The Insolvency Service issued a report on research commissioned by her on the use of corporate voluntary arrangements (“HOW ARE YOU”) by large companies in the retail, accommodation and restaurant sectors.
The report was commissioned to gather evidence regarding significant concerns raised by the commercial real estate industry that the use of CVAs to compromise rental debts and make changes to long-term leases unfairly affects landlords over to other categories of creditors.
The report concluded that landlords were, on the whole, treated fairly in CVAs compared to other classes of unsecured creditors. However, he acknowledged that the research on which the report was based may have underestimated the level of compromise of landlords’ claims, as there may be other amendments (such as moving to a figure-based rent calculation tenant company’s annual turnover) or other areas of compromise, such as rent arrears, rental charges and dilapidation that the research was unable to assess.
The report made a number of suggestions which, if adopted, could bring greater clarity and understanding among CVA stakeholders. The use of standardized summary tables, clauses, annexes and annexes would help address proposals that the report perceives as legalistic, long, repetitive and unclear. Although there are often consultations with key stakeholders, this could be improved.
A voluntary company arrangement
A CVA is a “cram down” proceeding under the Insolvency Act 1986 which allows a business to agree with its creditors to pay its debts. To become effective, a CVA proposal must be approved by 75% or more (by value) of voting creditors. However, a CVA proposal will not be approved if more than 50% of the total value of unconnected creditors vote against it. No CVA can affect the rights of a secured creditor without its consent. The rights of preferential creditors (eg certain wage and tax claims) are also protected.
A CVA does not necessarily compromise all types of unsecured debt. In some cases, the company offering the CVA will decide not to offer compromise on certain unsecured claims, such as major suppliers or major owners.
The research report was based on a study of 59 CVAs of large companies in the retail, hospitality, and food and beverage sectors over the period 2011 to 2020.1.
Essentially, the Insolvency Service asked three key questions:
How do results for landlords in large business CVAs offered by companies in the retail, accommodation and food service sectors compare to those of other types of creditors?
The report found that in a large majority of the CVAs reviewed (93%) the claims of at least some owners were compromised. This compares to the next highest compromise categories, namely business-to-business creditors (51%) and commercial creditors (49%). However, for landlords whose contractual rent was compromised by the CVA, the level of compromise ranged between 46% and 85%, which the report found compared favorably to the level of compromise given to other key categories ( for example, local authorities (82%)). .
However, the report acknowledged that the level of compromise of a homeowner’s claim does not tell the whole story. The terms of the CVA may make other changes (such as moving to a rent calculation based on the tenant company’s annual turnover) or provide for additional areas of compromise, such as rent arrears, utilities rental and dilapidated which research has been unable to assess. Therefore, the level of compromise for owners might be underestimated.
Are lessors treated fairly, relative to other lenders, in large business CVAs offered by businesses in the retail, accommodation, and restaurant sectors?
The report concluded that landlords were, on the whole, treated fairly compared to other classes of unsecured creditors. In particular, the following specific points were noted:
- Homeowners generally have larger claims (and therefore more voting power) than other unsecured creditors.
- A CVA cannot alter an owner’s right to re-enter their premises because such a right is equivalent to a property right belonging to the owner2.
- If a landlord is asked to suffer a loss under the terms of the CVA, the landlord should be offered the option of repossessing the premises.
- Creditors (including owners) can challenge the CVA in court (although the adversarial nature of such a challenge, the substantial costs involved, the risk of an adverse costs order, and the failure of several recent challenges have all noted).
- All CVA proposals examined in the research resulted in a better estimated return for all categories of unsecured creditors compared to the relevant alternative, which in each case was an insolvency process.
However, the report acknowledged some specific concerns.
While the CVA proposal (which is prepared by the administrators) is subject to independent advice from an insolvency practitioner (the “Candidate”), the candidate tends to be heavily involved in writing the proposal, which can lead to a potential lack of independence.
In addition, the voting mechanism allows creditors whose claims are not impaired by the CVA to vote on it. Consequently, this voting mechanism continues to be open to criticism.
The report also made a number of suggestions which, if adopted, could provide greater clarity and understanding of the CVA process for stakeholders:
- Many of the CVA proposals reviewed in the research were found to be legalistic, long, repetitive and lacking in clarity. These proposals could be approved through the use of standardized summary tables, clauses, schedules and annexes.
- Although there is often consultation with key stakeholders/creditors prior to the launch of CVA proposals, such consultation may not always take place and could be improved.
As noted in the report, a CVA can, in certain circumstances, provide a suitable alternative to formal insolvency proceedings (such as administration or liquidation) and also an alternative to the “cram down” proceedings of a plan of restructuring (or scheme of arrangement), which can be significantly more expensive.
However, while the report contains a useful analysis of recent CVAs from large companies, it is unlikely to address the commercial real estate sector’s concerns about compromised lease liabilities and the treatment of landlords.
2 The CVA could modify any pecuniary obligation, upon breach of which the right of reinstatement could be exercised, and the right would then only be exercisable in relation to the pecuniary obligation so modified. However, he could not change the right of re-entry.