The Insolvency Service has published a report on the research commissioned by it on the use of Company Voluntary Arrangements ("CVAs") by large companies in the retail trade, accommodation and food and beverage sectors.
The report was commissioned to gather evidence in relation to significant concerns raised by the commercial property sector that the use of CVAs to compromise rental debts and make changes to long-term leases is unfairly affecting landlords in comparison to other classes of creditors.
The report concluded that landlords were, broadly, equitably treated in CVAs compared to other classes of unsecured creditors. However, it acknowledged that the research upon which the report was based could have understated the level of compromise of landlord claims, as there may be other amendments (such as moving to a calculation of rent based on the annual turnover of the tenant company) or additional areas of compromise, such as arrears of rent, service charges and dilapidations which the research was not able to assess.
The report made a number of suggestions which, if adopted, may afford greater clarity and understanding among CVA stakeholders. The use of standardised summary tables, clauses, schedules and appendices would address those proposals which the report perceived as legalistic, lengthy, repetitive and lacking in clarity. Whilst there is often consultation with key stakeholders, this could be improved.
A Company Voluntary Arrangement
A CVA is a "cram down" procedure under the Insolvency Act 1986 which allows a company to come to an arrangement with its creditors over the payment of its debts. To become effective, a CVA proposal must be approved by 75% or more (in value) of those creditors voting. However, a CVA proposal will not be approved if more than 50% of the total value of the unconnected creditors voting, vote against it. No CVA can affect the rights of a secured creditor without its consent. The rights of preferential creditors (eg certain employee and tax claims) are also protected.
A CVA does not necessarily compromise all types of unsecured creditor claims. In some cases, the company proposing the CVA will decide not to propose a compromise of certain unsecured claims, such as key suppliers or key landlords.
The research report was based on a study of 59 large company CVAs in the retail, accommodation and food and beverage industries in the period 2011 to 20201.
In essence, the Insolvency Service asked three key questions:
How do outcomes for landlords in large company CVAs proposed by companies in the retail trade, accommodation and food and beverage sectors compare to other types of creditors?
The report found that, in a significant majority of the CVAs considered (93%), the claims of at least some landlords were compromised. This compares with the next highest categories of compromise, being intercompany creditors (51%) and trade creditors (49%). However, for those landlords whose contractual rent was compromised by the CVA, the level of compromise ranged between 46% to 85%, which the report concluded compared favourably with the level compromise given to other key categories (eg Local Authorities (82%)).
However, the report acknowledged that the level of compromise of a landlord's claim doesn't tell the whole story. The terms of the CVA may make other amendments (such as moving to a calculation of rent based on the annual turnover of the tenant company) or provide for additional areas of compromise, such as arrears of rent, service charges and dilapidations which the research was not able to assess. Hence, the level of compromise for landlords could be understated.
Are landlords equitably treated, compared to other creditors, in large company CVAs proposed by companies in the retail trade, accommodation and food and beverage sectors?
The report concluded that landlords were, broadly, equitably treated compared to other classes of unsecured creditors. In particular, the following specific points were noted:
- Landlords typically have larger claims (and hence voting power) than other unsecured creditors.
- A CVA cannot vary a landlord's right to re-enter its premises as such a right amounts to a property right belonging to the landlord2.
- If a landlord is asked to suffer any loss pursuant to the terms of the CVA then the landlord should be offered the opportunity to take back the premises.
- Creditors (including landlords) can challenge the CVA in Court (although the adversarial nature of such challenge, substantial costs involved, risk of an adverse costs order and lack of success of several recent challenges were all noted).
- All of the CVA proposals considered in the research gave rise to a better estimated return for all classes of unsecured creditors compared to the relevant alternative, which in each case was an insolvency process.
However, the report did acknowledge certain specific concerns.
Whilst the CVA proposal (which is prepared by the directors) is the subject of an independent opinion from an insolvency practitioner (the "Nominee"), the Nominee tends to be heavily involved in drafting the proposal, leading to potential perceived lack of independence.
Further, the voting mechanism permits those creditors whose claims are not compromised by the CVA to vote upon it. Hence, this voting mechanism continues to be open to criticism.
The report also made a number of suggestions which, if adopted, it said may provide greater clarity and understanding of the CVA process for stakeholders:
- Many of the CVA proposals considered as part of the research were considered to be legalistic, lengthy, repetitive and lacking in clarity. These proposals could be approved by the use of standardised summary tables, clauses, schedules and appendices.
- Whilst there is often consultation with key stakeholders/creditors in the lead up to CVA proposals being launched, such consultation may not always happen and could be improved.
As noted in the report, a CVA may in certain circumstances provide a suitable alternative to formal insolvency procedures (such as administration or liquidation) and also an alternative to the "cram down" procedures of a restructuring plan (or scheme of arrangement), which may be significantly more expensive.
However, whilst the report contains a helpful analysis of recent large company CVAs, it is unlikely to address the concerns of the commercial property sector regarding the compromise of rent liabilities and the treatment of landlords.
1. "Large" company was defined using the Companies Act 2006 criteria.
2. The CVA could modify any pecuniary obligation, upon breach of which the right of re-entry might be exercised, and the right would then only be exercisable in relation to the pecuniary obligation as so modified. However, it could not modify the right of re-entry.
Originally published 07 July 2022
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