Company Voluntary Arrangements – a new dawn?

Discover Leisure (an AIM listed caravan retailer) has become the latest company to avoid administration and restructure through a company voluntary arrangement (CVA), securing 99.7% of creditors voting in favour. 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 bankers (although not being bound by the terms of the CVA) have agreed that they would renegotiate the terms of their banking facilities.

Discover Leisure’s CVA follows the high profile CVA in respect of JJB Sports but it is important to bear in mind that not all recent attempts to secure a CVA have been successful. For example 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 and more recently Cobra Beer failed to secure a CVA after a major creditor vetoed the proposal forcing the company into administration.

The challenges to securing a successful CVA are great. Particular difficulties are: the absence of a moratorium (unless the company qualifies as a “small company”) at a time when creditors are already inevitably stretched; obtaining secured creditor support (as they are not bound by a CVA); having sufficient resources to trade through the CVA process as well as the fact that post the approval of the CVA the supervisor remains in situ for 28 days making it challenging for the directors to revert to business as usual. So there is much upfront planning and agreement with creditors to avert enforcement proceedings and to enable the company to continue trading during the CVA process. The recent Budget announcements on insolvency reform on which the Insolvency Service, on 15 June, have launched a consultation paper, could mean that CVA’s have increased prominence as a rescue tool as the Insolvency Service will consult on extending the moratorium in CVA’s to medium and large sized companies and introducing priority funding during the CVA period.

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.