Scottish insolvency expert calls for rethink on Company Voluntary Arrangements

The recent controversy over the use of Company Voluntary Arrangements (CVAs) by several High Street retailers has angered landlords but government and property owners are missing the point, according to a leading Scottish insolvency practitioner.

Eileen Blackburn head of Restructuring and Debt Advisory at French Duncan LLP, says recent reports by the British Property Federation, representing landlords, and the insolvency trade body, R3, both found faults and failings within the current CVA system which require reform, but this is partly down to their implementation and application rather than any serious flaws with CVAs as a business rescue tool.

Ms Blackburn explains: “The recent high profile CVAs of many well-known High Street brands has increased the visibility of CVAs as a tool to rescue businesses experiencing difficult circumstances. However, many of the landlords believe that retailers are simply using CVAs as a quick and easy way to get out of their financial difficulties by holding their creditors to ransom claiming the choice is between a CVA or insolvency. The reality is something in between with a need for both landlords and struggling businesses to coherently project the mutual benefits of agreeing a CVA.”

“It should be remembered that a CVA is not a vehicle which should be used by all failing businesses but only by those with a chance of recovery who need a period to stabilise their finances. If a business is in terminal decline, then a CVA is not the answer as failure will occur even with the arrangement in place. A CVA is not a means to dodge the inevitable for a terminally ill business.”

It can be forgotten that CVAs are a process for businesses to prevent insolvency by producing an agreed way forward with their creditors. However, the British Property Federation (BPF), representing many large commercial landlords, has called for “an urgent review” as they believe the process is being misused. They want greater transparency in the process, a review of each large CVA by an independent party, and for the insolvency profession to work with the BPF to produce a code of good practice.

A recent R3 report, entitled ‘Company Voluntary Arrangements: evaluating success and failure’, included a survey which found that 65.2 per cent of CVA’s terminated without fulfilling their stated purpose while just 34.8 per cent continued to operate for periods approaching five years.

Ms Blackburn continued: “Although this may look as if CVAs fail two thirds of the time when you look at the detail you find that even many of those which terminated without fulfilling their stated purpose still produced comparable or greater returns to creditors than if they had been put into administration or liquidation.”

“Indeed, the early termination of a CVA can be a sign that companies entered the agreement without fully exploring alternative solutions. One of the key recommendations by R3 is for an extension of the law for a moratorium to include companies of all sizes (at present it is just small companies) prior to insolvency to give time for all differing options to be considered and, if required, to produce a CVA which will last.”

There are signs of continuing pressure on Scotland’s High Street with 48 retail insolvencies last year and 18 in the first quarter alone indicating a strong upward tick in the failure rate in the first three months of the year. Other High Street outlets include the casual dining sector which has already seen similar problems to retailers and in Scotland the total number of failures last year was 73 with 36 already recorded for Q1 2018 and could become the next sector to use CVAs as a form of business rescue.

Ms Blackburn added: “We need to look at the way CVA’s are being used, whether they are appropriate, why they are failing, and whether they are being used by the right businesses in the correct circumstances. We also need to look at why HMRC supports the use of CVAs and is the most engaged creditor yet is also the creditor most likely to vote against a CVA.”

“The High Street remains an integral part of our economy and is facing many major difficulties from rent, from business rates, and competition from online retailers. There is only so much money that can be generated from a high street outlet and with landlords and councils seeking to maximise their returns through rent and business rates respectively they need to acknowledge that they may end up killing the goose with the golden egg by being too financially demanding on hard pressed business owners. The Government needs to recognise its role in maintaining and protecting the High Street as an important source of employment and its role in developing local economies. It is also important to understand that many pension funds are heavily invested in High Street property so securing an adequate income for those is as important as ensuring our towns and cities have viable and vibrant centres.”

Eileen concluded: “CVAs are undoubtedly a useful tool in protecting valuable businesses from needlessly failing. It is important that we utilise existing legislation to protect important sectors of our economy. There is little doubt that the High Street has been under severe strain in recent years and it is vital that we maintain a vibrant and strongly performing retail sector to maintain our economy. CVAs are a tool to assist in this but that one needs to be sharpened and honed so that it protects those businesses which most need it and maximises returns for creditors to ensure all of those involved come out of these difficult circumstances in as positive a way as possible.”