The recent rise in Creditors Voluntary Arrangements is a worrying trend in the restaurant sector. Since the start of the year high street operators Byron Burger, Jamie’s Italian and Prezzo have all embarked on CVAs with a view to closing loss-making stores and secure rent discounts. Carluccios has since followed this trend – which is a disturbing sign of the financial stress in the eating out market.

However, taking this step can be a viable alternative to formal insolvency proceedings for hospitality businesses in trouble.

Often criticised because the burden seems to fall on landlords by way of rent reductions or surrenders, rather than creditors such as banks, or the company itself, a CVA can be preferable for creditors by providing significantly higher dividends than an administration.

If well structured, CVAs can provide acceptable levels of compensation to landlords and provide a dividend to creditors which is significantly in excess of what they would receive if the alternative route of administration was taken.

What is a CVA?

A Company Voluntary Arrangement aims to allow a company to avoid liquidation.  At its most basic, a CVA involves an agreement between a company and its creditors to restructure or reduce its debts.  The key to a successful CVA is that there must be a viable business for the future.  A CVA is ideal for a business that can identify what has gone wrong (for example the loss of a major customer or a bad debt) and can overcome those issues.  A CVA can keep a business going, with the directors staying in control, whilst giving it time to pay, although the support of creditors is crucial.

Procedure required to enter a CVA

Companies registered under the Companies Act 2006 and Limited Liability Partnerships are two of the organisations eligible for the CVA procedure.  If the company is not in administration or being wound up, the directors may propose a CVA to the company’s shareholders and creditors.  A nominee, often a licensed insolvency practitioner, is appointed.  If the nominee is not a liquidator or administrator, then he must submit a report to the Court within 28 days of receiving the proposals for a CVA.  The report will set out whether the nominee thinks the proposals are viable and whether and when a meeting of shareholders and creditors should be held to consider the proposals.  The directors must provide the nominee with a statement of the company’s financial affairs as well as details of the proposed CVA to enable him to submit his report to the Court.  If the nominee is an administrator or liquidator, then he does not need to report to Court before summoning a meeting of creditors and shareholders.

No automatic moratorium

Unlike an administration, a CVA does not automatically result in a moratorium. Therefore, the company’s creditors are not prohibited from taking action to recover their debts while a CVA is being negotiated.  Certain small companies are eligible to apply to Court for a moratorium to be imposed, but it involves the nominee giving a statement that the company is able to make payments during the moratorium period.  Because of the personal liability attaching to the nominee, a moratorium is rarely used in a CVA procedure.  If a moratorium is required the procedure is more likely to be combined with administration.

When the nominee calls the meetings of shareholders and creditors they decide whether or not to approve the CVA proposals.

There are 4 main types of creditor.

  • Secured – a secured creditor has security registered at Companies House as a fixed or floating charge.  A CVA cannot affect a secured creditor’s rights to enforce its security except with that creditor’s consent.
  • Preferential – these are primarily employee’s wages, accrued holiday and pension contributions. A CVA proposal must provide for debts to preferential creditors to be paid in priority to other unsecured creditors and pari passu among themselves.
  • Unsecured – unsecured creditors are all other non-secured and non-preferential creditors such as trade customers. Preferential creditors and unsecured creditors can vote on a CVA.
  • Shareholders/members.

Approval of a CVA

Secured creditors cannot vote on a CVA except to the extent that their debt is unsecured.  A CVA does not bind secured creditors and their debt can only be altered by direct negotiation and agreement.  In the absence of an agreement, a secured creditor must be paid in full.

At the creditor’s meeting called to consider a CVA proposal it must be approved at the first vote by 75% in value of the total value of the company’s creditors present and voting at the meeting  (or by proxy) and at the second vote by 50% or more in value of creditors (excluding connected creditors).

The company’s shareholders can approve the proposal by a simple majority, although if they do not approve the proposal, and the creditors do, the proposal will still be implemented. An approved CVA binds all creditors, both known and unknown.

Implementation of a CVA

Once a CVA has been approved, the nominee becomes the supervisor and is empowered to implement the terms of a CVA.  If at any point the supervisor concludes that the company can no longer comply with the terms of a CVA, he can apply to the Court for an administration order.

The Pros and Cons

A CVA is not suitable in every situation.  However, where there is a viable business for the future a CVA can enable the directors of the company to remain in control and take the business forward.  Creditors are involved in the decision to reschedule debts and they therefore “buy in” to the process.  There is flexibility as to the content of a CVA which can be negotiated to suit the business and creditors and this can mean that assets do not have to be sold.  On the other hand, a CVA is still a formal insolvency which is registered at Companies House and credit reference agencies and trade insurers will note a CVA.  Note though, such an arrangement can fail if not adhered to and it is important to consider the consequences if this happens.

A number of restaurant operators are in trouble because they have signed up to leases (in the good times) which now have an above market rent with upwards only rent reviews. CVAs are being used by tenants to renegotiate these leases with landlords by demanding, among other things, rent concessions, lease extensions and changes to rent review dates and rent review provisions. However, if handled fairly (as in the example quoted above) CVAs can work for both parties.

How we can help

Where hospitality businesses are facing difficulties with unsustainable debts,  Freeth’s hospitality team has taken an active role in negotiating hard on behalf of operators trying to avoid or involved in an insolvency process to get a result with landlords.  The current market is such that tenants are in the driving seat in these negotiations and it is viable to reach an amicable solution and keep the business afloat.


The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.