Creditors now more accepting of Company Voluntary Arrangement (CVA) A Company Voluntary Arrangement (CVA) has hit the headlines again with outdoor and leisure retailer Blacks trying to agree one with its creditors. This provides more evidence that creditors understand the value of a CVA in the business turnaround of a struggling company.
The outdoor and leisure clothing retailer Blacks is planning to resolve its financial difficulties by agreeing a Company Voluntary Arrangement (CVA) with its creditors. Yet more evidence that creditors are starting to understand the value of CVAs for restructuring struggling companies.
According to recent reports, outdoor and leisure clothing retailer Blacks Leisure, (Blacks, Millets and Free Spirit) is likely to agree a Company Voluntary Arrangement with its creditors within the next few weeks. This agreement will allow Blacks to close unwanted stores, and gain the support of its creditors to survive.
In a nutshell, a CVA is an agreement where a company's creditors decide to accept reduced payments and write off debt. This frees up cash by reducing the debt burden on the company allowing it to continue to trade. Because of the CVA, creditors write off part of the debt they are owed, but have the opportunity to continue ongoing trade with the company. This is certainly a better prospect than the total failure of the business and the likelihood that there will be no returns for creditors at all.
As with many business recovery solutions, CVAs have attracted some criticism. Creditors argue that they are forced to accept the terms of a CVA because if they do not, they are threatened with the closure of the company and that they will be left with nothing. In reality this is a flawed argument because a company would only consider a CVA in the first place if it is struggling to repay its debts and facing liquidation. If this situation were allowed to happen, the creditors would be very likely to lose everything anyway.
A Company Voluntary Arrangement is designed to save the business and at least get some return for the creditors. It is not as some have said, simply a way of avoiding paying the company's debt. It is seen a more consensual business rescue option than others such as pre-pack liquidation as it requires the approval of 75% of the value of voting creditors to be accepted and set in place. Without this, the CVA cannot be implemented.
In an article in the Sunday Times on the 27th September (http://business.timesonline.co.uk/tol/business/industry_sectors/retailing/article6850821.ece) the author suggests that Company Voluntary Arrangements are most often used by retailers to reschedule their debts and close under performing stores. It is true that during 2009, there have been a number of high profile retailers who have used the CVA solution. Notably JJB Sports plc, Stylo plc and Focus DIY plc have all put forward CVA's (although Stylo's was rejected by the creditors). However, the CVA solution can be used by any struggling business , which needs to renegotiate the debt it owes to its creditors in order to survive.
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