Company voluntary arrangements (CVAs) remain popular as a restructuring tool, particularly in the retail and hospitality sectors. Businesses such as clothing retailers and high street restaurants have successfully used CVAs to close non-performing outlets and compromise the historic debt and ongoing liabilities relating to those premises. Having done so, the restructured business is able to move forward and concentrate its efforts on the retained, profitable sites.
The arguments for CVAs include the potential for a rescue of a business, directors retaining control, preservation of jobs, and the prospect of a greater return to creditors than would be possible in an alternate insolvency process. A key feature is the creditor participation required for approval of a proposal, although even with the high threshold for approval (75% in value), a significant number of creditors, often representing a significant sum of debt, can be left bound by a CVA that they did not approve.
Common amongst the retail and high street dining CVAs is to categorise leases separately from other types of creditors (and split out particular leases into different categories depending on, for instance, how critical the site is to the business) and then to treat historic rent arrears and future liabilities under the variously leases differently depending on that categorisation. Often, the CVA proposal seeks to compromise certain leasehold liabilities significantly, whereas other types of creditors are not significantly affected by the proposal.
While many CVA proposals will have met the 75% in value threshold as a whole across all creditors, often a particular category or categories of lease will have had a low approval rate amongst affected landlords, so the approval has been largely carried by those creditors whose position is not significantly affected by the proposal.
Therefore, unhappy landlords have recently made a number of challenges to recent CVAs which have taken this approach. Famous brands affected by these challenges include Debenhams, New Look, and Regis.
Creditors may apply to court to challenge a CVA on the grounds of either material irregularity or unfair prejudice (the latter which we consider in more detail in our article here). Challenges must be instituted within 28 days of approval of the CVA.
The Debenhams, New Look, and Regis challenges all alleged both material irregularity and unfair prejudice against the landlords, and provided an opportunity for the Court to consider the fairly standard approach taken in dealing with lease liabilities. While elements of some of the challenges were successful, in the majority of the decisions the CVAs were not revoked, and therefore this restructuring tool is likely to remain popular with struggling businesses, and unpopular with landlords.
Some of the key points from the recent decisions include the following:
Landlords affected by the insolvency of tenants will need to carefully consider the terms of any proposal, particularly the treatment of historic liabilities and rent on offer for their premises according to the categorisation, against the likely option to terminate the lease.
The recent judgments emphasise the often stark choice landlords face when a tenant successfully proposes a CVA: accept the CVA terms, or take the premises back.
For more information about this article, please contact a member of our Restructuring & Insolvency team.
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