Retail Review - Company Voluntary Arrangements
In the first article of our new Retail Review series, Partner Natasha Atkinson looks at CVAs and impact on the retail sector.
Is a Company Voluntary Arrangement ('CVA') a fair insolvency tool?
Many are referring to 2018 as the year of the Company Voluntary Arrangement. From House of Fraser's attempt this summer, to retailers such as New Look and Carpetright getting the green light on CVAs, much media attention focused on the retail sector and why it is attracting these arrangements. But is it a fair insolvency tool for both retailers and landlords?
What is a CVA?
A CVA enables a company to obtain some breathing space from creditors to allow it to restructure by making proposals to any unsecured creditors to compromise their claims. A CVA will be approved provided 75% of those creditors, by value, vote to approve it.
In the CVA proposal, a company should set out any potential outcomes should the CVA not be approved. Ordinarily, this would be that the company will enter into liquidation or administration, ending up with a much worse outcome for creditors receiving few pence in the pound rather than if the CVA was approved.
Why is the retail sector attracting CVAs?
A CVA is not binding for a secured creditor until they agree to it. As most distressed processes or restructurings involve the cooperation of Lenders and Banks who are likely to hold a debenture or fixed charge over the company’s assets, a CVA is not normally an option.
Rather than banks, the main creditor of a business in the retail sector is more likely to be the landlord of it’s premises, meaning these landlords are likely to be unsecured creditors of the company. This is where the retail sector is different and why CVAs are being proposed more frequently.
The unfortunate reality is that CVAs are being used to cram down and stifle a landlord’s voting power and create a process which a company could abuse, by over-stating the connected creditor position to push through a CVA, at a time when the validity of such connected claims hadn’t yet been investigated or adjudicated upon.
Any business that proposes a CVA may have a long lease containing rent reviews which only provide for rent increases going forward. Therefore, the CVA will likely propose that either the company remains in occupation of the premises on a reduced rent or will vacate the premises should any CVA be rejected -leaving the landlord with an empty property.
Landlords are usually unable to oppose a CVA unless the business has already missed a number of rent repayments, as they can only vote on a limited time frame for future losses, regardless of the fact that there could be much longer remaining on the lease and therefore their future losses significantly higher. A CVA can also include amendments to terms of the leases, for example the frequency at which rent is paid, additional covenants and obligations of guarantors. If landlords receive a CVA proposal from one of their tenants will need to take action quickly to find a new tenant since there is only 14 days before the meeting of creditors will be held to consider it.
Other retailers and future trends
Although landlord CVAs may be beneficial for some retailers, their rivals can be put at an unfair disadvantage. Earlier this year Next argued that a new clause should be inserted into its property leases granting a rent reduction if a neighbouring property is provided a CVA. In the coming months it will be interesting to see if the retail sector backs Next’s bold approach.
Other retailers have been saved by the rent reductions as part of a CVA this year too, these include New Look, Carpetright, Mothercare and Select. Not all CVAs however are a success, examples of collapses include Maplin and Toys R Us (UK).
In July 2018 a group of landlords have filed a legal challenge in Scotland to House of Fraser’s CVA. The challenge was based on unfair prejudice and material irregularity grounds. The investors, C.banner decided to pull out stating the inability to “achieve a solvent solution” as the reason. Administrators were appointed on the morning of 10 August 2018 and House of Fraser filed for insolvency protection. Later the same morning Mike Ashley’s Sports Direct agreed to buy the retailer for £90m. The sale was effected by way of an insolvent sale by its administrators EY. Although 1,7000 jobs have been secured, a significant part of the business may be likely to rebrand as Sports Direct stores.
The case of House of Fraser is a success story for the retailer and its landlords who challenged the CVA. However, it could have gone the other way too.
Landlords may feel encouraged after the success of House of Fraser to put a stop to or challenge CVAs but in reality it is likely that these will continue to be approved. CVAs offer a better return to landlords than administration or insolvency and offer a helping hand in saving the high street retailers.
Each situation should be examined on a case to case basis. If you are a landlord or a retailer seeking advice in relation to a CVA please contact Natasha.Atkinson@weightmans.com or firstname.lastname@example.org