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Bankruptcy proceedings designed to save struggling companies have resulted in failure in more than half the cases where they have been used, according to research by estate agency Colliers International.
Between 2016 and 2019, 13 of 23 company voluntary arrangements, which are used by UK businesses to reduce their debts, saw the group going into administration, while other companies that did not agree a CVA ended up seeking investors to buy the business. Failed CVAs include those agreed by Toys “R” Us and Jamie’s Italian.
“[CVAs] are a sticking plaster on a life-threatening ailment,” said Richard Hyman, a retail industry adviser. “They look to shave costs in a business and in this trading market the real issue that distressed businesses face is that they don’t generate enough revenue.”
Last week both the Centre for Retail Research and the British Retail Consortium said 2019 had been the worst year for retail in 25 years. Figures from the BRC showed that total sales fell 0.1 per cent, compared with 1.2 per cent growth in 2018.
Non-food sales suffered the most with an average drop of 3.1 per cent.
The CRR said that 16,073 shops closed in 2019, up 10.5 per cent on the year before, and more than 11,000 restaurant employees lost their jobs.
CVAs allow struggling companies to renegotiate debts with unsecured creditors such as landlords. Most often the process, which requires the agreement of creditors who own 75 per cent of the debt, results in businesses paying reduced rents and closing outlets.
Retailers and leisure businesses have struggled with rising wages and taxes for physical shops while internet shopping and food ordering has continued to grow. Many businesses have turned to steep discounting and restructuring to survive.
Duncan Swift, president of the restructuring specialists R3, said the failure of CVAs was not because there was a problem with the process.
“At this stage there is no better insolvency procedure that would prevent a company falling into administration,” he said, adding that it allowed “incumbent management to stay in place and work out their structuring plans”.
However, David Fox, co-head of retail agency at Colliers, said that management staying on was part of the reason why many CVAs failed.
“They are the ones who have been making the mistakes and carrying out the strategy badly,” he said.
CVAs have also prompted an increasing number of successful companies to request rent reductions.
Clothing company Jigsaw and confectionery chain Hotel Chocolat both said this week that they were negotiating to lower their rents.
“Like any good retailer at the moment we are using current market turbulence as a reminder to seek best value from our landlords,” Jigsaw’s board said in a statement.
Mr Fox said the end result could be a rebalancing of rents, but this could take a decade.
“For retail, it is an industrial revolution,” he said. “We are going through something which in high street property terms is like the printing press and milling.”
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