The recent spate of high-profile company voluntary arrangements (CVAs), including those of BHS, Store 21 and more recently Love Coffee, The Food Retailer Group and Blue Inc, has placed this corporate rescue tool back in the spotlight.
CVAs can be a useful mechanism for turning around a failing business, but it is clear that they are no panacea. First, they don’t always work, and BHS is a striking example of a CVA failing to save a business despite compromising a large number of leasehold liabilities.
Secondly, a CVA needs approval from the requisite majority of creditors in order to take effect. For landlords, supporting a CVA proposal can prove challenging: they highlight the tension between the protection of businesses and the legal rights of property owners who see their claims compromised in the interests of creditors as a whole. When landlords voted against The Food Retailer Group’s CVA in February this year, and the company subsequently went into administration, it was seen by some as an indication that landlords’ patience with the process was finally running out.
So is it time for a new process?
Last year the Insolvency Service consulted on proposals for the ‘Review of the Corporate Insolvency Framework‘. The proposals included a new moratorium for struggling businesses. Subject to fulfilling certain criteria, it was proposed that businesses would benefit from a three month moratorium, to “consider the best approach for rescuing the business” during which no enforcement action may be brought by creditors, including forfeiture of leases by landlords.
The justification for changing the rules was to make corporate rescue more business friendly, with more opportunities to restructure companies without a formal insolvency process whilst being protected from creditor claims. There is, however, concern that this could be open to abuse and unnecessarily delay inevitable insolvencies.
Although the responses received to the consultation broadly favoured a new moratorium, some clarification and amendment was called for to ensure a fair balance between the rescue of insolvent businesses and the rights of creditors, including:
- Rent: the business will “be obliged to meet on-going trade costs and debt obligations during the moratorium“. However, the consultation did not clarify how landlords will be safeguarded if a tenant enters into a moratorium having failed to pay a quarter’s rent the previous day. With an administration, landlords know that their rent will be paid as an expense of the administration, at least for the period that the premises are in use. Landlords will want to see similar protections clearly codified in the revised proposals.
- Length: Three months was viewed by many of the respondents to the consultation as excessive, given that the purpose of the moratorium is for the tenant to seek some agreement with creditors. The most common length of time considered appropriate by respondents for the moratorium was 21 days.
- Role of the supervisor: During the moratorium, the business’s activities will be overseen by a supervisor who will help safeguard creditors’ interests. The proposals envisage this being an accountant, solicitor or insolvency practitioner. Landlords will want to see the supervisor having sufficient control over the business to protect their interests, particularly the payment of rent during the moratorium.
Clearly, rescuing a struggling business can be beneficial for all stakeholders. However, it is not clear whether this proposal for an additional moratorium strikes the right balance between saving a business and protecting the rights of creditors. CVAs at least allow creditors some say in whether and how the company is restructured, and require the company to come up with a turnaround plan. Where the plan does not address the fundamentals of the business, the CVA is ultimately more likely to fail. A standalone moratorium would, it seems, be even more exposed to this risk. Whilst there is no automatic moratorium for most CVAs, the company can apply to court for one. If creditors vote down a CVA because they do not think it is fair or credible then perhaps placing the business into the hands of an administrator through a formal process is the right logical step.
It is hard to see how the purpose of this proposed moratorium cannot be just as well, if not better, served by making full use of the processes that already exist.