Empty units, falling yields and the spectre of tenant defaults are increasingly common issues that landlords have had to face in the current recession. To add to this landlords have also had to confront a number of high profile CVAs including JJB Sports (twice), Blacks Leisure, Stylo Group, Focus DIY, Fitness First and Travelodge to name a few.
In many of these cases the CVA could be described as a last ditch rescue solution for companies who are under attack from creditors for payment of unpaid debts yet still have what they believe to be a viable business or particularly for retailers who have a good brand image that they hope to protect. Many of the CVAs have been unpopular with landlords because they have left them significantly out of pocket but landlords have been prepared to consider them on a business by business and a site by site basis.
What is a CVA?
A CVA is a rescue mechanism for companies in financial difficulty introduced by the Insolvency Act 1986 to enable companies to avoid liquidation by coming to an informal, but binding, compromise with creditors.
It allows a company:
- To settle its unsecured debts by paying only a proportion of the amount that it owes to its creditors; and
- To come to an arrangement with its creditors over the payment of its debts.
How does it work?
During a CVA the directors of the company will continue to control the business albeit under the supervision of an Insolvency Practitioner (firstly as a nominee and later as a supervisor). Where the nominee is not a liquidator or an administrator, the nominee must, within 28 days of being given notice of the proposals for a voluntary arrangement (or such longer period as the court may allow), submit a report to the court. This report must include a statement as to whether, in his opinion, meetings of the company and of its creditors should be summoned to consider the proposals and if so, the date, time and place of such meetings. This effectively gives the nominee a period of time to consider the proposals and their viability.
If an administrator or liquidator is the nominee, he may simply summon a meeting of shareholders and creditors without the prior need to report to the court. The person who calls the creditors' meeting must summon every creditor of the company of whose claim and address he is aware and creditors must be given 14 days' notice of the meeting.
Unlike an administration, a CVA does not automatically result in a statutory moratorium to protect the company from creditors taking action to recover their debts without leave of the court. It is worth noting however that since the Insolvency Act 2000 certain eligible (small) companies can opt to take the benefit of a 28-day moratorium in the proposal stages.
The creditors and shareholders decide at their relevant meetings whether or not to approve the proposed CVA, with or without any modifications. A CVA cannot alter the priority of creditors and preferential debts are still paid in priority to unsecured creditors. It also does not affect a secured creditor's right to enforce its security, except with its consent.
Unlike preferential creditors, secured creditors are unable to vote on a CVA, save to the extent their debt is unsecured. The secured creditors debt must be dealt with or paid in full and must not be compromised by the existence of the CVA (without its consent).
The proposals must be approved by a majority of creditors comprising both:
- 75% in value of the company's creditors present and voting at the creditors' meeting called to consider the CVA proposal; and
- 50% in value of the creditors that are unconnected with the company.
The company's shareholders can approve the proposals by a simple majority in value, although if they do not approve the proposals and the creditors do, the CVA will still be implemented.
If the CVA proposal is approved it binds:
- All Creditors that voted for or against the CVA.
- Creditors that attended the creditors' meeting called to consider the CVA proposal, but who did not vote.
- Creditors that did not attend the creditor's meeting called to consider the CVA proposal.
- Creditors that did not attend or know of the meeting because they did not receive notice.
Once bound by a CVA, a creditor cannot take any steps against the Company to recover a debt that falls within the scope of it to a greater extent than provided for in the CVA, or to enforce rights against the company that arise from the company's failure to pay the relevant debt in full.
What is acceptable?
Typically CVA proposals will include a reduction of the Company's debts, possibly termination of some of the company's leases, and in some cases restructuring of rent obligations all of which involve balancing the interests of many different parties. This, almost inevitably, leads to conflict in certain cases.
Many recent of the recent CVAs reported on in the press have been unpopular and some have been successfully challenged by aggrieved landlords. An approved CVA can, however, only be challenged by a creditor on one of two grounds:
- that the CVA unfairly prejudices the creditors interest; or
- that there has been a material irregularity at or in relation to the shareholder and /or the creditors meeting sufficient to have affected the outcome of the meeting.
For a creditor to challenge the CVA it must apply to the court within 28 days of the meeting approving the proposal. If the Court finds under either of these grounds it may suspend or revoke any decision relating to the CVA.
Unfair prejudice is a matter of fact and the Court will assess the fairness (or otherwise) taking into account all the circumstances of the case. Fairness has to be judged on the information available at the time the CVA was approved. It may take account of comparisons between the position of the creditor in a CVA and the position it would be in if the Company was in liquidation, or it may make comparisons between how the creditors are being treated. It is important to note that the latter comparison between creditors may be unsuccessful if there are reasons that justify why creditors are treated differently. In some circumstances differential treatment may even be necessary to achieve fairness. One thing is clear though: anyone promoting a CVA must ensure that they have accurately calculated the extent of, and compensated the landlords in relation to, the losses. Guarantee stripping for example has been virtually banned and a solvent guarantor should expect to pay full value for any lifting of obligations under their guarantees.
Successful CVAs involving multiple landlords have been concluded where care has been taken to ensure no particular creditor is unfairly prejudiced. For example, this has been achieved where funds have been set aside for the benefit of landlords of closed stores to cover loss of rent plus the expense of business rates.
Opinion is however divided on CVAs. Some see them as an effective rescue tool while others see them as a form of asset stripping, allowing businesses to walk away from unattractive leases. One thing however seems certain: we should expect to see more CVAs as the recession continues.