Everything they need to know

The Insolvency Service has published a new report on Company Voluntary Arrangements (CVAs) based on concerns received from landlords that they were being discriminated against in their use and implementation. 

The report investigated the views of the commercial property sector and its representatives that CVAs were being used to target or disadvantage commercial landlords more than any other creditors especially in the retail and hospitality sectors. 

The whole of the report can be found here and the main finding is that “landlords are, broadly, equitably treated compared to other classes of unsecured creditors” in CVAs. 

The report served up several other key findings. These were:

  • Equitable treatment for landlords – while there may have been individual instances where corporate landlords could argue they had not been equitably treated, these are mainly when compared to landlords in categories that imposed lower compromises.  Based on the report’s key analysis however, it appears that landlords have been broadly treated equitably compared to the other classes of unsecured creditors because:-
    • They tend to have disproportionately larger voting rights and influence on the process than any other group of creditors
    • Voting on CVAs doesn’t appear to have been skewed by the impact of unconnected creditors
    • Landlords still have similar rights to all other creditors: they can propose modifications to any proposals and, if lease terms are being amended (other than a move to monthly rather than quarterly payments), and they disagree with a proposal voted through, they can exercise their break options and take their site back (similar to withdrawing a service) or submit a statutory challenge.
  • Checks and balances – The statutory legal requirements of the CVA process includes a series of checks and balances including the role of the nominee and that 75% of creditors have to vote in favour of a CVA proposal.
  • Forfeiture rights – While there have been some high profile challenges and criticisms of the CVA process in cases such as Debenhams, New Look and Regis, these themselves don’t mean that the CVA procedure discriminates against landlords. Particularly, almost all leases contain clauses that permit landlords to take back sites if the tenant company enters an insolvency procedure such as a CVA.  A CVA will not undo this right. 
  • Returns – When compared to relevant alternative insolvency procedures, the CVA presents a better opportunity for return for all classes of unsecured creditors.

Alternatives and Improvements

This is not to say that the CVA procedure is 100% perfect and couldn’t be improved. The report goes on to make some recommendations on this including:

  • The length and clarity of CVA proposals – The analysis of the report found that some CVA proposals were written overly legalistically and were lengthy with unnecessary repetition. This could be improved with the use of executive summaries and a standardisation of tables showing the returns expected to different categories of creditor and creating a post-CVA balance sheet that would illustrate the impact of the CVA.
  • Improved consultation with key stakeholders – this could also include consultation with trade bodies such as the British Property Federation on behalf of their members prior to the launch of a CVA, if it sought to compromise landlords’ claims that met certain criteria.
  • Vote swamping – In some prior challenges certain landlords (such as in the challenge to New Look’s CVA) have complained that it was unfair that some creditors were able to vote who weren’t being compromised by the CVA. In response the report found that the exclusion of any uncompromised creditors would represent a fundamental change to the CVA process; that given the low potential return compared to any relevant alternative (should CVA proposals be rejected) uncompromised creditors would argue that they still have a significant interest in the voting process; and any change such as excluding the votes of uncompromised creditors should require consultation with the relevant industry stakeholders.

The report says that “the CVA offers a flexible and cost-effective solution that bridges the gap between informal negotiations and formal insolvency procedures such as administration or liquidation.

“It provides an increased chance for the business to survive as a going concern, arguably a cornerstone of the UK’s rescue culture.”

The research showed that compromise was widespread with 747 companies across the retail, accommodation and hospitality industries reporting that they found their positions being compromised 93% of the time by a CVA between 2011 and 2020 inclusively.

The data was refined down further to include just companies defined as “large” which reduced the sample size to 82 which also saw the number that reported a compromise of interests fall to an average of 43% instead. 

The report goes on to state that the level of future rent doesn’t tell the full story and that there may be additional areas of compromise relating to rent arrears, service charges and dilapidations that were unable to be assessed.

Chris Horner, insolvency director with BusinessRescueExpert, said: “While the use of CVAs has decreased somewhat over the past two years due to the unique circumstances and economic conditions and environment faced by many companies, it remains an important and viable tool to help otherwise viable businesses overcome problematic debt problems.

“The report shows that while some landlords might feel a little pressured to accept a CVA, on the whole they are still generally in a better position than unsecured creditors and will still benefit from a procedure being accepted than not.”

One of the key advantages of the insolvency industry is that it provides a range of appropriate tools for the situation. There is no “one size fits all” solution – which is a great advantage to any business facing financial difficulties. 

If debts are too great to be repaid over a reasonable period of time then liquidation might be the best option for a business but increasingly for many, if debts can be combined into regular, manageable payments, then they can continue and ultimately thrive as a growing enterprise instead of closing.

But before any option should be selected in advance, the essential step is to get some impartial, expert advice first. 

After arranging a free, initial consultation with one of our experienced advisors, business owners or directors will have a clearer understanding of the options available to them – what each one will do and how they can help their company towards their goals if they choose to follow them. 

Then they can give all their energy and attention to what they do best – running their business instead.