What do directors need to know
Last week saw the first indications that the government are beginning to wake up to the issue. The House of Commons library published a research briefing paper on CVAs along with a summary of recent Government consultation papers on their use and purpose.
These include a report commissioned by the insolvency industry trade body R3 which amongst other recommendations, suggested that the government backed reforms which could improve the effectiveness and reputation of CVAs.
Ultimately R3 see the CVA procedure being used more extensively, rescuing more businesses and improving confidence in the wider insolvency framework. They say: “CVAs are a very useful insolvency tool. In the best case, when combined with new funding, they can turn around a company and maximise repayments to creditors. Even where they don’t meet all their objectives, they can still see more money returned to creditors than an alternative procedure.”
So is the issue public misunderstanding of the purpose of the CVA, increasingly widespread misapplication of the procedure, or a legal but cynical way of escaping due liabilities?
Bill Grimsey, author of the Grimsey Reviews into high street retailers in 2013 and 2018 is adamant in his opposition and is calling on the government to set up an inquiry into their use in this way.
Upside sharing
Chris Horner, Insolvency Director with BusinessRescueExpert said: “One factor that hasn’t been widely discussed in coverage of retail CVAs is upside sharing.
“This gives the landlord something in return for their support for the CVA. Yes, the business would see rent reductions and other immediate benefits but the landlord also has incentives to support the package.
“When Paperchase entered their CVA one of the proposals was that landlords would receive a guaranteed base rental income of between 35% to 80% which was then further increased based on the performance of individual stores. If the store did well then the landlord did too.
“Early break clauses are increasingly included in CVAs so landlords can terminate early if they choose too. Equity is another effective inducement strategy – One of Arcadia’s proposals was to offer landlords a 20% stake in the company – while BHS had a backup provision that allowed landlords to claim back the full rental amount due if their CVA was terminated and BHS went into liquidation, as they ultimately did.
“While there’s short term pain in reduced rents, there’s also a long term gain through higher returns if the business returns to profitability.
“The alternative to a CVA is usually liquidation which sees landlords recovering pennies in the pound at best as well as leaving them with a hole where the unpaid rent would go, holding the lease to an empty property and now with liability for local business rates.”
If you have any questions about CVAs or the insolvency process then we’ve got the answers. Read our guide or arrange a free consultation with our of our expert advisors who can talk you through all the available options for you and your business.