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.
Key points from landlord challenges
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:
- A CVA cannot alter proprietary rights and therefore cannot oblige landlords to accept a surrender of their leases or to waive their rights of forfeiture
- The treatment of landlords less favourably than other types of creditors is not inherently unfair
- A CVA which provided for a reduction in future rent during a notice period before the landlord could terminate the lease was not necessarily unfairly prejudicial
- Generally, a CVA should not reduce rent to below market value, but this is subject to particular circumstances, and the Court found that this was balanced by providing a right of termination
- Neither the 25% discount to landlord’s claims for voting purposes in the New Look case, nor the 75% discount in the Regis case, amounted to material irregularity (although the 75% discount was considered irregular)
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.