Company Voluntary Arrangements (CVA’s) in the retail and leisure sectors continue to make the news as the high street adjusts to Covid-19 and changes in consumer behaviour. Voluntary arrangements can be very flexible, allow existing management to remain in control and offer shareholders the prospect of real value once the CVA is completed.

Over the last few months commercial tenants have needed to reduce property costs in line with reduced footfall or customer demand. The landlord community have often criticised tenants who have proposed a deal based upon over optimistic projections, inadequate funding and unworkable turnaround strategies. To be feasible, a CVA needs to really change how the business operates so that the plan delivers benefits for all stakeholders once the restructuring is implemented.

So far the focus for many retail proposals has been to reduce property costs and other contingent liabilities. The trend has been to propose turnover based rents which will mean more transparency and collaboration between tenants and their landlords. Probably no bad thing in the new world we are all facing.

Unintended consequences
One area that hasn’t been getting very much media attention is the forthcoming change to the status of Crown debts. As the law currently stands, on Tuesday 1 December 2020 HMRC will become a secondary preferential creditor for VAT, PAYE and employees NIC. These claims will rank ahead of floating charge holders, typically banks and other secured lenders.

A CVA cannot compromise a preferential creditors claim without their consent. In the context of restructuring, this is a real problem and will have a huge impact on proposals launched once the new law takes effect.

Let’s look at an example: A company currently has £200,000 in unsecured debts, of which £50,000 is owed to HMRC and £150,000, the majority, to trade suppliers. Under the CVA £75,000 will be paid to creditors – a dividend of 37.5p / £1.

After Tuesday 1 December 2020, HMRC would take £50,000 leaving only £25,000 to be shared by the £150,000 of trade suppliers – a dividend of only 16.5p / £1. The result? The proposal is going to be a lot less attractive to the majority of unsecured creditors.

Practical considerations
These new rules apply to all CVAs approved on or after 1 December 2020. The date of approval is the key date, not the date of the proposal. Given that creditors need effectively three weeks’ notice to consider the CVA – and for the company to hopefully get a consensus agreement to the plan – proposals will need to be issued by 9 November 2020 if the new regime is not to be a major issue.

Expect to see a few more retailers and restaurants sending out CVA proposals this month. And as always, if your company needs help, get in touch soon.