The Long Road To Recovery -Why CVAs Fail

The move to try and remarket insolvency as a restructuring and recovery-based profession is in full swing.  The championed recovery tool is a Company Voluntary Arrangement, allowing a company to continue to trade whilst addressing past liabilities.  However, all too many CVAs fail; BHS and Toys R Us are two of the highest profile CVAs to have collapsed recently, but many more have been unsuccessful. Why is it such a difficult process to complete successfully?  Here are three suggestions:

1. The reasons for the Company’s insolvency in the first place aren’t addressed. Usually there are a number of reasons for difficulty, some of which may not be under the Company’s control, and some of which may be symptomatic of the Company’s industry, or management.  The reasons presented for why the Company will not suffer these difficulties again may be more hopeful than real, with the result that the Company continues to struggle even after a CVA has been approved.
2. Offers are overly optimistic. The Company wants creditors to accept the CVA, with cash flow forecasts to support good offers.  However, the reality of being in the CVA may result in these forecasts being over-optimistic, perhaps due to suppliers increasing their prices to recoup some of their losses, imposing tighter credit terms than anticipated, customers being put off by the CVA, or director fatigue (see next point).  The Company then finds itself unable to afford what it proposed.
3. It’s a long-term procedure. CVA’s can last 3-5 years, depending on the levels of debt and what the Company can afford to repay.  In that time, the CVA will bind directors to the CVA’s terms, and will most likely restrict what they can draw from the Company, which may result in fatigue and loss of morale.  Would you want to be director of a Company subject to years of CVA contributions and conditions?

These problems may be mitigated if advice is sought early, before difficulties become numerous and debts become great.  At WSM Marks Bloom we have three Licensed Insolvency Practitioners ready to speak with individuals and companies in financial distress.  Give us a call at WSM’s Kingston Office on 020 8939 8240 or email insolvency@wsm.co.uk, and one of our experts will be ready to assist you.