Why retailers are increasingly turning to CVAs

With high profile names such as Mothercare, New Look, and Carpetright all turning to restructuring options in recent months in an effort to stay afloat, CVAs are big news at the moment. But what exactly is a CVA, and what does it mean not only for those retail giants entering into one, but also for the wider retail market as a whole?

What is a CVA?

A CVA, or Company Voluntary Arrangement, is a formal restructuring programme which allows a struggling company to close unprofitable elements of their business and cut costs from other areas. A CVA proposal must be drawn up by a licensed insolvency practitioner, and creditors totalling at least 75% of the value of the company’s unsecured creditors must agree to the proposal in order for it to be implemented. Once in place all creditors, regardless of how they voted, must adhere to the terms set out.

While CVAs are not right for every situation, for a company struggling financially, but with a viable future ahead of it, CVAs can offer the ideal solution to their problems.

CVAs and the High Street

CVAs are particularly popular with those retailers who trade from various locations, as this type of insolvency procedure allows for negotiations to take place regarding the terms of any property lease agreements in place. Depending on the size of the company and the locations it trades from, current leases are likely to be lengthy and extremely expensive; therefore the opportunity to reduce this cost or even terminate the lease entirely can save the company a massive amount of money, making a huge difference to its ongoing viability.

 For landlords, being approached with a CVA proposal from a tenant is a double edged sword; while a drop in rents may be welcome news for the retailer, this loss of income could push landlords to the edge. However, not agreeing to the CVA proposal could see the tenant entering liquidation and therefore leaving the landlord completely out of pocket, as the likelihood of recouping any of the money owed would be slim. In this case the landlord may feel it is more preferable to continue to receive a rental income, albeit reduced, rather than face the risk of the company going under and the landlord being left with an empty retail unit and unrecoverable rent arrears.

The backlash of CVAs

The danger of agreeing to a CVA, however, is not just the reduced rent which would be received from the struggling retailer, but the bigger fear is that other tenants, perturbed by these cuts offered to its competitors, will follow suit and demand similar reductions. Many retailers are tied into long leases and are left unable to renegotiate during this time unless a CVA is entered in to. This is seen as extremely unfair by some retailers who are looking at ways of levelling the playing field.

Next, the fashion and homeware store, has raised concerns about the growing popularity of CVAs and have stated their intention to insert a ‘CVA clause’ into any future lease agreements they enter in to. Essentially, this clause would give the store the right to receive a reduction on their own rent should a neighbour have their rent slashed after entering a CVA.

Is a CVA right for you?

It must be said that a CVA is not a magic bullet which is guaranteed to set a company back on the track to profitability. Toys R Us, for example, entered into such an agreement before later being forced into administration when their finances still failed to add up. However, a CVA can give a viable company the breathing space it needs to restructure its liabilities and set up more affordable repayment terms giving them time to trade their way out of their current difficulties.

How Real Business Rescue can help

Regardless of the sector you are working in, if you are considering the possibility of a CVA, you should make it a priority to speak to an expert in this field. Real Business Rescue’s team of licensed insolvency practitioners can talk you through the ins and outs of a CVA and suggest whether this is the right course of action for your company to take. If not, we will be able to suggest a more appropriate alternative route depending on your company’s specific circumstances. Call our team today to arrange a free no-obligation appointment with any one of Our extensive office network comprises 72 offices across the UK with a partner-led service offering immediate director advice.