An insolvency procedure utilised this year by a number of struggling High Street retailers should be reformed to make it even more effective and equitable.
That’s the view of Andrew Haslam, North East chair of insolvency and restructuring trade body R3, after the publication of a new report into the effectiveness of Company Voluntary Arrangements (CVAs).
A CVA is a statutory insolvency procedure which sees a company and its creditors agree the repayment of a portion of the company’s debts over a set period of time.
The existing management stays in control of the company, while an insolvency practitioner reviews the CVA proposals and checks the terms of the CVA are met once approved.
CVAs are reported to have been explored by Mothercare and House of Fraser in the last couple of weeks as part of their restructuring of their finances and operations.
The recommendations of the new research, which was commissioned by R3, supported by the ICAEW and produced by the University of Wolverhampton and Aston University, include CVAs lasting no longer than three years without good reason, directors’ duties being articulated more clearly and fully to include a requirement to promptly address any perceived financial distress, and relevant documentation that is filed at Companies House being more informative to improve transparency and encourage confidence in the whole process.
Although CVAs made up just 1.8% of insolvencies in 2017, they often involve well-known brands, with High Street chains such as Select, Carpetright, New Look, Prezzo, and Byron Hamburgers also being among those reported to have sought or agreed a CVA this year.
CVAs have been criticised by some as having a high failure rate and questions have been asked about their benefits for creditors.
However, the research also reveals that the early termination of a CVA does not automatically mean failure, as terminated CVAs may return more money to creditors – the ultimate goal of any insolvency procedure – or otherwise be more beneficial for creditors than an administration or liquidation.
Andrew Haslam, who is head of specialist business advisory firm FRP Advisory LLP’s Newcastle office, says: “The CVA system already works well, but changes could see the procedure used more than alternatives, return more money to creditors, rescue more businesses, and improve confidence in the process and wider insolvency framework.
“CVAs are a very useful insolvency tool, and in the best cases, 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, which is at a key part of ensuring any insolvency process is fair to everyone involved.
“CVAs are flexible enough to be adapted to all sorts of situations, give creditors a direct say in the insolvency process, and are much more transparent than procedures like a ‘pre-pack’ administration which can be used in similar circumstances.
“While CVAs can be criticised, particularly given that not all of them meet their objectives and creditors can feel like they have been left out of pocket. Ultimately, however, we’re talking about insolvent companies and without procedures like CVAs, the outcomes for creditors would be worse.”