CVAs: Some Pros and Cons

1st February 2019

If you are a commercial landlord or tenant, you are likely to have heard of a company voluntary agreement. A ‘company voluntary agreement’, known more commonly as a ‘CVA’ is a form of insolvency process which a struggling business can enter into, allowing it to continue its business operations, under the Insolvency Act 1986. The purpose of a CVA is to allow a company to negotiate the repayment of its debt with unsecured creditors, including suppliers, HMRC, employees and landlords, to generate capital whilst maintaining the business and its structure; rather than simply filing for liquidation or insolvency.

Market Backdrop

Recently, there has been heightened interest in CVAs, which in prevailing market conditions have become increasingly commonplace. 2018 saw an increase in CVA proposals, largely issued by retail and leisure business. These sectors often face issues arising from large property portfolios and with pressure on profits from a number of factors, such as rent and minimum wage increases, changing consumer preferences and behaviours and tax rises. Crucially, shifting shopping tastes in favour of online-based retail giants such as Amazon and ASOS, being all a part of a perceived shift away from the traditional bricks and mortar business model, have rapidly eaten away at traditional retailer’s market share. CVAs can therefore be a way for companies to restructure costs and business operations.


There are many reasons why CVAs are adopted as a mechanism to save a company from collapse, for example:

Company control

For retailer tenants a major advantage is that a company director retains control. While liquidation and administration remove a company director’s powers, they are still entitled to keep control of the company with the CVA procedure, controlling the business recovery plan and carrying out the CVA’s obligations. Directors still have to comply with the terms of the CVA proposal, but can continue to oversee the day-to-day running of the company.

More flexibility and less scrutiny

CVAs allow more flexibility as to how the company is run; there is relief from creditor pressure and costly legal action; a licensed insolvency practitioner will assist the company with the CVA proposal and once the CVA is approved, creditors are bound by the proposal and cannot take further legal action. For companies that have a realistic chance of recovery, this could post the most significant opportunity, as long as the CVA proposal is complied with. Also, the company cannot be wound up once the CVA is in place – unless it fails to comply with the terms.

Margin for optimal change

During the CVA process, which can last between 3-5 years, the company is free to make important restructuring changes straightforwardly. In a CVA, retailers can terminate unprofitable contracts and can make staff redundant more easily. This makes a CVA attractive where if the company is weighed down by unprofitable, burdensome contracts and agreements, or is over-staffed. Further, CVAs are carried out privately unlike in administration, which in some cases, may enable a company to reduce potential negative publicity or exposure

Better chance of returns

There are often benefits to creditors and the company. Compared to other insolvency measures, CVAs often provide the optimal outcome for creditors and directors. While creditors may not receive all monies owed, they can recover more than they might through winding up orders. It is in their best interests for the company to succeed and the CVA process can even improve the returns a business makes, meaning the company can recover more for the creditors in the future. For the tenant, the CVA allows creditors to receive payment in instalments and keeps the tenant in control of finances. The process can also cause less damage to the company’s reputation resulting in unaffected consumer confidence; a CVA is only published at Companies House and to creditors, giving the company time to recover and make the necessary restructuring changes. Furthermore, CVAs stop pressures from tax, VAT and PAYE while the company voluntary arrangement is being prepared – this allows a tighter control over finances whilst aiding operations to run more smoothly.


However, the disadvantages of CVAs also need to be considered, and may include the following:

Credit Issues

Once a CVA is issued, a company’s credit score falls to zero. Resultantly, accessing credit from banks and suppliers may become extremely difficult to do, which may have an adverse effect on the company’s ability to trade moving forward with suppliers or obtaining new lease agreements.

Cost burden

Despite being interest free, it can take years to pay off a company’s debts under a CVA, making it a solution that is only designed for companies with a long-term approach. Alternative insolvency solutions such as administration or using short-term finance to pay debts may be better suited to certain companies. Moreover, signing up to a CVA is a serious financial commitment as they usually last between 3-5 years. Although this is generally shorter than terms of expensive commercial leases, failure to comply with the terms of the CVA will often result in the practitioner winding up the company either voluntarily or through the courts by way of a winding up petition.

75% of unsecured creditors need to agree

Secured creditors are not bound by the agreement. The fact that a bank with a legal charge, for example, is not bound by the terms of a CVA leaves companies open to administrators being called in, even when the agreement is adhered to. If a CVA fails for some reason such as not keeping up with repayments, creditors can take legal action against the company. This is why it is important to make sure the terms of the agreement are drafted with the long term recovery of the company in mind. Convincing both groups that a CVA is in their best interests is, therefore, essential to ensure the company’s success. There is also a chance that negligent directors remain in power as a CVA requires no investigation of directors’ conduct leading up to insolvency; any accusations of wrongful trading or improper practices are avoided.

CVA Exploitation

Landlords have been openly critical as to what they view as the misuse of the CVA process, as highlighted by the case of House of Fraser. There is a genuine concern that the CVA structure is being used to avoid onerous lease liabilities rather than being used to restructure the business. It has been reported that Next plc is looking to insert a ‘CVA clause’ into its leases whereby if its neighbouring retailers are granted rental cuts as part of a CVA then its stores should be entitled to a similar reduction. It would not be surprising if well-advised tenants were taking the same approach.


As it has been shown, there are both positive and negative aspects to consider when deciding whether adopting a CVA is the best option for a retail tenancy. It is important to remember that a well-constructed CVA is one of the few routes out of debt which allows the company to remain open, trading, and with an active director, whilst in parallel allowing creditors and landlords to make a steady return. However, and as evidenced by the cases of Toys R Us and Maplin, a CVA cannot guarantee a company’s future.

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