CVA set to stay in vogue say experts

THE recession has sparked a boom-time for the insolvency profession.

In the North West we’ve seen some spectacular failures – Modus, Dylan Harvey, Dairy Farmers of Britain, TheYang Sing Oriental and Premium Bars & Restuarants  – to name but a few.

But it’s not all been about job cuts, unpaid creditors and lenders losing out.

While pre-pack insolvencies have also played a role – 2009 has been the year of the CVA.

CVAs or Creditors Voluntary Arrangements-  have become a popular instrument to help struggling businesses – particularly retailers – restructure while remaining solvent.

Wigan-based JJB Sports was the first  to go through the process. Others included DIY chain Focus, Blacks Leisure and fashion retailer Flannels.

Brian Green, of KPMG in Manchester, who devised and managed the JJB CVA, expects 2010 to see more of the same.

“We certainly expect more retailers to go down the CVA route, particularly following the Insolvency Service’s announcement that it would press ahead with plans to extend a moratorium on creditor action – currently in place for small companies restructuring using a CVA – to medium-sized and large companies.”

Mr Green, pictured right, said the hostility to CVAs from property landlords is inderstandable, but argues that it is often a better alternative than administration.

“It’s worth remembering that the consequences of administration or liquidation can be far more damaging. For example, the company can quickly lose its value, while job losses and store closures are often an unfortunate inevitability.

“Furthermore, from a creditor’s perspective, the amount of money that can be recovered from a company trading on through a CVA is more than that from a company in administration or liquidation.”

Gary Lee, a partner at Begbies Traynor in Manchester, believes that while insolvency rates will rise, the CVA is here to stay.

He said: “The pre-pack administration will still be a useful tool when exploring all restructuring options but more increasingly we may well see the use of a CVA to restructure a company’s finances.

“This will be especially true if there are a raft of high street retail failures in the bleak winter months of January and February.

“As the year progresses the CVA may well be the restructuring tool of choice for many insolvency practitioners as directors, creditors and financiers look for ways to retain an interest in a business and try and recoup some of the losses by sharing in future revenue streams.”

But Tom Jack, a partner at Ernst & Young, believes the days of the CVA may numbered.

He said: “CVAs have proved a very useful rescue tool this year in a way not really seen in the past.  However, CVAs could be a temporary measure that we are likely to see less of in 12 to 18 months time.   

“Landlords are already looking at CVA proposals in great detail to be satisfied they are not simply a plan to restructure leases.  As economic conditions improve landlords’ appetites for accepting CVAs may wane.”
 
Chris Ratten, head of Tenon Recovery in the North West shares the view that CVAs may not be a long-term solution.

He said: “The success of the JJB and Blacks CVA cases shows what can be achieved in the short term to ensure businesses remain open, but it must be realised that businesses that require CVAs in the first place usually have problems that cannot be solved via a patient landlord alone. CVAs will remain a valuable tool, but not a long-term solution.”

But Julian Heathcote, director in the reorganisation services team at Deloitte in the North West, believes the CVA may be increasingly used beyond the retail sector.

He explains: “CVAs are used to support fundamentally sound businesses. While they have been most relevant in the retail sector, we expect to see the CVA implemented in other recession-hit sectors, such as commercial property and manufacturing, as landlords and other creditors work to support viable businesses. “