A spate of high profile insolvencies in the retail sector have led to the familiar question of whether this time, it really is the death of the high street as we know it. 

Retailers are undoubtedly facing a difficult climate and the consumer is ever more savvy with comparing prices online or using online delivery services, such as Deliveroo, rather than visiting bricks and mortar stores. Add this to increased wage bills with the introduction of the National Living Wage, a weaker pound, a decline in consumer spending and business rates which continue to soar, and it should come as no surprise that profit margins are being continually squeezed.  High Street insolvencies rose for the first time in 5 years. Deloitte reported in January 2018 that there was an increase in retail administrations of 28% from the previous year.

Debenhams issued a profit warning, as did House of Fraser. Carpetright is the latest retailer to make its financial woes known, after New Look recently announced multiple store closures.  This comes hot on the heels of the Toys R Us and Maplin administrations and the well publicised problems of some restaurant chains, such as Jamie’s Italian.

In light of the current difficult trading conditions, what insolvency law options are open to cash strapped retailers?

Company Voluntary Arrangements                                                                                                

A company voluntary arrangement (CVA) is frequently used in the retail and leisure sector, given that CVAs have less stigma attached to them and allow the retailer to trade, largely, as normal.  A CVA is a binding but more informal arrangement with a retailer’s creditors (75% of those unsecured creditors present must approve it, or 50% in value of unsecured creditors).  Creditors are more likely to approve a CVA proposal rather than go through more prescriptive court based insolvency procedures.  This is because a CVA should theoretically give a better return to unsecured creditors than they would receive in an administration or liquidation. They are an attractive option where there are complex leasehold arrangements which need urgent attention to allow a retailer to continue to trade. The lease obligations can often be the straw which finally breaks the financially unstable camel’s back.

BHS, Toys R Us, Travel Lodge and Byron Burgers are just some of the high profiles names which have used CVAs to varying degrees of success in recent years.  A recent op-ed piece in Retail Week in fact asks if 2018 will be the year of the retail CVA.

Challenging a CVA

A CVA should give the company some breathing space from its creditors, who can only challenge any approval of a proposed CVA at court on grounds that it unfairly prejudices the rights of a creditor or where there has been some procedural discrepancy in how the CVA was approved.  Challenges are rare as the burden of proof on the challenging creditor is quite high, as CVAs can, by their nature, treat creditors differently as part of the proposal.

What happens if a CVA fails?

The Toys R Us case is a good example of what happens when a retail CVA goes wrong, or least does not achieve the desired effect.  Toys R Us entered into a CVA in December 2017 when 98% of their unsecured creditors approved the CVA proposal.  It was designed to protect the company pension fund and to allow the business to continue, with a relatively small number of jobs and stores lost.

However, with poor sales even over the Christmas period and a large VAT bill looming on the horizon, no buyer could be found for the business and so the directors had little choice but to enter into an administration.  The administrators are still seeking a buyer for all or part of the business, but could no longer continue to trade in a CVA, especially given the collapse of its US parent company.

2018 CVAs

In the first quarter of 2018, we have already seen some high street names using a CVA as a way to restructure and refinance existing onerous obligations.  Byron Burgers took advantage of a CVA in January 2018 and Jamie’s Italian has followed suit, blaming rising costs because of Brexit and challenging market conditions.  It is very likely that other restaurants and retailers will follow as we enter into Q2 of 2018.

Conclusion

It remains to be seen whether the recent CVAs on the high street, especially in the restaurant sector, will enable these businesses to survive going forward.  A CVA may not be appropriate in all circumstances, but it is a useful tool where there are leasehold portfolios which can be restructured so as to improve cash flow and protect a business from creditor action.  As with all things, difficulties for one type of business can be  for another and these high profile CVAs may lead to a more streamlined but robust high street – this notion may be what prompted ugh the Spectator to recently argue that news of the death of the High Street has been greatly exaggerated – again.