House of Fraser is the latest in a string of companies this year seeking to use a Company Voluntary Arrangement, or CVA, to save the business. Others have included Mothercare, Carpetright, New Look, Prezzo and Byron Hamburgers.
Now the Midlands branch of insolvency and restructuring trade body R3 is calling for reforms to be made to improve the effectiveness of CVAs following research, supported by accountancy body ICAEW, which recommends a cap on CVA lengths, more time for companies to plan a CVA, and clearer roles for directors and CVA supervisors.
Produced by the University of Wolverhampton and Aston University, the report also outlines a need for more engagement from public sector creditors and the introduction of standard terms.
The call comes come at a time when CVAs are said by some to have a high failure rate, and questions have been asked about their benefits for creditors.
R3 Midlands chairman Chris Radford, a partner at law firm Gateley in Birmingham, said: “A Company Voluntary Arrangement is a statutory insolvency procedure which sees an insolvent 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.
“The R3 research reviewed the progress of CVAs agreed in 2013, and found that 18.5% of those CVAs had been fully implemented, 16.5% are still ongoing, and 65% had been terminated without achieving all of their objectives. The research also revealed, however, that the early termination of a CVA does not automatically mean failure: 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.”
R3 Midlands believes the CVA system works well, but changes could see the procedure used more than less-suitable alternatives, return more money to creditors, rescue more businesses, and improve confidence in the process and wider insolvency framework.
Chris Radford continued: “When combined with new funding, CVAs can turn around a company and maximise repayments to creditors. Even when they don’t meet all their objectives, they can still see more money returned to creditors than an alternative procedure. They also give creditors a direct say in an insolvency process which is much more transparent than alternative procedures, such as a ‘pre-pack’ administration.
“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.”
To further improve the perception and performance of CVAs, the R3 report recommends:
CVAs should be capped at three years – CVAs typically last five years, but, the research shows, long CVAs increase pressure on the struggling company, increase the risk of failure, and do not guarantee better creditor returns.
A pre-insolvency moratorium should be introduced – Companies which used an existing, limited pre-CVA moratorium from creditor enforcement action, or which used the moratorium provided by administration, tended to have a higher chance of completing their CVA. The pre-CVA moratorium should be expanded to all sizes of companies, simplified and should be available for use ahead of any insolvency procedure. The moratorium would give companies more time to plan a CVA free from creditor pressure.
Directors’ and insolvency practitioners’ (IPs) duties should be more clearly defined – Directors should be required to address financial distress at an earlier stage than now, while the IP’s role in a CVA should be clarified and reporting enhanced. Consideration could be given to extending the existing system of insolvency fee estimates to CVAs.
Public sector creditors should have to explain why they won’t support a CVA – The research found HMRC was the most likely creditor to oppose a CVA but that it provided little feedback on its reasons for doing so. This prevents an effective negotiation – and sometimes leads to a company’s administration or liquidation, which can undermine returns to creditors, including the taxpayer.
Standard CVA terms and conditions should be introduced – Standard terms would improve the consistency of CVAs, reduce costs, and help build knowledge among stakeholders about how the process works.