A leading North West insolvency practitioner is calling for reforms to improve the effectiveness of CVAs, a common restructuring process used by high street retailers.
House of Fraser has become the latest in a string of retailers to have proposed or entered a CVA and plans to use the process to close three North West stores. Paul Barber, who is North West chair of the insolvency and restructuring trade body R3, says he expects to see even more CVA proposals in the run-up to ‘rent quarter day’ on 24 June, when retail rents traditionally fall due.
However, while CVAs are coming under fire from retail landlords and other critics, Paul Barber says they can be a valuable rescue tool – but he wants to see changes to return more money to creditors, rescue more businesses and improve confidence in the process.
His comments are backed by a research report commissioned by R3 and supported by ICAEW. The report, produced by the University of Wolverhampton and Aston University, found that while 65% of CVAs agreed in 2013 had been terminated early, this did not automatically mean failure. In fact, terminated CVAs may return more money – the ultimate goal of any insolvency procedure – or otherwise, be more beneficial to creditors than an administration or liquidation.
Paul, who is also a partner at Begbies Traynor, the firm advising a group of landlords affected by House of Fraser’s plans for a CVA, says: “CVAs generally are a very useful insolvency tool. Importantly, they give creditors a direct say in the insolvency process and are more transparent than procedures like a ‘pre-pack’ administration.
“When combined with new funding, they can turn around a company and maximize repayments to creditors. Even where they don’t meet all their objectives, they can still result in a better outcome than an alternative procedure.”
Under a CVA or Company Voluntary Arrangement, an insolvent company agrees with its creditors – often the landlords – to repay a portion of its debts and the existing management stays in control. New Look, Select, Carpetright, Mothercare, Prezzo, Byron Burgers and Carluccio’s have all reportedly explored or entered CVAs this year.
The report recommends that CVAs should be capped at three years and that the existing pre-insolvency moratorium should be extended to give companies more time to plan a CVA free from creditor pressure. Directors’ duties should be more clearly defined and they should be required to address financial distress at an earlier stage, while the insolvency practitioner’s role should also be clarified.
HMRC and other public sector creditors should have to explain why they won’t support a CVA. The report also recommends standard CVA terms and conditions to improve consistency and reduce costs.
Paul Barber adds: “The research makes a strong case for the Government to back reforms to improve CVAs. Not all companies in distress can be saved, but it is important to make turnaround processes as efficient and timely as is reasonable. As with any insolvency procedure, it is about achieving the right balance between the interests of the company and its creditors. Our report highlights ways that CVAs can be made to work more effectively for the benefit of all stakeholders.”