CVAs continued to be a popular restructuring tool in 2021. As the retail industry gears up for what is expected to be a busy festive period, it marks the end of another year in which the close scrutiny and attempted challenge by landlords to retail CVAs continued.
What is a CVA?
A CVA (a Company Voluntary Arrangement) is a contract between a company and its creditors in which the company seeks to compromise the debt it owes and pay it back to its creditors over an extended period of time. The CVA proposal will be implemented if it is approved by at least 75% (by value) of the company’s creditors who respond in the decision procedure, unless those voting against include more than 50% (by value) of all the unconnected creditors. Once approved the CVA will bind all unsecured creditors of the company and that is whether or not the creditor voted for or against the proposal or even attended the meeting. CVAs can be powerful restructuring tools as, in addition to compromising the company's debts, the CVA gives a company protection from its creditors by preventing action being taken against it whilst the CVA is in place. From a landlord's perspective, the CVA may produce a better result than terminal insolvency proceedings but, given that the CVA has the ability to restructure lease liabilities, there have been increased challenge of CVA terms by landlords in recent years.
How can landlords challenge a CVA?
Any challenge to a CVA needs to be lodged within 28 days of the CVA being approved and can be on the grounds of (i) unfair prejudice; and/or (ii) material irregularity. Unfair prejudice is a question of fact which is determined on a case-by-case basis – a CVA which treats different unsecured creditors in different ways may be prejudicial to those creditors, but the question of fairness will depend on the overall effect of the CVA. Material irregularity is also a question of fact but arising out of the conduct of the decision procedure used to consider the CVA proposal. Given that the time period to challenge a CVA is relatively short and the underlying terms of each CVA are bespoke and tailored to meet the specific needs of the company and its creditors, any landlord seeking to challenge a CVA needs to move quickly.
What happened in 2021?
In Lazari Properties 2 Limited and others v New Look Retailers Limited, Butters and another, there were several challenges to the CVA by the landlords on the grounds of both unfair prejudice and material irregularity. While the court rejected each ground of challenge, the case did provide some key takeaways for landlords:-
- It is not unfair for a CVA to provide for different outcomes for different groups of creditors. The outcomes for each creditor will, however, be relevant in assessing any challenge.
- If a CVA does not interfere with a landlord's proprietary rights then it is likely to be difficult to challenge on grounds of unfairness alone.
- There is no requirement on those proposing CVAs to ensure that a landlord gets market rent or that their rights are interfered with only to the extent necessary to achieve the CVA. The impact of the terms of the CVA will be important, but whether a CVA is unfairly prejudicial will depend on all the circumstances of the case.
The above case was swiftly followed by the decision in Carraway Guildford (Nominee A) Ltd and others v Regis UK Ltd in which the CVA was revoked by the court, although it had already terminated.
Like the New Look decision, the court confirmed that it was critical that landlord's proprietary rights were not infringed (i.e. they had the right to terminate). The court criticised a profit-sharing mechanism in the CVA as being illusory as the shareholder stood to benefit from it. The reason why this case stood out though was the was criticism levelled at the nominees. The court will scrutinise not only the terms of the CVA proposal but the conduct of the nominees. They have a duty to act in good faith and to properly scrutinise the terms the CVA and consider its impact on stakeholders.
What may lie ahead?
The judgements in both New Look and Regis provided some long-awaited guidance on the practical application of CVAs in a property context. Due to their flexibility and ability to be utilised effectively across large property portfolios it means that CVAs are likely to continue to be a popular restructuring tool. As such, landlords faced with a potential CVA should read the proposals without delay, process and take advice on how the specific terms will affect them and ensure that they fully exercise their voting rights.
Landlords should also be alert to the emerging trend of companies using Restructuring Plans (introduced by the Corporate Insolvency and Governance Act 2020) to achieve a similar result to CVAs, by imposing reduction of lease liabilities on landlords. So far they have proved quite an effective tool for the companies looking to use them. However, for a number of reasons, Restructuring Plans do not suit all companies so CVAs still very firmly have their place in disrupting the landlord/tenant relationship.