The CVA isn't dead yet...

The CVA isn't dead yet...

Restructuring and insolvency bulletin - June 22

Whilst creditors’ voluntary liquidations (CVLs) have spiralled in number in recent months, the formerly popular company voluntary arrangement (CVA) has fallen out of the limelight. There were only 29 registered CVAs in Q3 2022, representing just 1% of recorded company insolvencies and languishing behind administrations (also down in number compared with Q2 2022). 

A falling trend

How times have changed. Until relatively recently the CVA was the restructuring model of choice for many businesses, particularly for the beleaguered casual dining or retailer sectors with large leasehold footprints. 

With the pandemic now over, that corner of the British economy has adapted to match customers’ spending habits. Struggling businesses now seem to have less reason to turn to a CVA. 

Take, for example: few physical stores, too much stock, but no obvious group of unsecured creditors (such as landlords) who could be easily crammed down via a CVA to give the company more time. 

It would be easy to dismiss the CVA in the current restructuring landscape, with more restructuring tools available than ever before. But each have their own advantages and disadvantages. The benefits of a CVA for example are the ability for management to remain in control, the possibility to stay out of court (omitting any creditor challenges), and therefore the potential to keep a lid on costs. Costs are a key factor for many businesses looking to restructure (particularly for SMEs) and here the CVA has the edge over schemes of arrangement and the new Part 26A restructuring plan. A CVA can also be teamed with the standalone moratorium, or even administration, to give breathing space to conclude negotiations on key CVA terms before the CVA is formally launched. 

Tough times ahead

So, what can we expect from the next six to twelve months? Company insolvency numbers will continue their upward trend given a climate of higher interest rates, a cost-of-living crisis, and supply chain disruptions. Businesses will find it more difficult and expensive to borrow or refinance. Putting the recent energy crisis aside, the British government is less likely to offer business support of the kind many relied on during the pandemic. We anticipate that CVLs will continue to outpace other forms of company insolvency procedure, whilst the latest Insolvency Service statistics indicate that compulsory liquidations are also on the rise.

What about business rescue?

But CVLs and compulsory liquidations each represent terminal procedures –the death of a company. What about those businesses which are teetering on the edge of survival and need just a dose of medicine?

The CVA is suited to those who can see some light at the end of the tunnel but need to undertake an operational restructuring – for example, to revisit lease liabilities where bilateral negotiations with individual landlords fail. With an element of stability reintroduced at the helm of the British government, some business managers may be encouraged to keep calm and carry on. And the recent decision of the Supreme Court in the Sequana SA case provides some incentive here, providing reassurance to directors that until insolvency is probable or imminent, they can continue in office (carefully balancing the interests of shareholders with creditors) rather than calling in insolvency practitioners.

Administration by contrast is more suited to those who have run out of road but where there is some residual value left in the business. And then it is a question as to whether there are investors out there with the appetite to buy the business and attempt to turn its fortunes around. Let’s hope that the recent troubles experienced by the wider British economy do not dampen the enthusiasm of investors for such opportunities.  

This piece was originally published on CoStar and can be found here

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