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CVA’s; The Missing Ingredient

An interesting article in the influential London newspaper The Times on January 7th, 2020. It refers to a report from Colliers, a respected UK commercial property adviser, that states that of 23 CVA’s in UK retail and high street fast food restaurants since 2016, 13 have gone on to fail and fall into liquidation or Administration. A CVA or Company Voluntary Arrangement is a UK near insolvency process supervised by Insolvency Practitioners (IP’s) where unsecured debt is restructured, with management staying in place to continue the business.

The writer raises the question; wouldn’t it be better for the economy in general and for the creditors to recognise the inevitable and force a break-up of the business immediately rather than prolonging the inevitable death throws and accrue subsequent greater losses. It cites Schumpter’s “gale of creative destruction” as potential saviours of the business world from such zombie companies. However, it conveniently ignores the 44% of businesses saved and the trickle-down effect that insolvency has on unsecured trade creditors. A report by Insolvency Professional Association R3 has estimate that around 25% of insolvencies in UK are the result of a customer insolvency. Not surprising when returns to unsecured are usually less than 10p in the £1.

But more interesting to Turnaround Professionals is that the writer completely misses the major problem with CVA’s. It addresses the balance sheet and sometimes as in recent retail cases gains a reduction in onerous rents, but not the underlying management issues. Incumbent management that presided over the problem by failing to act to changing circumstances remains to continue the business and most likely pursue much the same business practices. Where a fundamental rethink is needed by a different management approach a CVA does not demand that. Stakeholders do not have the leverage to demand that either. They are faced with a dilemma; accept a smaller haircut or suffer a near total loss of money and a customer. Legislation that insists an IP supervises the CVA does not recognise that IP’s are rarely trained in management best practice. Turnaround managers with that skill set are not used.

The thinking expressed by the writer shines a spotlight of a challenge that EACTP and its members face. Moving the default position of the financial community’s thinking from balance sheet restructuring, otherwise reshuffling the asset pack at the expense of the unsecured creditors, to management practice change and turnaround. This may be a greater problem in UK than elsewhere in Europe and particularly so in post Brexit Britain. Draft new UK legislation held up by Brexit delays calls for a pre insolvency moratorium, a step ahead of a CVA and a welcome one, but then stipulates that the supervisor should be an IP, a clear conflict of interest and a failure to recognise a fundamental issue of management deficiency. EACTP will continue to challenge this thinking and act as a voice for the Turnaround Profession not only in UK but across Europe. Italy has similar new pre insolvency consensual legislation due to be introduced in June of this year. It too will stipulate a “qualified supervisor”. The challenge is there for EACTP to be recognised as a force for better practice. 

Alan Tilley; President European Association of Certified Turnaround Practitioners;

January 8th, 2020

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