More struggling businesses are using company voluntary agreements (CVAs) to starve off the threat of insolvency, with the number increasing by 32 percent in the last year alone.
CVAs allow companies to continue trading and prevent creditors from taking action to recover debts until the agreement ends, either through completion or failure. However, in order to enter a CVA, a company’s arrangement for repaying creditors must be approved by three-quarters of them by value and supervised by an insolvency practitioner.
One reason for such a large rise was the collapse of Southern Cross Healthcare, where the company entered into hundreds of CVAs to avoid bankruptcy.
However, many other well-known businesses have been using them recently, including JJB Sports, Blacks Leisure, Fitness First and Focus DIY. Whilst last week hotel chain Travelodge agreed one, while eight other chains entered CVAs in the last six months.
Unfortunately, the biggest loser in a CVA, particularly with large chains, tends to be the landlord and after the Travelodge announcement, Liz Peace, the chief executive for the British Property Federation, said: “Once again landlords are being asked to play a significant part in rescuing a business, and a minority at that, who are being asked to take a ‘hit’ to keep a far bigger business afloat.”
But many hoteliers and retailers are blaming the inflexibility of rents for the increase in CVAs. In their press statement, Travelodge said that the rent being paid on a fifth its 500 properties was unsustainable.
It must be remembered that CVAs are no guarantee of future solvency. JJB Sports for example is being carefully monitored for performance and has a big rent bill due at the end of September; if it cannot pay that then bankruptcy could be the next step.
If your business is suffering financial difficulties and you are concerned about the threat of insolvency; you should seek financial advice, support and guidance at the earliest opportunity, and the team at Milsted Langdon can assist.
Tim Close is an accountant specialising in business insolvency, debt recovery and business rescue.