How to dispel the CVA facts from the fiction

Thursday December 5, 2019

What is a CVA is, and why have so many prominent businesses turned to them in recent times

Company Voluntary Arrangements (CVAs) have hit the headlines in the last year, with household names across all sectors turning to the process as a rescue route. The widespread use of CVAs reflects the challenges UK businesses have faced over the last 12 months, and the impact this has had on their finances.

According to our research, almost a third (30 per cent) of the South East’s large retailers are showing signs of distress or are already in administration – just one example of a sector under pressure. New figures from the Centre of Retail Research have shown nearly 6,000 stores have been closed by major retailers across the UK this year, with analysts predicting a “perfect storm” of unfavourable factors in the run up to Christmas. With increasingly challenging trading conditions for UK businesses it is likely we will see another flurry of CVAs next year.

Despite their prominence, CVAs remain shrouded in mystery and are quite often misunderstood by businesses. So, what is a CVA, and how can it help rescue a business? Where has it helped businesses in the past, and what might we see across the region in the year ahead?

What is a CVA?

In challenging economic times, businesses can quickly run into difficulties, whether that be cash flow issues or existing creditor debts mounting up. When facing distress, entering a CVA could be an option, and can be a valuable escape route for a business to avoid outright collapse. The process was first introduced to UK law in 1986 and is one of the Government’s favoured rescue options.

A CVA is an arrangement made by the company with its creditors to repay them over a fixed period, while helping to better protect jobs. The purpose of a CVA is to rescue a company via a contract to compromise and settle liabilities. For a CVA to be put in place, the majority (75 per cent by debt value) of creditors of the business must agree to the plan at a vote.

There are some important factors to consider before agreeing to a CVA to ensure it isn’t a short-term fix, and thorough due diligence is a vital part of the process. If you are at the helm of a distressed business, you should consider the reasons why your business is struggling to begin with, by stepping back and assessing its position in the market. By asking questions about your company’s resilience and whether it has a viable long-term future, it can be easier to assess whether your proposition will stand the test of time. If the answer is no, it’s likely that the business would find itself struggling again upon completion of a CVA.

What are the advantages of a CVA?

If there is a solid foundation, a CVA can provide a business with the second chance it needs to make repayments and get its feet back on the ground. One of the biggest advantages is that the board and shareholders generally remain in control of the company, allowing them to steer its direction and ensuring continuity of leadership, strategy and employment. Cashflow can be improved in a relatively short time-frame, and once a CVA is completed successfully, the company’s debt will have been settled, allowing it to continue to trade profitably and grow.

Another key advantage is that it is a much less public event than administrations and receiverships. Businesses do not have to notify customers that they have entered a CVA, and they tend to generate less media interest than other options.

Tipping point: when to call in an expert?

Too often, business owners approach advisers for support when cracks are already visible, and problems are engrained.

In times of economic uncertainty – when businesses tend to operate in a phase of hesitation and put proactivity on hold – it is easy to understand why directors opt for the ‘wait and see’ approach. But, if a red flag or issue is detected, business owners should take immediate action in order to tackle any problem head on, no matter how small it might initially seem.

Some of the symptoms of financial stress to watch out for include deteriorating KPIs and poor performance; declining sales and a thinning order book, as well as difficulty in delivering services or products on time. There can be many root causes for financial pressure, such as increasing competition in the market, not keeping up with advances in technology, higher costs of raw materials, fluctuating consumer trends – the list goes on.

By working alongside specialist business advisers when you notice early signs of distress, you will have a greater chance of protecting your business. It is at this stage that we can provide strategic guidance to turn things around, whether that’s supporting businesses with budgeting and negotiating creditor payments, streamlining operations or focusing on areas to add value which will guide your business moving forward.

If you have reached the point where you recognise the challenges facing your business, it is inevitable you will have to adapt to give your firm a chance of moving forward. CVAs are supervised by registered insolvency practitioners, so the first port of call is to reach out to a trusted advisory firm to discuss options ahead.

When in a CVA, change isn’t an option but is fundamental to the success of the process. Old habits die hard, but it’s crucial to embrace new ideas, think creatively and deconstruct business models in order to return to financial stability.

Throughout any period of change it is important all employees and stakeholders are updated regularly – be that on new business plans, direction or strategy. This keeps a level of personal involvement and engagement in the process, with the entire workforce working towards the same goal.

First published in the Essex Chronicle in December 2019.

Related team

Glyn Mummery

Glyn Mummery

Glyn Mummery

  • Partner
  • Restructuring Advisory
  • Brentwood