Spotlight: Company Voluntary Arrangement

by Franklyn Ofonagoro

As 2020 begins in earnest, the lively debate about the merits or otherwise of the Company Voluntary Arrangement (“CVA”) process shows no sign of abating any time soon.

The CVA is a tool that can be effective in providing a company with the opportunity to navigate its own path to survival, including approaching existing stakeholders or new investors in order to obtain support and fund a turnaround plan. The rationale is to maximise returns for all stakeholders, including allowing creditors to recover as much of what was owed to them, and significantly more than what they might get in the event the business entered administration, or if it failed completely and was liquidated. In doing so CVA’s can provide the platform, and a liquidity bridge, that allows a business to take the necessary actions to stabilise and ultimately turnaround its performance. 

Many of the most headline grabbing CVA’s have been in the retail sector in the last two years, with many high street brands and large multiple retail chains using the process to consolidate, restructure and reduce costs. A recent report from commercial property adviser, Colliers, cited figures that show that of 23 large CVA’s entered into by businesses since 2016, 13 of the companies have since gone into administration, including BHS, Supercuts and Mothercare. 

Furthermore, an authoritative research report published in May 2018 by R3 (Company Voluntary Arrangements: Evaluating Success and Failure) found that from a sample size of 552 CVA’s, 65.2% were terminated before completion; 16.3% were ongoing (at the time of the report); and only 18.5% managed to be fully implemented.

The statistics appear to be proportionately on the side of those who argue, with increasing volume, that most CVA’s they are forced to partake in are prejudicial to the interests of certain significant creditors; or are often indicative of corporate directors seeking the easy route to shedding the company of legacy debts they don’t like, without addressing the fundamental issues affecting the business. 

The aforementioned meagre success rate of CVA’s would on the face of it appear to support the assertion that most CVA’s don’t work, some suggest they end up causing creditors bound by them greater potential loss when a company inevitably falls into administration or liquidation months or years later. In reality the majority that fail work for a period within which many creditors benefit from the ongoing trading and in some a proportion of the repayment of their historic debt, even if not the full amount originally proposed. 

Well thought out CVA’s should be based upon reasoned assumptions in respect of future performance of the subject business but can fail where the speed or capability to deliver the turnaround plan proves unachievable; insufficient funding is committed; an unexpected negative event occurs; or simply the projected financial performance proves to be too bullish. Furthermore, whilst the longer the term of the CVA the more creditors are likely to recoup, there is an increased risk that unexpected issues will arise. 5 years is a long time in business and the development of credible forecasts for this term can be challenging.   

Focusing on the retail sector, whilst businesses can seek to reduce their cost overheads, sector specific headwinds such as increases in the minimum wage, business rates, utilities and property lease costs amongst others can be contributors to a decision to enter into a CVA as there is insufficient flexibility to allow a business to adjust swiftly where its revenues and gross margins come under significant pressure. It should be unsurprising therefore that similar headwinds may have an impact upon a business post CVA. 

So, what is our view at Quantuma?

Whilst we certainly agree that the high (and rising) failure rate of CVA’s does nothing for the credibility of the process, we would argue that CVA’s can be an incredibly effective tool in an Insolvency Practitioner’s tool kit to help rescue companies with viable businesses. However, for this to be the case, there must be certain conditions present (see below) which we believe are critical to a proposed CVA standing a better than average chance of successful implementation.

  • Realistic proposals based on a thorough sounding out of the key creditors and agreeing financial settlements that are affordable and fundable;
  • Preparation of a robust post CVA business plan with credible financial projections (including sensitivities) that critically, demonstrate how the financial settlement to be put to creditors will be funded;
  • A cogent turnaround strategy (as part of the post CVA business plan) that identifies the business / strategy / operational issue that needs to be addressed post CVA approval and how these will be implemented and funded;
  • A detailed funding strategy that outlines the extent of “new monies” (and likely source) that will be required to fund the business in order to support (1) the financial settlement to creditors (2) the turnaround strategy and (3) working capital given that suppliers tend to restrict credit at least initially for CVA companies.

It is worth noting that successfully achieving the rescue of a company is not an easy process and even with the availability of the ideal conditions outlined above, some CVA’s will still fail in a market- based economy. Despite this, a CVA can provide a lifeline to viable businesses and in doing so protect members of their supply chain who are reliant upon them. Insolvency Practitioners should be judicious in deciding which CVA’s to put their names to and ensure that they are ticking off the right pre-requisites before giving their seal of approval.

Quantuma have successfully supervised a large number of CVA’s across a wide range of business sectors, including retail, distribution, manufacturing and transport and logistics. If your or your client’s business is facing challenges which have led to you needing to assess your options, please do make early contact with one of our experts who can provide early professional advice to maximise the options available.