A spate of high street retail failures over the past few months has seen the acronym CVA splashed across various newspapers and online articles.
Struggling DIY retailer Homebase is the most recent company to seek a CVA, but it is far from the first and unlikely to be the last.
Among those on that list are Mothercare plc (LON:MTC), Carpetright PLC (LON:CPR), New Look, Jamie’s Italian, Byron Burger and Prezzo – all of whom have sought a CVA to try to keep their heads above water during what has been a difficult time for high street retailers and restaurants.
But what exactly is a CVA?
CVA stands for company voluntary arrangement and, in a nutshell, it is an offer by a struggling company to its creditors – usually landlords, banks, the tax man etc.
In a lengthy document, the company has to explain how it got itself into a mess, outline what assets it has as well as all of its liabilities – i.e. everything it owes – before offering a reduced payment plan.
Things that the firm will usually request include asking landlords to agree to reduce its rents or cancel the lease altogether, while banks might be asked to restructure repayments.
The company sends its CVA pack round to all of the people and organisations to whom it owes money, after which they vote on whether to accept the proposals or not.
Most creditors will approve a CVA
Generally speaking, creditors will agree to it. It can be painful for them but getting some of their money back over a period of time is better than getting nothing at all if the company goes bust.
Firms seeking a CVA need at least 75% of their creditors to say yes for it to be approved. In some cases, the largest creditor on the list is the owner, so they can almost wave it through on their own.
For the company itself, a CVA can rapidly improve cash flow and cut costs, while it also stops creditors attacking it through things like a winding-up petition.
For the directors of the struggling business, one of the key features of a CVA is that they get to stay in control of the company and don’t have to hand over control to an administrator or liquidator.
It also keeps the existing company intact so there is no need to go through the laborious process of setting up a new one.
For the creditors, it is generally seen as the ‘best option of a bad bunch’, in that they retain the customer and can get back some or most of what they are owed over time.