House of Fraser, New Look, Mothercare, Jamie’s Italian, Byron Burger … the list goes on.
A Company Voluntary Arrangement (“CVA”) is a proposal by a company in financial difficulty, to its creditors, in respect of its debts and their repayment over a period of time. The CVA proposal itself is ordinarily prepared by an insolvency practitioner and explains to creditors the financial consequences of accepting or rejecting the proposal. A successful CVA proposal will normally mean a higher return to creditors, as the alternative is likely to be that the company enters into either administration or liquidation.
The recent spell of CVAs in the retail sector has highlighted the impact they can have on landlords in particular. If a CVA proposal is approved by 75% in value of those unsecured creditors present in person or by proxy and voting on the proposal, and not opposed by more than 50% in value of non-connected unsecured creditors, then the CVA proposal will be binding on all unsecured creditors, irrespective of whether they voted in favour of the proposal or not. The CVA proposal may not have the same impact on all creditors who are eligible to vote.
The CVA proposals we have seen recently have included restrictions on landlords, such as being forced to: terminate leases, accept a significantly reduced rent, and/or move their agreed rental payment dates from quarterly to monthly. The difficult question for landlords, in deciding whether to accept a CVA proposal, is whether they agree to reduce their rents to keep the tenants in the property, or run the risk of their store being empty, with the associated holding costs of security, rates etc.
The British Property Federation has requested an independent government review of the CVA process, as some landlords have questioned whether their original purpose is now being undermined and CVAs are becoming a way for companies to shed underperforming stores. The pattern we have seen is that the majority of these CVAs have still failed and the companies have ended up in administration in any event.
CVAs are, however, already open to challenge. In Mourant & Co Trustees Limited v Sixty UK Limited, the landlords of the Miss Sixty stores in Liverpool challenged the CVA of Sixty UK Limited on grounds of unfair prejudice. The CVA was set aside in this case because the court determined that the sums due to the landlords, under the terms of the CVA, were below what the landlords could have expected if the company had gone through an alternate insolvency process and relied upon the parent company guarantee.
The CVA model is widely recognised as a necessary tool to afford companies the ability to renegotiate their debts, avoid collapse and save jobs. However, in light of recent criticism, we expect to see regulatory and/or legislative change in the future and, until then, disgruntled creditors will increasingly turn to the Courts to challenge CVAs on the grounds of unfair prejudice.
If you have any questions about CVAs, please contact our Corporate Recovery and Insolvency Team.
Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.