In defence of the CVA
Recent research has highlighted some 23 prominent CVAs that have been launched since 2016* – of which 13 have later gone into liquidation including such well-known brands as BHS, Bonmarche, Toys R Us, Mothercare and Jamie’s Italian.
* From 2016 to Q3 2019 there have been 1,281 CVAs in England and Wales. There were an additional 23 in Scotland during this period and 93 in Northern Ireland.
The findings suggest that rather than restructuring and setting the company up for future success, CVAs actually “prolong inevitable future failure rather than helping retailers secure longer-term futures”.
Retail Expert David Fox who helped compile the research said: “CVAs were designed to help struggling businesses, but they do nothing to address high debt levels, which often require restructuring, refinancing or a debt write-off.
“For many brands, the CVA fails. It merely delays the inevitable future failure and pushes out the problems for the next couple of years, creating even more polarisation in the marketplace.”
Several high profile landlords including Westfield, Hammerson and Intu have all blamed CVAs and store closures for rising vacancy rates across their shopping centres which have led to a fall in values.
More landlords are resisting CVAs recently as there is an increasing perception that some companies are attempting to use them as a “get out of jail free” card to escape liabilities and obligations.
Other tenants are also complaining about the CVA process as they claim they’re being punished for running a profitable, successful business.
This is because part of the CVA process involves rent reductions for some or all properties and retailers such as Next are insisting on automatic rent reduction clauses for future parity, causing another potential obstacle to future CVA negotiations.
Other retailers such as Ann Summers have used the threat of a CVA to try and achieve rent reductions in advance of negotiations – CEO Jacqueline Gold said they would have to pursue a CVA unless landlords agreed to cut the rents for their stores.
Ian Fletcher of the British Property Federation thinks the process is being abused when used this way. He said: “These requests illustrate how far the CVA process is at risk of being misunderstood or misused.
“It’s nonsense to suggest that a process designed to try and keep a sinking ship afloat should be applied to healthy business.
“Where does this end? A CVA often allows a business to cut what it pays in business rates or renegotiate the terms agreed by its banks. Will they also seek these concessions?
“Ultimately, these requests undermine the CVA process, which was set up to ensure businesses facing insolvency have a chance of survival and don’t disappear from our high streets.”
Chris Horner, Insolvency Director with Business Rescue Expert said: “Landlords are commonly seen as being the poor relations in a CVA but there can be compensations.
“One is upside sharing where, in return for their support for the CVA and potential rent reductions, the landlord receives incentives such as a guaranteed base rental income which could also increase based on the performance of an individual store.
“The 2019 Arcadia CVA proposal saw landlords offered a 20% stake in the company and in the 2018 BHS CVA there was a backup provision that allowed landlords to claim back the full rental amount due if the CVA was terminated and BHS went into liquidation which ultimately happened.
“Landlords can take advantage of early break clauses too so while there could be the short term pain of reduced rents, there’s long term gain to be had through higher returns if the business returns to profitability and growth.”
“The CVA might have been criticised from some quarters recently and deliberately misconstrued or misunderstood but the alternative is usually liquidation.
“This is the end of the business and sees landlords and other unsecured creditors recovering pennies in the pound at best as well as leaving them with a hole where the unpaid rent would be, and leaves them holding the lease to an empty property and now becoming liable for local business rates and other bills too.
“The CVA process can always be refined and improved but it exists for a good reason – and that is to give viable companies the best possible chance of restructure, rescue and recovery.”
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