The Use of Company Voluntary Arrangements (CVAs) in Rescuing Businesses in the UK

Sample Answer

The Use of Company Voluntary Arrangements (CVAs) in Rescuing Businesses in the UK

Introduction

Corporate insolvency has long been a central concern in the UK economy, particularly as businesses face volatile market conditions, rising interest rates, and post-pandemic recovery pressures. One of the most significant mechanisms available under the UK insolvency framework for corporate rescue is the Company Voluntary Arrangement (CVA), introduced under the Insolvency Act 1986. CVAs are designed to allow struggling but viable businesses to restructure debts and continue trading rather than face liquidation.

This essay critically evaluates the role, effectiveness, and challenges of CVAs in rescuing UK businesses. It examines their legal framework, practical applications, advantages, limitations, and outcomes through case studies, supported by academic theory and professional analysis. The essay concludes by considering reforms and recommendations to enhance the CVA’s role as a genuine rescue tool in modern corporate practice.

Overview and Legal Framework of CVAs

A Company Voluntary Arrangement is a formal insolvency procedure allowing a company to reach an agreement with its creditors to repay part or all of its debts over time. CVAs are governed by Part I of the Insolvency Act 1986, and their primary purpose is to provide breathing space for a viable company to restructure without the disruption of liquidation.

A CVA must be proposed by a company’s directors, administrator, or liquidator, and it is supervised by a licensed insolvency practitioner (IP) acting as the nominee. Once approved by 75% (by value) of creditors voting, the CVA becomes legally binding on all unsecured creditors.

This flexibility distinguishes CVAs from administration or liquidation. Unlike administration, where control shifts to the administrator, a CVA allows the company’s management to retain control under the oversight of the IP.

However, this flexibility also invites criticism: some argue it can be misused by directors to delay inevitable failure or to exploit landlords and trade creditors while shareholders retain control (Walters & Frisby, 2018).

Rationale for Using CVAs in Business Rescue

The CVA’s central aim is corporate rescue, to preserve jobs, sustain economic value, and maintain supplier networks. It supports the “rescue culture” that UK insolvency law promotes (Finch, 2009).

Key reasons why companies use CVAs include:

• Avoiding liquidation and protecting the company’s brand and goodwill.

• Continuing operations while restructuring debts over an agreed timeline.

• Reducing operational costs, such as renegotiating leases or closing loss-making stores.

• Retaining control by directors, allowing continuity in business strategy.

A notable wave of retail CVAs during the 2010s (e.g., Debenhams, New Look, Mothercare, and Carpetright) illustrates their popularity. These companies used CVAs primarily to renegotiate commercial property rents and close underperforming outlets without total collapse.

Advantages of CVAs

3.1 Business Continuity

Unlike administration or liquidation, CVAs allow a company to continue trading. This can preserve customer confidence, retain employees, and maintain supplier relationships.

3.2 Flexibility and Cost Efficiency

CVAs are typically faster and cheaper to implement than administration. They can be tailored to a company’s financial position and operational priorities, offering flexible payment terms.

3.3 Legal Protection

Once approved, a CVA binds all unsecured creditors, preventing disruptive legal action and allowing time for recovery.

3.4 Support for “Rescue Culture”

The procedure aligns with the UK’s policy objective of rescuing viable businesses rather than dissolving them. The government’s stance, especially following the 2020 Corporate Insolvency and Governance Act (CIGA), reinforces this pro-rescue philosophy.

Disadvantages and Criticisms of CVAs

Despite their advantages, CVAs are far from perfect. They face persistent criticism from creditors, insolvency professionals, and policymakers.

Limited Creditor Confidence

Many creditors view CVAs with suspicion, particularly landlords and suppliers. In retail CVAs, landlords often bear the greatest losses through rent reductions or lease terminations, while shareholders retain equity. This raises concerns about fairness and transparency (Fletcher, 2017).

High Failure Rate

Empirical research shows that a large proportion of CVAs fail within three years (Walters et al., 2019). This suggests that while CVAs offer short-term relief, they may not ensure long-term viability.

Lack of Court Oversight

Unlike schemes of arrangement, CVAs require limited judicial involvement, which can lead to inconsistency in protecting creditor rights. Courts generally intervene only when there is clear procedural unfairness.

Abuse of the Mechanism

Some companies use CVAs strategically to shed liabilities, such as onerous leases, rather than genuinely restructure operations. This has prompted calls for tighter regulation and landlord protection.