Mon, 14 May 2018
WITH the recent news about fashion chain New Look closing down a number of stores and Toys R’ Us going into administration, the spotlight is firmly on high street businesses once again.
David Tann, recovery and restructuring partner at Wilkins Kennedy, takes a look at some of the ways in which businesses can be recovered, without necessarily closing the doors for good.
THE all too common story, particularly with high street retail, is that trading conditions constantly get tougher.
Recent figures from the Newbury Business Improvement District show that footfall in Newbury town centre in February 2018 was down 4.9 per cent on the previous year.
However, this isn’t a picture that is exclusive to Newbury.
Footfall across the UK fell by 2.4 per cent and across similar market towns, such as Newbury, the footfall decrease was 3.7 per cent.
New Look is the latest retailer to hit the headlines with trouble and is looking to scale down on a number of its stores – including one in Reading and a further four in the Thames Valley.
This was done as part of a business recovery strategy, known as a Company Voluntary Arrangement (CVA), which allows the company the breathing space it needs to reorder its finances and allows a return to be made to creditors.
What is a CVA?
Essentially a CVA is an agreement between a company and its creditors to freeze their debts with repayment to be made over an extended period, commonly up to five years.
The key feature of a CVA is that it is a formal process under the Insolvency Act and Rules, which means that all creditors are bound by its terms.
Dissenting creditors are unable to upset the plan, provided a requisite majority vote in favour.
While the plan under the CVA is supervised by an Insolvency Practitioner (IP), the directors remain in control of the company and it is able to continue to operate normally and generate income for the benefit of its creditors.
The company usually will be required to make regular payments into a pot controlled by the IP, who will make distributions to the creditors when there is enough in the pot to make it cost effective to do so.
What is the process associated with a CVA?
The legislation which deals with CVAs is relatively short, which allows a high degree of flexibility with the process so it can be moulded to fit the circumstances of a particular company, but there are also safeguards built in and creditors have the comfort of an independent person supervising the plan.
The big issue for retailers such as New Look is being locked in to property leases with terms which in some cases are unsustainable in the current market.
The reports on the New Look CVA indicate that some 60 stores will close, with around 1,000 staff being made redundant.
The CVA allows for the termination costs under leases and staff redundancy costs to be dealt with in the CVA.
While a CVA is an excellent procedure in the right circumstances, it is not a panacea for all business problems.
It is important that the business is able to demonstrate that the problems of the past will not be repeated and that it will be able to generate sufficient cash to provide a return to its creditors.
Trading in a CVA can be tough, with suppliers likely to restrict credit terms and, with markets so unpredictable, projections showing future profits may become out of date very quickly.
If you would like any further information relating to CVAs, please contact Wilkins Kennedy’s insolvency team at your earliest opportunity, to talk through your options and find a solution.
David Tann, partner, Wilkins Kennedy