Another day, another CVA

Discover Leisure (an AIM listed caravan retailer) has become the latest company to avoid administration and restructure its debt repayment schedule managing to secure 99.7% of the vote in favour of the proposed company voluntary arrangement (CVA). Although unsecured creditors will only be paid 22p for every £1 they were owed, it was considered that they would fare better in the CVA than under a traditional administration. In addition, Discover's banks (although not being bound by the terms of the CVA) have agreed that they would renegotiate the terms of their banking facilities. The success of yet another high-profile company securing its future through a CVA demonstrates an increased willingness on the part of both trading and institutional creditors alike to amend the terms of their credit agreements or reduce the amount owed to them, particularly if they are to fare worse if the company were to enter a more formal insolvency process such as administration or liquidation.

Another high profile CVA in the last couple of months was JJB Sports but not all recent attempts at proposing a CVA, however, have been successful reminding companies that they need to be careful to ensure that all creditors are treated fairly in a CVA. For example, in February the footwear retailer Stylo failed to get the relevant majority to vote in favour of its proposal when it sought to make its landlords accept turnover based rent. Another recent example is Cobra Beer's failure to secure a potential restructure through a CVA after a major creditor vetoed the proposal forcing the company into administration and the business to be sold through a conventional pre-packaged administration. Clearly, the flexibility of CVAs are the ability to cram-down certain creditors or creditor groups can be beneficial to a company's future but only if those creditors are unable to influence the final vote on whether the proposal for a CVA is ultimately implemented.

The challenges to securing a successful CVA are great and among the reasons for this is that there is no protective moratorium to give a company the breathing space it needs during negotiations with its creditors. A particular difficulty for larger companies is that their creditor base is often so large/adverse that they are simply unable to approach, explain and elicit the cooperation of a significant proportion of its creditors. When a company is facing mounting pressure from certain creditors or creditor groups, which often includes the threat of being wound-up, companies will often find that they simply do not have the time or the financial resources to plan their proposals to get a CVA across the line. The recent Budget announcements on insolvency reform, however, could mean that the rescue framework will have an enhanced focus on protecting the legal entity by, among other things, giving companies the benefit of a moratorium so that they might have the breathing space necessary to plan for a successful CVA without the threat of legal and/or winding-up proceedings being commenced against them.

The spotlight on CVAs as a potential lifeline in certain situations for financially distressed companies and the Government's willingness to enhance the practical availability of this rescue procedure should see an increased number of companies follow the examples of JJB Sports and Discover Leisure.