One of the South East’s leading corporate recovery experts is predicting that the forthcoming increase in VAT could lead to a significant rise in the number of Company Voluntary Arrangements (CVA) by the middle of next year.
Matt Wild, partner at Baker Tilly Restructuring & Recovery in Guildford, says the retail sector will be badly affected by the increase in VAT and believes there could be 1,000 CVAs during the next 12 months.
A CVA is a legal procedure which enables a company to create a binding agreement with its creditors and shareholders about how debt is to be repaid. A CVA usually enables a company to continue trading and can provide a full or partial repayment for creditors.
There were 726 CVAs recorded during 2009, representing a 24% increase on the previous year.
Matt Wild explains:
“The VAT increase from early next year is certain to have an impact on the retail sector. The rise will be costly to administer and re-pricing may very well hit margins as they may choose to adhere to established price points rather than pass on the full VAT rise to customers.
“It will certainly dampen demand on the high street and impact discretionary spending. This will be particularly visible in the leisure industry, the licensed trade and areas of discretionary spending.
“Despite the number of CVAs dipping slightly in the early part of 2010, I think overall we are on the verge of a CVA renaissance. Not only do they deal effectively with problem areas such as onerous leases, the number of pre-packaged Administrations is likely to fall.
“Regulation for pre-packs has tightened to the point that a director who initiates such a process has no guarantees of being the final purchaser. Funding for this type of purchase is also likely to become more difficult than in pre-credit crunch days.
“There were 726 CVAs in 2009 and I wouldn’t be surprised to see around 1,000 during the next 12 months.”
High-profile retailers which have used CVAs to restructure their businesses include Stylo plc, JJB Sport, Focus (DIY), Blacks Leisure Group plc, Miss Sixty and Flannels.