So what is a CVA and how do they work?
With the rise of company voluntary arrangements (CVAs) in the retail sector, Kuits’ insolvency specialist, Vanessa Stuart, sets out the steps landlords should be taking to fight-back.
What is a CVA?
A CVA is an alternative insolvency procedure designed to save a company by allowing it to restructure its business (by managing its cash flow, seeking additional funding, re-negotiating payment and contractual terms with creditors whilst generating revenue) with the approval of its creditors.
How is a CVA approved?
The directors (or the administrator, if a company is in administration) put forward a proposal to creditors, outlining the terms offered by the company in respect of its debts. Before the proposal can be sent to creditors it must be sanctioned by a nominated supervisor (a qualified insolvency practitioner).
Notice of a creditors meeting is given to all creditors, who are entitled to vote to approve or reject the proposal.
A creditors voting weight is determined by the value of its debt. The value of a creditor’s debt is determined by the chair of the meeting (usually the nominated supervisor). For the proposal to be approved, at least 75% of the creditors who vote, must vote in favour with at least 50% of those supporting creditors being unconnected to the company.
Why are landlords feeling aggrieved?
There are a few issues:-
1. Forfeiture
If arrears of rent are included as a debt bound by the CVA, then the landlord’s claim for breach of covenant for rent arrears is compromised and any right to forfeiture in reliance upon such terms are lost. A landlord’s rights for non-payment of rent is replaced by the rights under the CVA.
2. Reductions
Typically, the company uses the CVA to re-negotiate its tenant obligations under its current leases, resulting in the landlord suffering substantial write-offs in respect of future rent and dilapidations.
For example:-
• The Homebase CVA proposed that 42 stores would close and 70 of the remaining stores be subject to discounted rents between 25%-90%.
• The House of Fraser CVA proposed that 31 stores would close and 10 of the remaining stores be subject to discounted rents of 75%.
• The New Look CVA proposed that 60 stores would close and 393 of the remaining stores be subject to discounted rents of between 20%-60%.
• The Mothercare CVA proposed that 60 stores would close and 19 of the remaining stores be subject to discounted rents of between 30%-50%.
Conversely, most of these CVAs proposed that payment terms and amounts due to other unsecured creditors would be unaffected.
Case law suggests, however, that it would seem wrong, for a tenant to be able to trade under a CVA for the benefit of its past creditors at the present and future expense of the landlord; and if a tenant is to continue to occupy a landlord’s property for the purpose of trading under a CVA, it should normally expect to pay the full rent due under the lease.
3. Voting
The system for approving a CVA is predicated on the logic of a majority rule (in this case, the majority is 75% or more). Despite this, when it comes to voting, the value placed on a landlord’s claim and the approval system appears open to manipulation.
A landlord’s claim is typically comprised of rent arrears, future rent and dilapidations.
The calculation for rent arrears is simple. Future rent and dilapidations are however treated as unascertained or unliquidated claims and attributed a nominal value of £1, unless the chair of the creditors’ meeting (usually the nominated supervisor) is willing to attribute a higher figure.
The calculation of a landlord’s claim in the aforementioned high-profile CVAs discounted the actual loss suffered by 75%.
If the CVA sees non-landlord creditors receiving 100% recovery and they make up more than 75% in value of voting creditors, it is difficult to foresee a scenario where a CVA proposal is rejected.
What are the options?
1. Pursue a guarantor
A CVA can include a provision to prevent landlords from pursuing guarantors, but this is wholly dependent on the precise terms of the CVA.
Case law is, however, clear that where a CVA is being used to deprive a landlord of guarantee rights against solvent third parties, this is considered to be unfairly prejudicial.
2. Challenge the CVA
Section 6 of the Insolvency Act allows any creditor aggrieved by a CVA to make an application to court to challenge it on the grounds of ‘unfair prejudice’ or ‘material irregularity’. Any challenge must be brought within 28 days from the date of the approval of the CVA.
What steps should a landlord be taking?
1. Obtain and supply as much evidence as possible with your claim with a view to convincing the chairman to attribute a higher figure to your claim and in turn giving you more voting power.
2. Obtain your own expert report on rental valuation, enabling you to challenge any suggestion that your premises is over-rented compared to market rate, with a view to negotiating better terms and/or proceeding with a section 6 challenge.
3. Join with other landlords and seek to make a section 6 challenge and/or increase your collective bargaining power.
4. Ensure that you protect all guarantee rights or consider a section 6 challenge if the CVA seeks to deprive you of these.
5. If possible, take steps to forfeit before the CVA is approved with a view to increasing your bargaining power and/or allowing you an opportunity to re-let. This will require you or your agent to be vigilant in respect of your tenant’s position and monitor for signs of difficulties.
6. Ensure that you protect the right to recover full rent, retrospectively, in the event the CVA fails.
7. Carry out a realistic comparison of the alternatives – is some rent (and payment of rates) better than none? What is the likelihood of you being able to re-let and the estimated rent? What are the consequences for you/the lease, if the company is forced into administration or liquidation?
To speak to Kuits’ specialist insolvency solicitor, Vanessa Stuart, about a potential or current CVA, call 0161 838 7864 or email vanessastuart@kuits.com.
