Company Voluntary Arrangements increase in retail in recession

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Newly released insolvency statistics show CVA’s (Company Voluntary Arrangements) still remain popular in retail as a tool to steer through the downturn, according to insolvency experts Baker Tilly Restructuring and Recovery LLP.

Commenting on the latest insolvency figures in retail released for Q2 2010, Lindsey Cooper, partner at Baker Tilly said: “Q2 figures on insolvencies in retail are pretty much in line with what we saw in Q1, a stall in administrations and liquidations.

“What is interesting is that Company Voluntary Arrangements (CVAs) continue to increase in popularity in retail. CVAs can be an effective tool to ensure the company continues to trade and for the survival of the business. The process normally involves formally agreeing a repayment plan with its unsecured creditors, allowing a greater return compared with liquidation or administration. It also is favourable to secured lenders as they are not normally negatively affected by this process. CVAs have been commonly used in the retail sector throughout the recession often as a means for retailers to reduce their lease liabilities and also procure the release of onerous parent company guarantees.

“However, there has been a recent case, Mourant & Co Trustees versus Sixty UK Ltd, in which Sixty hoped to obtain a release from its guarantees under terms of the CVA. This case largely depended on whether Mourant could show that the release of the guarantees to the landlord meant the CVA was unfairly prejudicial to its interests. In the case the Court held that the administrators and supervisors had not acted objectively and had allowed themselves to side with the Sixty group against the interests of the landlord. This case sets out a helpful framework for insolvency practitioners and provides some comfort to landlords that they will not be forced into accepting unfairly prejudicial proposals simply because they have a minority vote in proceedings.

“This case may make it tougher for companies to agree complex restructurings such as pre-pack administrations and CVAs which have saved retailers such as JJB and Blacks Leisure in the past.

“This along with the factors such as the impending VAT hike is also likely to have impact once this bites in the New Year.”