10 十二月 2019
High-profile use of company voluntary arrangements or CVAs, has led to widespread media coverage and controversies. Household names such as Jamie's Italian, Prezzo, Toys R Us, Mothercare, Gourmet Burger Kitchen and more recently Debenhams are amongst the growing list of companies who have followed this well-trodden path, with varying degrees of success. Those companies unable to turn their fortunes around face administration or liquidation.
CVA, enshrined in statute under the Insolvency Act 1986, was introduced as a rescue mechanism to aid companies which are experiencing financial difficulties. A CVA enables the company and its creditors to reach an agreement or compromise as to how its debts will be repaid. This is with the aim of helping the company to avoid insolvency proceedings. More importantly, a CVA allows the company in question to continue trading and provides an opportunity for the company to restructure and formulate a business strategy.
This article will briefly cover the CVA process, analyse the recent Debenhams High Court appeal, and discuss the impact of CVAs on lenders.
As CVAs are intended to be a rescue mechanism, statute has provided for the directors of the company to propose a CVA to the company's shareholders and creditors, if they wish to do so in the light of the company's financial difficulties. There are two principles which underpin a CVA:
While CVAs are enshrined in statute, a statutory procedure has not been prescribed and CVAs do not require approval from the courts.
Generally speaking, a typical CVA follows these steps:
In the recent High Court case, a group of disgruntled Debenhams' landlords brought a challenge to the CVA on the grounds of unfair prejudice and material irregularity. This is despite the fact that the CVA obtained an approval of approximately 82% from voting landlords.
In essence, the CVA proposal sought to alter the conditions of the shop leases depending on which category they fell into (eg reduction in rent, break rights, reduced business rates, early termination rights).
Unsurprisingly, the group of challenging landlords failed on both grounds.
The Court held that the landlords were not treated less favourably compared to other unsecured creditors.
The fact that the level of rent was being reduced did not render such treatment unfair prejudice because this was balanced by the fact that the landlords have the ability to terminate the lease within a certain timeframe.
While the landlords were treated differently compared to the other unsecured creditors, this was for business continuity reasons. Further, the Court noted that the CVA proposal did not bring the level of rent below market rate (which would have been viewed as unfair had that been suggested).
The landlords argued that the CVA failed to comply with the content requirements of the Insolvency Rules, which constituted a material irregularity. Again, the Court did not rule in favour of the landlords. An irregularity will only be deemed 'material' if, had the irregularity not occurred, "it would have made a material difference to the way in which the creditors would have considered and assessed the terms of the CVA".
It was held that the omission of details in relation to potential clawback claims that might crystallise, should the company go into administration, was not material. This was because the landlords potentially compromised by this would only amount to 0.5% of votes (by value), "a wholly immaterial amount".
The landlords, however, succeeded in their argument against the proposed waiver of the landlord's right of forfeiture. The right of forfeiture was deemed to be a proprietary right, which belonged to the landlord and not a 'security'. Therefore, the CVA was unable to modify the right of forfeiture in and of itself.
If triggered, a moratorium will prevent a secured creditor from enforcing its security for the duration of the moratorium without the consent of the Court. However, only SMEs that satisfy two or more of the following conditions are able to trigger a CVA moratorium:
Furthermore, companies which have incurred a liability under an agreement of £10 million or more will be ineligible for a CVA moratorium. The possibility of a moratorium in connection with a larger enterprise with secured loan arrangements in place is therefore rather remote.
While the company is not required to consult its lender before proposing a CVA, in reality, it is likely to do. This is because the onset of a CVA is likely to be caught within the definition of an event of default in a loan agreement. It is important that such consultation takes place as soon as possible because any prudent lender will want to evaluate the workability of the CVA proposal and its potential impact on the lender.
It is highly unlikely that a secured creditor will be affected by a CVA but as the ever persistent calls for CVA reform grow, it is anyone's guess as to whether any reform proposal will adversely affect the almost impenetrable secured creditor's rights.