVA serves as nothing more than a ‘sticking plaster’ on the company’s financial difficulties and does not address the more deep-seated issues that it may face. British Home Stores and JJB Sports are examples of where a CVA was agreed with creditors, but the businesses ended up in Administration anyway.

Despite this, Company Voluntary Arrangements are still a useful tool in the insolvency practitioner’s armoury. Used properly, they can strike the right balance between debt forgiveness and future prospects, and allow a struggling business to return to health, enabling continued trade between the company and its suppliers, which is profitable for all involved.

How AAB can help

The Restructuring and Recovery team at AAB have years of experience in advising the directors of distressed businesses. We are more than happy to meet any director looking for advice or an initial meeting at no cost or obligation.

For more information, please contact Duncan Raffett, Restructuring & Recovery Senior Director or your usual AAB contact.