CVAs are the lesser evil

Churchill famously said democracy was the worst form of government, except for all those other forms that have been tried from time to time.

Much the same could be said of CVAs. They are not ideal but I do believe that they are a much better solution than the alternatives of full administration or the pre-pack.

However, they are undoubtedly controversial and there is a lot of genuine concern that the process might be abused in the future. I understand those concerns but I do not think they represent a real risk.

There is a view that businesses might undertake a CVA trivially or in an attempt to “try it on” with creditors. This is highly unlikely. The costs involved in undertaking a CVA are very significant (whether it works or not). The impact on suppliers is massive and can result in your credit terms being removed or supply cut off.

The distress caused to employees is also huge since every member of staff has to be written to as a creditor and invited to vote on the survival of the business. Finally, there is the reputational battering that is a necessary consequence of any such major restructuring exercise and the opportunity this provides to a whole range of has-beens, opportunists and bottom-fishers to try to destabilise the company.

You would need to be insane to embark upon such a process unless there really was no alternative. 

You can only undertake a CVA when you can show that the real alternative is an administration. In these circumstances a CVA is better – or in some cases less bad – for all parties concerned. The compromised creditors at least get a rent payment and ongoing payment of rates. The other creditors get paid in full.

The suppliers benefit from an important customer remaining in business. But most importantly you save lots of jobs. Jobs in the stores, jobs at the suppliers, jobs at the head office. That must be a good thing.  In many ways the pre-pack administration route can be a more attractive one for management but I believe it is a much less honourable route and one that results in much more damage to creditors, employees and shareholders.

The other area of opposition to CVAs is from stronger competitors who believe it provides a lifeline to a weak business. In this sense it does not provide a level playing field. This cannot be denied. All the successful CVAs in the past year have been conducted by turnaround management teams brought in to rescue loss-making companies. Without the CVA these businesses would have failed.

But would this really have removed capacity from the market? Unfortunately not. If these companies and Blacks had not undertaken CVAs they would almost certainly have gone through pre-packs. They would still be there, they would still be trading, the playing field would not be any more level. It is just that a lot more value would have been destroyed in the process and several thousand more people would have lost their jobs.

In this respect the CVA really is the worst form of restructuring, except for all those other forms that have been tried from time to time.

Neil Gillis is chief executive of Blacks Leisure