A new wave of CVAs?
A company voluntary arrangement (CVA) is, provided the voting thresholds are met, a binding agreement made between a company and its creditors, designed to compromise a company’s obligations to its creditors.
As retailers and restaurateurs across the UK continue to show signs of financial distress, interest in the use of CVAs has increased. A common facet of a CVA is a focus on reducing rents and offloading unprofitable leases.
Compromised or full rent?
The recent BHS CVA provided that certain landlords would receive less than the full amount of the rent falling due under their leases to BHS. However, the terms of the CVA also provided that, on termination of the CVA, the compromises and releases effected under the terms of the CVA would be deemed never to have happened.
BHS subsequently went into administration and is now in liquidation. The question that has recently arisen is, could affected landlords, whose properties continued to be used by administrators for the carrying on of the BHS business, go back to claiming full rents following the termination of the CVA or would their claims remain compromised by the CVA? If the answer to that question was yes, would the rent fall to be paid as an expense of the administration/liquidation?
In a case brought by one of the BHS landlords, the High Court has now given directions to the joint liquidators[1] that, following the termination of the CVA, the full amount of rental payments (rather than the amount as compromised under the CVA) was payable to the landlord as an expense of the administration in relation to the period during which the (then) administrators were in possession of the relevant premises for the purposes of the administration.
Clearly, this could be taken as confirmation for landlords of retained properties that, ironically, they will be better off in an insolvency process than in a CVA, at least in the short term. That of course does not acknowledge the purpose of the CVA, which is to try to rescue the business and avoid an insolvent situation altogether.
Each case will turn on its own facts. Ultimately, CVAs are contractual agreements and each one is different. What is interesting for landlords, however, is that the Court also commented that provisions in a CVA, being a contract, which seek to vary the position under an underlying deed may be subject to challenge for want of the amendment or variation being made by deed. If this point was pursued further, it could change the way in which CVA proposals are packaged, requiring landlords to enter into deeds of variation at the outset. That would be a much bigger issue for the future of the CVA as a tool for business recovery.
Comment
It is not uncommon for a CVA to fail and for the company to subsequently enter administration or liquidation, so the author of the CVA and any landlords of property that continue to be traded should be mindful of the consequences of termination of the CVA. A potential liability to pay full rent as an expense of an insolvency should be considered a very important element of the CVA proposal when assessing the implications of the proposal for both the company and its landlords.
[1] Wright (and another) (as joint liquidators of SHB Realisations Ltd (formerly BHS Ltd) (in liquidation)) v. Prudential Assurance Company Ltd, [2018] EWHC 402 (Ch)