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Oliver Fitzpatrick
Oliver Fitzpatrick,
SENIOR ASSOCIATE - SOLICITOR
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Why are restaurants entering into Company Voluntary Agreements (CVA)?
24 July 2018

Co-authored by Oliver Fitzpatrick and Grace Hudson

It seems as though every one of our much loved high street restaurants are currently having to consider closing restaurants as part of their Company Voluntary Agreement (CVA) as restaurants struggle with their finances. But what is a CVA and how can they help the casual dining sector survive the current high-street crisis?

What is a Company Voluntary Agreement or CVA?

A CVA is a formal arrangement between a company and their creditors that permits a company to repay their debts in accordance with an agreed payment plan, whilst continuing to trade. In order to get a CVA, the company must negotiate a payment plan with the creditors. The proposal must be approved by at least 75% (by value) of creditors who vote on the company’s proposal. If the CVA is approved but the company later fails to comply with its terms (such as making monthly repayments to satisfy the company’s debts), this could lead to the company’s creditors presenting a winding up petition against the company. 

Why are so many restaurants entering into a CVA? 

Post-financial crash the casual dining sector was considered relatively resilient, sustainably scalable and an otherwise sound investment by private equity committees and other investors. Restaurants such as Prezzo, Carluccios and Jamie’s Italian, were targeted by investors looking to scale up their business models and create profit by way of economy of scale. For a while this worked well and these restaurants become household names, with the casual dining sector being worth approximately £5.9bn in 2015. However in 2018, a third of the UK’s top 100 restaurant groups are making a loss, an increase of 75% since 2017. Competition is fierce both on the high street and from delivery apps such as Deliveroo and JustEat. The sector also faces pressures from falling consumer spending power. The weaker pound since the UK’s Brexit vote has pushed up the costs of importing food for restaurants, a longer-term decline in real wages means customers are worse off and consumer spending has fallen as a result. Given the high proportion of EU workers in the UK hospitality industry, staff shortages may well push labour costs up further too. Companies are finding that a flooded market, increased labour costs and crippling rent is all contributing to significant struggles in the casual dining sector.  

What are the benefits of restaurants entering into a CVA? 

A CVA is an alternative insolvency procedure which is designed to save a company’s business by effectively allowing it to restructure certain aspects of its business with the blessing of creditors. It can also mean that the company avoids entering an alternative process, such as administration or liquidation, which is likely to result in the company ceasing trading and shutting down. 

The main benefit of a CVA is that it seeks to preserve the company and its business and allows for the company to continue trading, with the directors continuing to manage the day-to-day running of the company. It provides the company with an opportunity to manage cash flow, seek additional funding, re-negotiate payments and, if permissible, contractual terms with certain creditors and continue to bring in revenue, all of which will assist in promoting the prospects of the company and its business’ survival.

Providing restaurants can become more efficient and adhere to the terms of their CVAs, they have a second opportunity to make the company profitable again.  

What does this mean for the casual dining sector in 2018 and beyond?

In 2018 we will see many restaurants in the casual dining sector scale back their businesses. However it won’t be the end of the sector. Hopefully these changes will help rejuvenate the sector by encouraging restaurateurs to be creative, listen to their customers and the current trends in the sector and not just operate in an oversaturated marketplace. 

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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