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21/02/2019

CVAs and the high street

The Housing, Communities and Local Government Committee has today published a report on its inquiry into the current state and future of the UK’s high streets, which examines “the future role of the high street in contributing to the local economy and the health, cohesion and cultural life of the local community and the challenges faced amid changing demographic, technological and other trends in recent decades.
 
One of the most prominent issues facing the high street, particularly over the last two years, has been the number of retailers struggling to adapt to changing market demands, alongside increased costs from business rates and new requirements placed on employers by government. This has led to a spate of insolvencies of well-known high street retailers and restaurant chains.
 
It’s perhaps not surprising then, that the use of Company Voluntary Arrangements (CVAs – 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) features in the report, given the number of retailers who have used the procedure in an attempt to rescue their business (New Look, Byron Burger and Carpetright being just a few prominent examples).
 
The committee’s report refers to concerns around the failure rate of CVAs, and what benefits they offer to creditors, and asked that the Government “provide us with its assessment of the effect CVAs are having on the high street and any consequential reforms that may be necessary.
 
R3 is clear that CVAs are a very useful insolvency tool. In the best case, when combined with new funding, they can turn around a company and maximise repayments to creditors. Even where they don’t meet all their objectives, they can still see more money returned to creditors than an alternative procedure such as an administration or liquidation. It’s also worth noting that CVAs only account for a very small proportion of insolvencies – just 2% in 2018.
 
In 2018, R3 published research (carried out by the University of Wolverhampton and Aston University, and supported by the ICAEW) looking at how effective CVAs are, and identifying changes which could help CVAs to return more money to creditors, rescue more businesses, and improve confidence in the process and the wider insolvency and restructuring framework.
 
In light of the HCLG Committee’s report, we thought it would be helpful to provide a reminder of the research report’s main findings and recommendations. Looking forward, R3 and the British Property Federation (BPF) will be hosting a roundtable in March, to allow members of both organisations to share their experiences and perspectives on large retail CVAs, as well as to address landlord concerns, and to ensure the work of, and challenges faced by, the insolvency and restructuring profession are recognised.
 
We hope that this discussion could form the basis for proposals for CVA reform supported by both the landlord community and the insolvency and restructuring profession.
 
 
In 2017, R3 commissioned the University of Wolverhampton and Aston University to conduct research into the effectiveness of CVAs as a business rescue tool. This research project was sponsored by ICAEW, and involved close cooperation with the Insolvency Service so that the researchers could access official CVA data.
 
The research involved the analysis of the 552 CVAs commenced in 2013 (to allow a sufficient period of time to have passed to permit a meaningful analysis of their outcomes) involving companies in England and Wales, along with other official data, surveys of insolvency practitioners, and interviews with creditor groups, government, and the insolvency and restructuring profession.
 
The review found that:
 
  • The biggest strength of a CVA is its flexibility.
  • 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.
  • Of the 552 CVAs commenced in 2013, 18.5% were fully implemented, 16.5% were ongoing at the survey date, and 65% were terminated without achieving their intended aims.
  • CVAs with the benefit of a moratorium – either from the existing 28-day pre-CVA moratorium available to small companies, or the moratorium provided by an administration – were terminated in only 20% of cases.
  • Often directors do not implement necessary changes or fail to identify and tackle fully the problems identified in the CVA.
  • HMRC is seen as the most engaged creditor but also the one most likely to vote against a CVA whether for policy or commercial reasons.
The review recommended that:
 
  • 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.
  • Directors’ and insolvency practitioners’ duties should be more clearly defined – Directors should be required to address financial distress at an earlier stage than now, while the insolvency practitioner’s role in a CVA should be clarified and reporting enhanced. Consideration should 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.
  • Standard CVA templates should be introduced – Standard templates would improve the consistency of CVAs, reduce costs, and help build knowledge among stakeholders about how the process works.

Notes to editors:

  • R3 is the trade body for Insolvency Professionals and represents the UK’s Insolvency Practitioners.

  • R3 comments on a wide variety of personal and corporate insolvency issues. Contact the press office, or see www.r3.org.uk for further information.

  • R3 promotes best practice for professionals working with financially troubled individuals and businesses; all R3 members are regulated by recognised professional bodies
     
  • R3 stands for 'Rescue, Recovery, and Renewal' and is also known as the Association of Business Recovery Professionals.