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Thursday, 28 October 2010

Suits You CVA Fails and Ill informed Views on Pre-Packs and Company Voluntary Arrangements

An article in the Independent today seems to question the validity of the company voluntary arrangement (CVA) mechanism, because a well publicised retail CVA has failed.

Suits You (Speciality Retail Group Ltd) entered administration yesterday after the CVA proposed by the company in March 2010 collapsed. James Moore writing in the Independent Business section calls it "get-out-of-jail (almost) free route". His earlier comment that "the brutal truth is that this was a business that was simply not up to scratch" is much more accurate.

CVA's are not a panacea, but they're the most flexible way of keeping a business afloat, while returning dividends to creditors, maintaining employment and restructuring loss making elements of a company. But the fundamental issue that needs to be addressed by journalists is not whether CVA's. administration, (pre-pack) or liquidation are appropriate tools, these are fixed by a very complex web of legislation over decades; no, the real point is that turnaround experts and insolvency practitioners don't cause bust businesses. Management does.

In all CVA's the issues that caused the business to break down MUST be addressed. Change management or change management is our basic views. If the business is to survive the rigour of the insolvency process, management needs to be strong, determined and willing to learn from mistakes and to change. The CVA scheme itself should set out why the creditors might support the CVA restructure, what changes have been made so far and what the change plans are for the future. Why should creditors support the management team in other words.

Without being too critical of a fellow CVA expert, I personally don't think the Suits You CVA went far enough to change the business. Our research showed that something in the order of 20 factory outlets were performing well, with turnover related rents. The high street chain of c45-50 stores was burdened with high fixed rents. The CVA scheme only reduced these rents by 40% for up to 18 months, after which they could be closed. In my experience, retailers always over estimate future sales and margins. So, in my opinion, the loss making (at operating level) high street chain should have been been closed down in March 2010; the smaller leaner factory outlet business would have been left with turnover rents and flexibility. In addition the suppliers and tax creditors should have been compromised.

Simply using a CVA to hammer the landlords isn't equitable in our view. How can it be fair to penalise one class of creditor whilst allowing all other aged creditors to be paid? Having said that, the brilliance of the CVA mechanism, when understood, is that it is very flexible and the law is not minutely prescriptive on the scheme construction. Many of our clients have heard me say, "propose a deal and if the creditors approve it, you have a deal", meaning as long as 75% of the creditors support a scheme whatever it sets out, then the scheme is contractually agreed.

One swallow does not make a summer and a failed retail CVA is not a meaningful statistic; a number of retail CVA's have been very successful recently, witness Blacks Leisure plc. In that scheme the non performing stores were quickly closed and the cancer of failure treated aggressively. That company is now attracting bids. JJB Sports plc exited its 2009 CVA in early 2010.

KSA restructured a well known London design & furniture retailer earlier this year, 5 stores were closed, the warehouse operations outsourced, the MD stood down and new experienced retailers recruited to help run the company. Time will tell of course whether that CVA is successful. Perhaps people will criticise our work if that fails. Its the nature of insolvency and turnaround, some rescues work, some don't.

Finally, and almost gratuitously, the journalists lapses into lets lash out at the fat rich accountants who "stand to pocket a fortune in fees, so what do they care"? Well my normal response to this facile observation is that we didn't get the companies that we work with into trouble. Expertise, experience qualifications and strong minds are required to fix them or bury them. For that and sheer bloody hard work, we should be well paid.

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