What are CVAs, and why are retail and restaurant chains opting for this solution when in financial difficulty?

Recently, there have been several high-profile company voluntary arrangements (CVAs) for high street chains. This includes Jamie’s Italian, which closed 12 branches, and Byron Burger, which has recently had a CVA approved by creditors, as have Prezzo. And now Select, a fashion chain with 183 shops, has also had a CVA approved.

The CVA proposal

In a nutshell, a CVA is an offer by a company, overseen by a licensed insolvency practitioner, disclosing what assets it has, and everything it owes to suppliers and lenders, but offering back a reduced and often delayed payment to creditors. This offer is called the CVA proposal, and chains are using it to get out of expensive leases and close branches, or to secure substantial rent reductions to make the sites more viable.

The CVA proposal will set out the financial consequences to creditors of accepting or rejecting it. A rejection will often mean a reduced payment back to the creditors, as the outcome may be closure and liquidation.

Creditors inevitably accept a CVA, as it is a better outcome than liquidation, though they can accept it with modifications. The company shareholders must agree to the modifications.

In most of these high-profile CVAs, the largest creditor of the company is often the owner of the chain that has lent money to it, so they can influence a large proportion of the vote to get the CVA approved. 75 per cent of the creditors (voting by value) must agree and vote for the CVA for it to be approved.  

If there are ‘connected’ creditors, there is a second round of voting when only ‘unconnected’ creditors are allowed to vote.  At least 50 per cent of ‘unconnected’ creditors voting by value must vote in favour before the CVA is approved.

Leases

The CVA is often used to escape individual unprofitable shop or restaurant leases. The company achieves this by offering landlords two choices:

• To accept the CVA and a much-reduced rent, in return for the company staying on the premises.
• Or, if the landlord will not accept the CVA, the company will move out, take the fixtures and fittings, and leave the landlord with a large shop or restaurant empty.

Though there is a written lease, perhaps with a 25-year contractual commitment to pay rent, the landlord can only claim for a year’s loss of rent against the company and vote for that in the CVA. This is the established protocol for landlord claims, even though the landlord may lose more than this.

The landlord can also usually claim for one month’s rent as dilapidations, eg the cost to make good the shop or restaurant after the tenant has moved out.

Using the CVA method, the retail or restaurant chain can effectively ‘dump’ leases, because the rent is too high, or the location has proved not to work; or they can force a landlord to vary the lease to a lower rent.

The directors stay in control

One of the key features about a CVA is that the directors stay in control of the company. They never hand over control to someone else, such as an administrator or liquidator. There is also no investigation into what went wrong and no report on the directors’ conduct to the Insolvency Service.

It also keeps the existing company intact, so there is no need to set up a new one; which means that there is no need to notify employees, change banks or assign property leases on the retained sites.

How did we get here?

A lot of chains start small and then gain backing from a venture capitalist or investor. Their aim is to build the business up in scale and then sell it.

This means opening numerous branches to build turnover, brand awareness and gain economies of scale, such as better buying power. Consumers like brands. When you walk into a Prezzo or Byron, you know what you are going to get.

The chain grows quickly by investment, and when some of the branches start to falter, it is the investor that decides on the CVA, and who usually has a substantial vote to help push it through.

About the author

David Kirk is a chartered accountant and licensed insolvency practitioner based in the south west. Follow @kirksinsolvency, or visit www.kirks.co.uk.

See also

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