Following the rejection of Stylo's proposed CVA earlier this year and the successful "unfair prejudice" challenge of Powerhouse's CVA in 2007, the recently approved CVA proposal put forward by JJB Sports, widely described by commentators as "ground-breaking", has generated significant interest in the CVA process and the use of a CVA to effect a solvent restructuring of a listed company without resorting to administration and a suspension of trading in its shares.
Herbert Smith is advising JJB on its restructuring and refinancing and this bulletin highlights some of the key terms of JJB's restructuring and the potential for use of company voluntary arrangements going forward.
Background to JJB's restructuring
In the second half of 2008, JJB found itself in financial difficulty and in need of additional financing and working capital. Initially the company attempted to address the difficulties with a short term loan from Kaupthing and by raising cash through a placing of new shares and the sale of a number of retail stores.
On 10 December 2008, as the repayment date of the short term loan approached, the company entered into a standstill arrangement with its lenders. This allowed the company continued access to its existing working capital facilities and the short term loan whilst the directors considered the group's options more generally including possible disposals and how to deal with the continuing costs associated with a significant number of closed retail stores (stores that were no longer trading, but where the company remained a party to a lease).
On 25 March 2009, the company announced details of its restructuring and refinancing. Firstly it announced that it had agreed the £83.4 million disposal of its fitness clubs business to Dave Whelan Sports Limited. Secondly it announced the key terms of a CVA proposal to deal with the continuing costs associated with the group's closed retail stores and, subject to the implementation of the CVA proposal, new financing arrangements to provide working capital for the restructured group going forwards. Full terms of the CVA proposal were announced and the CVA proposal document was published on 6 April 2009. A copy of the CVA proposal document is available on the JJB website at: http://www.jjbcorporate.co.uk/pdf/CVA Proposals - 6 April 2009.pdf.
What is a company voluntary arrangement or CVA?
A company voluntary arrangement or CVA is a formal procedure under Part I of the Insolvency Act 1986 which enables a company to agree with its creditors a composition in satisfaction of its debts or a scheme of arrangement of its affairs which can determine how its debts should be paid and in what proportions.
The terms of the CVA are set out in a proposal document that is sent to a company's creditors and members. The document must comply with the content requirements of the Insolvency Rules 1986. Creditors and members are invited to vote on the proposals at meetings convened on not less than 14 days' notice.
A CVA requires the approval of a majority in excess of 75 per cent in value of a company's creditors present in person or by proxy and voting at a meeting on the resolution to approve the arrangement. Once approved, it binds all of the company's creditors who were entitled to vote at the meeting (whether or not they so voted) or would have been so entitled had they received notice of the meeting.
A resolution, however, will be invalid if those creditors voting against it include more than half in value of the creditors, for these purposes counting only those creditors:
- to whom notice of the meeting was sent;
- whose votes were not left out of account due to no written notice of claim having been received at or prior to the meeting, or where the claim or part of it is secured; and
- who are not, to the best of the chairman of the meeting's belief, persons connected with the company.
A CVA also requires the approval of more than 50 per cent in value of a company's members present in person or by proxy and voting at a meeting on the resolution to approve the company voluntary arrangement. Notwithstanding this, if the outcome of the meeting of members differs from the outcome of the meeting of the company's creditors, the decision of the creditors will prevail, subject to the right of any member to apply to the Court to challenge the approval of the company voluntary arrangement.
After creditors and members have voted, the results of the meetings are reported to the Court.
Broadly, even if a CVA is approved by the requisite majority of creditors, it may still be challenged in the 28 day period following the result of the meetings being reported to the Court. Any creditor entitled to vote at a meeting to approve a CVA may apply to the Court on one or both of the following grounds:
- that a CVA unfairly prejudices the interests of that creditor; or
- that there has been some material irregularity at or in relation to the meetings called to approve the CVA.
If a challenge is successful, the Court may revoke or suspend the approval of the CVA and/or give a direction to any person for the summoning of further meetings, which can consider a revised proposal or reconsider the original proposal.
The JJB CVA proposal
The JJB CVA proposal sought to address the continuing costs of approximately £17.3 million per year associated with the group's closed retail stores and ensure that the closed retail stores were no longer a burden to the operating cash flow of the group.
As a result of JJB's group structure, the proposal comprised two inter-conditional CVAs – one of JJB Sports plc, the group's holding company and principal trading company, and one of Blane Leisure Limited, a wholly owned trading subsidiary.
In summary, the key terms of the JJB CVA proposal put to creditors and members for approval were as follows:
- the compromise of claims of landlords of approximately 140 closed retail stores and certain related contingent claims (such as claims of former tenants and guarantors) but with JJB retaining the obligation to pay business rates in respect of these stores;
- the right of landlords of those closed retail stores to make a claim against a total aggregate fund of £10 million, with payments from that fund in two instalments in late 2009 and early 2010; and
- a concession arrangement in respect of the terms of leases of the open retail stores, approximately 250 stores in total, such that rent would be paid on a monthly rather than quarterly basis for a period of twelve months from the next quarter date.
The JJB CVA proposal did not seek to compromise the claims of any other creditors.
The creditors' meetings took place on 27 April 2009 and the members' meetings took place on 29 April 2009, with creditors and members of both JJB and Blane voting overwhelmingly in favour of the proposals. The results of the meetings were reported to the relevant Courts on 30 April 2009 and the proposals are expected to be implemented on 28 May 2009.
The future of the CVA – lessons learnt from JJB and reform of the process
Until now, in comparison with administration, CVAs have not been that widely used. CVAs have often been criticised by creditors, especially commercial landlords, because the proposed returns usually represent a fraction of the amounts owed to creditors. This is because a struggling company will often turn to a CVA proposal as a last resort, which means that the company will not be in a position to make a suitably attractive offer to creditors.
Unlike previous CVA proposals, such as the failed attempt earlier this year by Stylo (which was rejected by creditors), the JJB CVA proposal focused on particular groups of unsecured creditors (namely landlords of open and closed retail stores) and sought to make a clear, fair and reasonable proposal to such unsecured creditors. Commercial landlords have made it clear that their support for the JJB CVA proposal was based on the fact that, aside from a temporary amendment for rent to be paid monthly over a 12 month period starting from the next quarter date, the group was not seeking to amend the terms of the open store leases. In addition, commercial landlords of closed retail stores believed that a share of an aggregate fund of £10 million (which, on average, will provide them with a return in excess of six months rent) offered a reasonable compromise and a better return than would otherwise have been received in an administration or liquidation (which was inevitable if the proposal had not been approved).
In response to the approval of the JJB CVA proposal, whilst praising JJB's approach, commercial landlords have been quick to state that they will not necessarily acquiesce to CVA proposals from other struggling retailers, but that CVAs will be considered on a case-by-case basis. The press release issued by the British Property Federation on 27 April 2009 in response to the approval of the JJB CVA proposal by creditors is available at: http://www.bpf.org.uk/newsroom/pressreleases/document/23644/landlords-positivity-sees-jjb-sports-pass-cva.
The lessons to be learnt from the JJB CVA are that a CVA proposal is much more likely to have a sympathetic audience if it is clear, focused and commercial landlords and other unsecured creditors are offered an acceptable amount of compensation for their lost rent revenues and certainty as to when such compensation will be received.
The Government has recently announced that the Insolvency Service is to consult on two new proposals to reform part of the CVA process. The full text of the Insolvency Service's release of 24 April 2009 is available at: http://nds.coi.gov.uk/environment/fullDetail.asp?ReleaseID=399584&NewsAreaID=2&NavigatedFromDepartment=False.
The first proposed reform is to make a moratorium available to any organisation while it seeks to agree a CVA and would, for the first time, enable large corporates to access a moratorium without having to enter into administration. In addition, the consultation will propose giving absolute priority to new money lent to companies in a CVA process. That would give such lending a similar priority to the position of "debtor in possession financing", which is a common feature of US Chapter 11 cases.