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The rise of Company Voluntary Arrangements (CVAs)

House of Fraser is the latest high-profile CVA in the retail sector but it’s not just the retail sector which has been inundated: the latest government statistics show that there has been an 85.5% increase in the use of CVAs.

What is a CVA?

Essentially, a CVA, a company voluntary arrangement, is an arrangement between unsecured creditors and an insolvency practitioner which allows a company to pay its creditors over a fixed period, rather than enter administration.

A CVA will allow a company to keep trading and repay creditors, often using a combination of ongoing trading profits and the sale of assets. The CVA will also usually stipulate a certain level of debt to be written off at the end of the term. For example, a company may agree to pay 30p for every £1 owed to all unsecured creditors, with the remaining debt being written off after, say, 5 years.

What Process is Used?

All the directors of the company must agree to apply to an insolvency practitioner for a CVA. The insolvency practitioner will work out an appropriate payment schedule for the company to repay the amount it owes, taking into account the amount the company can pay.

Once the arrangement has been worked out, the company must write to its creditors outlining the details of the CVA. Before a company can enter into a CVA, the arrangement must be approved by creditors who are owed at least 75% of its outstanding debt.

Once approved, the CVA will bind all unsecured creditors – even those who opposed it or who failed to vote. This means that, for those creditors who voted against the CVA, the imposition of the arrangement can be a particularly bitter pill to swallow. In reality,  CVAs are not often rejected, as they are usually the last hope before administration.

In an ideal world, the company will meet the payment terms of the CVA and will rise like a phoenix from the ashes to fight another day. However, if the company fails to meet the payments, any of its creditors may then apply to have the company wound up.

Essentially, a CVA, a company voluntary arrangement, is an arrangement between unsecured creditors and an insolvency practitioner which allows a company to pay its creditors over a fixed period, rather than enter administration.

Why do CVAs get such a bad press?

Using a CVA is a final attempt to avoid administration, so the argument is often made that CVAs simply delay the inevitable.

However, the real reason CVAs frequently get pilloried in the press is the impact these arrangements often have on landlords and suppliers. CVAs may mean substantial rent reductions for landlords and substantial write-offs for suppliers. For landlords with properties which may be difficult to rent, this can present significant problems.

CVAs are increasingly perceived as a “get out of jail free card” for companies, a mechanism used to restructure and renegotiate lease agreements with, potentially, few repercussions. The ability to renegotiate lower rent and continue to trade may (understandably) frustrate other companies in the retail sector who have operated prudently.

But, given the very challenging trading environment on the high street, House of Fraser is unlikely to be the last high-profile CVA we see this year.

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Disclaimer
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

About this article

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