What is a CVA? Insolvency process used by House of Fraser, Carluccio’s, Mothercare and more
What is a CVA?
A company voluntary arrangement (CVA) is a type of insolvency process used to pay creditors over a fixed period. It means a company may not have to pay back all of its debts. Unlike going into administration, the company does not fall into the hands of a third party. Instead, an insolvency practitioner oversees the process.
All creditors, including landlords, banks, and suppliers, vote on the proposal in a meeting. It needs 75 per cent approval to pass.
What does it mean for retailers and restaurants?
Most businesses can use a CVA, but this year the most prominent cases have been restaurants and retailers such as Byron, Jamie’s Italian, Prezzo, Mothercare, Carpetright, Carluccio’s, New Look, and now House
of Fraser.
Since CVAs being one of only a few ways in which these businesses can get out of 10, 15, and even 25 year leases, almost all of them have opted to close some stores. For example, House of Fraser has said it
will close 31 of its 59 stores, dramatically altering its portfolio.
This means the practical effect of the CVA is to slim down a retailer or restaurant’s presence on the high street, as well as leaving a gap to be filled in those towns and cities affected.
Read more: House of Fraser closures list: Oxford Street and City branches to be axed
What are the advantages of a CVA?
Directors can remain in control of the company while lowering the costs of a potentially viable business. It is also more private for the company than other insolvency processes, as there is no obligation to tell customers. There is also no investigation into the conduct of the directors, as there would be in a liquidation.
What are the disadvantages of a CVA?
It affects the company’s credit rating, making it harder to obtain or renegotiate credit. It also ties the company into whatever obligations it has left for a long time, sometimes as much as five years.
Why are landlords unhappy about CVAs?
Several groups have criticised the frequent use of CVAs over the past few months.
Because all creditors vote on the proposals, even though landlords are the only ones taking a financial hit, some feel it unfairly disadvantages the property owners.
“Typically, landlords of profitable stores are treated reasonably well in CVA proposals but those of loss-making stores are offered very little,” comments Matthew Weaver, a barrister at Radcliffe Chambers. This has further added to the perception that CVAs place the burden for an underperforming business on just a few creditors.
Read more: Mothercare subsidiary Childrens World fails to get CVA approval
Why are some businesses unhappy about CVAs?
Another problem it creates is an inequality between different businesses. If two retailers operate side by side in similar stores but only one gets a rent reduction due to a CVA, the other can understandably feel that this is unfair. M&S and Next have both indicated that they will be talking to their landlords in light of the change in the market.
This will only increase the anger of landlords,” warns Weaver. “There is a view that retailers are using CVAs to gain a commercial advantageand there is a growing air of cynicism about them.”
Read more: Poundworld to close as many as 100 stores
Can CVAs be stopped?
If less than 75 per cent of creditors vote for the proposal it will fail. This happened on Monday when a small part of Mothercare’s CVA was revealed to have received insufficient support.
However, most creditors feel they have little option but to vote for the measure as they risk losing even more money if the company goes under.
Lance Ashworth QC, a barrister at Serle Court, thinks this is the case for House of Fraser. “The landlords are almost certainly powerless to resist the passing of the CVA. Even if they vote against it, if 75 per cent of House of Fraser’s creditors vote in favour, the landlords will be bound regardless.”
Read more: Carluccio’s gets creditors’ backing to close up to a third of restaurants