If it feels like you’ve been hearing a lot about Company Voluntary Arrangements (CVAs) in the media recently, then you’d be right. They have become such a common feature this year that the press has dubbed 2018 ‘the year of the CVA'. In a worrying sign for the future of the high street, the number of companies adopting them has increased by 143 per cent since the first half of 2018, with even well-known brands like House of Fraser and Mothercare seeking them out.
But what are they? How do they work? And what do they mean for landlords?
CVAs – what are they?
A CVA is a rescue procedure for insolvent companies under Part 1 of the Insolvency Act 1986. It’s a legally binding agreement between a company in financial distress and its creditors. It provides:
- a breathing space for a company from debts that it cannot pay when due, and from enforcement action in respect of those debts; and
- an agreed manner and timescale in which those debts will be paid. This often results in:
a) a reduction of the company’s debts (as creditors will usually agree to accept a percentage of what is owed over a period of time, rather than payment in full);
b) the company repaying its creditors from future profits or through a deal to sell assets; or
c) a rescheduling of payments to creditors over an extended period.
A CVA can also change the wider terms of a contract between a company and its creditors.
CVAs have become popular because they are a flexible and relatively cheap process that requires limited court involvement. They also allow companies that are struggling with debt, but are still viable businesses, to trade their way out of trouble. A qualified Insolvency Practitioner (IP) is responsible for implementing and supervising the CVA agreement. It is the IP’s task to ensure that a fair balance is struck between the various creditors and the company.
However, an IP doesn’t take control of the company, as the directors remain in office.
Obtaining a CVA
A CVA agreement may be suggested by directors of a company that is in difficulty. Alternatively, if a company is already in administration or liquidation, its administrator or liquidator can propose a CVA. A proposal for the CVA is prepared by the company (or the IP if the company is in administration or liquidation) and is sent to all creditors of the business, who are given a period of time to consider it. All of the company’s unsecured creditors are then invited to vote either for or against the CVA Proposal (whether in its existing form or with modifications). Each unsecured creditor that votes is entitled to vote based on the value of its debt at that date. The proposal is approved if more than 75% (in value) of the unsecured creditors who vote in relation to the CVA, vote to approve it (whether with or without modification).
The CVA cannot affect the rights of any secured creditor of the company, unless that secured creditor agrees.
Do landlords get a vote?
If the landlord is deemed to be an unsecured creditor of the company (whether by way of rent arrears or otherwise), that landlord is entitled to vote in relation to the CVA. If they don’t vote by the deadline date, they will lose their right to vote and could find themselves bound by the terms of the CVA, if it is approved by the unsecured creditors who do cast a vote. Creditors, including landlords, can also put forward modifications to change the CVA proposal ahead of the creditors’ vote.
What does this mean for landlords?
It is fair to say that, for most landlords, CVAs are not popular. They often appear to allow struggling tenants to renege on lease terms to keep themselves afloat, at the expense of the landlord.
Landlords have also criticised CVAs as a 'quick fix' to reduce property costs, whilst ignoring the wider trading errors or circumstances that produced the financial difficulties.
The CVA process also allows a tenant to propose what can be controversial terms, such as seeking to remove a landlord’s right to forfeit a lease, or stripping it of valuable guarantee rights against a solvent parent company (known as guarantee stripping).
Can landlords challenge a CVA decision?
This ‘guarantee stripping’ issue was successfully challenged by landlord creditors in the landmark ‘Powerhouse’ case (Prudential Assurance Company Ltd and others v PRG Powerhouse Ltd and others ). Although the landlords won on this occasion, the risk remained that a CVA could be used to release a parent company from its guarantee as long as the landlord was sufficiently compensated for its loss.
It is difficult for a landlord to challenge the terms of a CVA that has obtained creditors’ approval. An example of where this was successfully done was in a case known as ‘Miss Sixty’ (Mourant & Co. Trustees Limited and Anor. v. Sixty UK Limited and others ), in which the landlords of Miss Sixty shops in Liverpool challenged a CVA on the grounds of unfair prejudice. The sums being paid to the landlords under the CVA were considerably less than the amount they could have expected had the company gone into liquidation. The court, in this instance, accepted that the CVA constituted unfair prejudice to the landlords and the CVA was set aside.
Challenging a CVA
Section 6 of the Insolvency Act allows any creditor to challenge a CVA in court on the grounds of either ‘unfair prejudice’ or ‘material irregularity’. The challenge must be brought within 28 days of the date the CVA was approved on or the date on which the creditor became aware of the CVA if they were not properly notified of it.
However, these kinds of challenges are rarely brought, as deals are often reached between a company, the IP and the company’s creditors before the case goes to court. For example, the recent House of Fraser CVA was subject to a S.6 challenge by a number of landlords in the Scottish courts but the matter was settled by consent, with the landlords collectively offered a sweetener of £1 million.
If you would like more information on company voluntary agreements, please contact our Real Estate Team.
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