Company Voluntary Arrangements are an insolvency process like no other.  Liquidation is certain death and administration is near certain death, however Company Voluntary Arrangements are like purgatory.  They allow insolvent businesses to continue to trade in order to see if they can be saved, whilst reducing the amounts that creditors can claim for existing debts.

Finance professionals and credit controllers often know little about Company Voluntary Arrangements; not much is written about them, their rules are rather sparse in comparison to other insolvency procedures and they often come with long, complicated proposals.  However, in the last few weeks, Company Voluntary Arrangements have been pushed into the limelight by well-known but struggling high street brand BHS.

BHS, or British Home Stores, was sold a year or so ago by Sir Philip Green’s Arcadia Group for £1.  It reportedly has £1.3 billion of debt and a £571 million pension deficit.  Much of its core market has apparently been lost to supermarket brands and discount retailers such as Primark, and many of its leases are subject to rents way beyond current market levels.

BHS’s answer to its problems was, according to its owners and board, a Company Voluntary Arrangement.  A few weeks ago, a 147 page Company Voluntary Arrangement proposal was submitted to BHS’s many creditors and it was accepted by around 95% of its creditors. Because of this, all of its creditors were set to receive much less than what was due to them.

What is the impact for creditors?

A Company Voluntary Arrangement proposal is essentially a proposal for creditors to be contractually bound by the terms of the proposal.  However, unlike the contracts you see every day where you can take the decision on whether or not you agree, a Company Voluntary Arrangement is like a contract by referendum; the majority can bind everyone. By their very nature, Company Voluntary Arrangements often result in significant reductions in amounts paid by companies to their creditors, so this process means that other people can force your business to provide significant discounts for the goods or services that you have already provided.

As was reportedly the case with BHS, there is often a very specific motive for large organisations to consider a Company Voluntary Arrangement as a way to turn around a struggling business, particularly in the retail industry.  Where long term leases were entered into in boom times, they often contained upwards only rent reviews. When rent is going north and high street sales are going south, it hardly takes a retail industry guru to work out that this is not sustainable in the long term.

Company Voluntary Arrangements therefore offer an opportunity for a business such as BHS to negotiate reduced rents with landlords in circumstances where their leases would not normally allow this. But because the majority can bind all creditors to Company Voluntary Arrangement terms, other creditors get caught in the cross-fire.

In the short term, your debt is suddenly worth a lot less than it was and it may take months, if not years, for you to be paid this reduced sum.

In the longer term, the Company Voluntary Arrangement may be the least problematic option, as the period in purgatory is supposed to allow for the possibility for resuscitation.  However, whether or not the purgatory period actually results in a positive outcome will ordinarily not be known for some considerable time.

In recent years, JJB Sports had two Company Voluntary Arrangements.  Blacks, Focus and Suits You each had one.  None of them survived.  Now, just a few weeks after the Company Voluntary Arrangement “rescue” package, BHS has become another seemingly inevitable retail casualty, rather than a rare success of a Company Voluntary Arrangement CPR.

So what choice do you have?

When faced with a Company Voluntary Arrangement proposal, particularly in large organisations such as BHS, the choice is usually a stark one; accept the Company Voluntary Arrangement proposal or the business will be no more.  This often comes down to a choice therefore of accepting the possibility of receiving a small amount of your entitlement at some point in the future against the likelihood of receiving nothing at all.

When faced with this choice, it is possible in some circumstances to make the best of a bad situation.  For example, consider the following:

• Do they need you more than you need them?  This might be because of the value of your vote or perhaps because you provide key supplies that they cannot do without.  In such circumstances, you may have a bargaining position to enable you to get a better deal than that on offer.  For example, Flint Bishop recently negotiated on behalf of a manufacturer client and its end customer in the Falkland Islands to secure a favourable outcome by blocking a Company Voluntary Arrangement proposal, until a revised proposal was agreed.
• Do you have security?  This could be retention of title, lien, company or personal guarantees, etc.  If so, you need to be careful not to inadvertently give up your security by voting in the Company Voluntary Arrangement and you shouldn’t be afraid to use your security, even if just for a bargaining tool.
• Is the proposal unfair to you or a class of creditors?  In some circumstances, a Company Voluntary Arrangement can be challenged through the Courts if it is unfair to a creditor or a class of creditors.
• Do you want to continue to trade with the company?  In the vast majority of circumstances, there is nothing to compel you to continue to trade with a company once it enters into a Company Voluntary Arrangement.  You certainly don’t have to offer the same credit terms, or indeed any credit terms, so you can protect your future risk even if you are bound by the terms of a CVA for existing debts.

The important thing is to weigh up any proposal carefully and consider the proposal and its ramifications properly.

You may be able to influence the outcome and get yourself into a better position than you realise.  At the very least, you can take steps to mitigate or remove your future risk. And, perhaps most importantly, seek advice if you need to.  Dealing with a Company Voluntary Arrangement proposal in the wrong way could make a bad situation even worse.

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