The pace of change within the retail world seems to be increasing everyday, with Mothercare, New Look and Carpetright all entering CVAs recently. House of Fraser is considering the option at the moment. Each company has hit troubled times and is looking to a CVA as a means of survival.
What is a CVA?
A Company Voluntary Arrangement, a CVA is the commercial equivalent of an IVA (Individual Voluntary Arrangement). Its a legally binding agreement with a company’s creditors which allows the business to repay it’s debts over a pre-agreed time, proving 75% of creditors agree. If the magic 75% of creditors agree, based on debt value, all creditors have to accept the arrangement which usually lasts for 3 to 5 years.
The positive aspect of a CVA is that it leaves the Directors in charge of the business and enables the business to continue. The potential downside of this is that the same people remain in charge who have taken the business to the point of needing a CVA in the first place!
The primary considerations of a CVA are as follows:
- The pressure of juggling creditors is resolved immediately, with one monthly payment being made to the Insolvency Practitioner, from which he will take his fees, and the balance being paid to the creditors on a pro-rated basis.
- Cash flow can improve rapidly.
- Creditors receive a larger proportion of their debts back albeit over a fairly lengthy period of time.
- Any legal action is usually stopped by the CVA.
- If the agreed schedule isn’t met, any of the creditors can apply to wind up the business.
Entering into a CVA is a significant step, and should not be taken lightly. It is more likely to achieve a positive outcome if the company is able to show that it can support the monthly repayment amounts the Insolvency Practitioner negotiates with the Creditors. Ironically, many companies look to enter a CVA because they have lost control of the finances, so there are usually some hard lessons to learn and big changes within the management processes.
You can find out more about the CVAs entered into by Mothercare and others here.
If you’re struggling with the cashflow in your business, do get in touch. We can help you improve matters, or can introduce you to Insolvency Practitioners who may also be able to help. Please don’t ignore the problem as it’s unlikely to improve without attention, and will probably only worsen!