This note outlines one attractive option for businesses within the retail and hospitality sector, Company Voluntary Arrangements (“CVAs”), and highlights how they can be used as part of a rescue or restructuring plan.

Why retail and hospitality businesses may seek a company voluntary arrangement

The Covid-19 outbreak has already had a huge economic impact on businesses across the world and the impact is set to last for many months. One area that has been particularly hard hit is the retail and hospitality sector. Two weeks ago, many cafés, shops and restaurants were suddenly forced to close to comply with government restrictions with no immediate financial support. This has left many businesses within the sector in a perilous financial position with no income, high costs and no clear timeframe for a resumption of trading.

This is financially devastating for the retail and the hospitality sector: a sector that was already grappling with rising business rates, increased wage costs, reduced footfall on the high streets and the effects of Brexit.

Last week, the government announced a series of measures designed to reshape existing insolvency laws. These are aimed at businesses struggling to deal with the effects of the Covid-19 pandemic by allowing them an opportunity to undergo financial rescue (or a restructuring process) whilst still having access to goods and services and avoiding payment pressure from creditors. Those measures include the introduction of a new business rescue moratorium. The new regime will be brought in at the earliest opportunity, but legislation is required and that is unlikely to be debated, or approved, until after the Easter recess. This may be too little, too late, for some within the retail and hospitality sector.

Druces LLP has already been instructed to advise and assist a number of businesses who find themselves in financial distress as a result of the sudden imposition of lockdown. We are working with those clients looking to undergo an urgent rescue or restructuring to avoid liquidation.

What is a Company Voluntary Arrangement (CVA)?

A CVA is a formal insolvency procedure available to companies in financial difficulty.

CVAs are designed as a mechanism for business rescue. They are a useful tool for viable businesses, which have traded and been profitable in the past, but find themselves operating at a loss or struggling with liquidity. They are a popular restructuring option for businesses in the retail and hospitality sector, particularly for businesses facing creditor pressure from landlords, because they enable the business to renegotiate its debts and continue to trade without the threat of a winding up petition from unsecured creditors.

The purpose of a CVA is to preserve the business and allow the company to avoid entering liquidation by coming to an informal, but binding, agreement or compromise with unsecured creditors. CVAs normally involve a rescheduling or reduction of the company’s debts, although they can involve more complicated structures as well. CVAs can also be combined with an administration to give the company the benefit of a statutory moratorium. A CVA proposal is prepared by an insolvency practitioner. Legal advice from an insolvency and restructuring lawyer is typically taken alongside that. Once implemented, the CVA affects the rights of all the company’s unsecured creditors. By contrast, it only affects the rights of secured or preferential creditors if they agree to the proposals.

The benefits of a CVA

One of the key benefits of a CVA is that it shields the business from creditor pressure and allows the company breathing space to pay its unsecured debts over a period of time based on affordability and cash flow projections. CVAs also allow businesses to continue to trade under the control of the directors, while the directors restructure the business as part of a wider rescue plan and with the benefit of professional advice.

CVAs are a cheaper option than many other more formal insolvency procedures and an important rescue and restructuring tool. They are likely to be much used in the months ahead, particularly in the retail and hospitality sector, as businesses react to the impacts of the crisis.

CVAs are also likely to be one of the exit routes available to businesses who take advantage of the new business moratorium once the new government measures come into effect.

The procedure for implementing a CVA

The procedure for implementing a CVA is relatively straightforward. It can be proposed by the directors of the company and they will need to appoint an insolvency practitioner (known as the nominee) to assist them with the process. The nominee will assist the directors in reviewing the company’s finances and identifying whether a CVA is likely to preserve the business. A draft CVA proposal will then be prepared. If the proposal is viable, the nominee will submit a report to the Court giving notice of it. The report will contain a statement setting out the nominee’s view on the feasibility of the proposal and give notice of a meeting to approve and implement the CVA. The minimum voting requirements for creditors must be met at that meeting. If the requirements are met, the CVA will take effect and all unsecured creditors will be bound by it.

The nominee will also then become known as the “supervisor”. The supervisor’s role is to implement the terms of the CVA and refer the matter back to Court if he/she determines that the CVA should be abandoned, or further order is required. However, ultimately control of the business remains in the hands of the directors and they can continue to trade in the usual way.

How we can help

Druces LLP’s Insolvency and Restructuring Team regularly advises businesses in financial distress on rescue and restructuring options, including the implementation of CVAs, and we are already helping a number of businesses preserve their future in these challenging times.

If you require advice on restructuring or rescue options, or wish to have a confidential discussion about the possibility of a Company Voluntary Arrangement (CVA), please contact our Insolvency and Restructuring Team for further information:

• Christopher Axford at c.axford@druces.com or +44 (0)20 7216 5557