Retail Cvas – A Force For Good Or Chancers’ Charter?
Published May 2018
Company Voluntary Arrangements (“CVAs”) have, up until recently, been a much under-utilised rescue procedure available to Insolvency Practitioners working with companies in financial difficulties.
A CVA is a contract between a company and its creditors with the aim to avoid a more detrimental insolvency procedure. It is usually initiated by a company’s directors who, working with an Insolvency Practitioner, issues to all known creditors a proposal which sets out amongst other things where the company is now, where it hopes to be in the future and what creditors can expect in return for their support.
The proposal is put to a vote and over 75% by value of creditors entitled to vote must agree with the proposal or to any modifications put forward. It also requires over 50% shareholder support. Once it is approved it locks all creditors into the terms of the CVA, whether they voted against it or not at all.
It is the fact that if approved a CVA locks in creditors who, as a class may be treated differently to other classes of creditors, that is causing friction between retail businesses looking at CVAs as a salvation to their high street problems and the landlords who own the retail units on the high street.
An example where landlords were treated differently was in the case of BHS. Although the CVA ultimately failed and landlords were reinstated to be able to claim their full entitlement, the original CVA proposal, which was approved by the requisite 75% majority, treated landlords as follows:
· Landlords of 77 stores were to receive all rents and other liabilities in full;
· Landlords of 47 stores were to suffer rent reductions of between 50% and 75%;
· Landlords of 40 stores were to suffer rent reductions of 75% and if not accepted then the store would close.
The treatment of landlords compares with other classes of creditors who were to receive 100p in the £ over the term of the CVA.
Although it is perfectly acceptable to vary the terms between different classes of creditors, what is giving landlords particular concern is that in their view, CVAs are being used to simply cut costs. They believe and rightly so in our view, that a CVA should be used as a final resort to avoid Administration or Liquidation, providing a breathing space for a company to restructure either the management team or its finances. The belief is that the CVA procedure is being used to enable a tenant to get out of its obligations under long term leases, signed when the high street looked very different to what it does today or to attempt to get the release of parent company guarantees.
With further high profile retail businesses lining up to put forward CVAs, landlords have started to join together to form a powerful lobby group to object to the sector being singled out to bear the brunt of losses that a CVA inevitably brings. It was reported in April that House of Fraser is considering a CVA as part of a multi-million pound bail out. House of Fraser may well prove to be the watershed case where landlords finally stand up to companies and their professional advisors try to push through more onerous CVA terms on landlords compared to other classes of creditors and may challenge the whole basis of the CVA as not being a rescue tool but more a management tool to cut costs.
One group has already written to the chairman of the Commons housing, communities and local government select committee expressing concerns as to the growing trend of retailers turning to CVAs. Another landlord group is working to find ways to make demands in exchange for support which may include more detailed forecasts, taking an equity stake or share in future profits. It is not beyond the realms of possibility that a landlord will challenge through the courts one of the CVAs coming down the tracks for being unfairly prejudicial.
Whilst it is generally accepted that CVAs in the right circumstances can be beneficial to all stakeholders overall, if the current thoughts prevail that one creditor group is being unfairly treated, then it could tarnish the whole procedure to the detriment of companies that could genuinely benefit from the breathing space a CVA offers.