Review of Company Voluntary Agreements (“CVAs”) | Hogan Lovells
The report sought to answer the following three questions posed by the Insolvency Service:
- How do owners’ results in CVAs of large companies in the Retail, Accommodation or Food Service business compare to those of other creditors?
- Are landlords treated fairly, relative to other creditors, in the CVAs of large companies in the retail, accommodation or restaurant business?
- If such a finding is made, to identify which specific levers in the framework are causing the problem and how.
The short answer of analysis? No: Overall, business owners do not appear to be treated unfairly. The analysis also concluded that the CVA remains an important, cost-effective and flexible restructuring tool available to debtors to enable businesses to survive as a going concern.
The longer answer is, well, a bit longer, and the true stance on the trade-offs imposed on commercial owners may well be underestimated. It is also likely that further analysis of the impact of CVAs on business owners will be required.
The report was asked to examine the CVAs between 2011 and 2020 offered by large companies in retail, accommodation or restaurant activities. Of the 5,106 CVAs offered at that time, the Insolvency Service identified 747 that were offered by companies in the retail, accommodation and restaurant sectors. Of these, 82 were proposed by “large” companies,1. The authors of the report had access to 59 of these 82 proposals and these formed the basis of the analysis (the “Proposals”). The report was therefore based on a review of just over 1% of proposed CAVs during the relevant period and just under 8% of those proposed in the relevant sectors during this period.
Question 1: How do owners’ results in CVAs of large businesses in the Retail, Accommodation, or Food Service businesses compare to those of other creditors?
Key figures from the report reveal that business owners were compromised in 93% of proposals, compared to business-to-business creditors in 51% and commercial creditors in 49% of cases.
The level Compromise was more difficult to compare, as owners were often divided into different categories, with critical (or Category A) owners often being kept whole, and non-critical (or Category B – D) owners being significantly compromised. Considering only lessors who have been compromised, the level of their compromise rises to 63%, compared to 81% for compromised intercompany creditors and 88% for compromised non-critical commercial creditors.
On average across all creditors in each category, owners had an average compromise of 43% versus 44% for noncritical commercial creditors and 48% for business-to-business creditors.
The report appears to show that while landlords were by far the most frequently compromised class of creditors under the proposals, the average compromise for landlords was no higher – and in some cases lower – than other creditors. However, the report acknowledges that this level of compromise by compromised business owners is likely to be underestimated. Indeed, the report did not assess the impact of other trade-offs often imposed on commercial landlords in proposals, such as moving to revenue-based rent and compromising rent arrears and charges. tenancies and dilapidations. Indeed, the scope was limited to a review of rent reductions over the duration of the CVA/rent concession period.
Question 2: Are landlords treated fairly, relative to other creditors, in the CVAs of large companies in the Retail, Accommodation or Foodservice business?
The report concluded that, overall, commercial owners are treated fairly. In reaching this conclusion, the report identified a number of safeguards built into CVAs that require them to treat all creditors fairly, including:
The Nominee: the requirement that a licensed insolvency practitioner be appointed as a “nominee” to provide independent advice on the Proposal. The report goes on to say that the candidate is often heavily involved in the writing process, which can lead to a perceived lack of independence.
The company’s unsecured creditors are given the opportunity to vote on the proposal, with a statutory majority of 75% by value of voting creditors having to vote in favor in order for the proposal to be implemented. There is a secondary protection here since the CVA will not be implemented even if the 75% threshold is met if those voting against comprise more than 50% (by value) of all unrelated creditors whose claims are admitted. to vote. Again, the report acknowledges that this does not exclude votes from unrelated but unimpaired creditors and therefore does not fully address the potential problem of vote “submersion”, where the CVA is approved by creditor votes. uncompromised whose rights are not affected by its terms.
More than half of the proposals had received an approval rate of over 85% – which “suggests landlords are likely supportive, given that landlords typically represent a large proportion of voting claims in this sample”. A non-owner creditor’s right to vote is based on the value of his claim on the date of the vote. For a lessor creditor, the debt is adjusted to take into account future rents on the part of the lease that has not expired, but a discount is then often applied. Despite this postponement, the report concludes the process of calculating the claims of the owners »can result in owners who have relatively little outstanding and payable debt at the time of the CVA having voting claims that are significantly higher”. Although the report notes the practice of discounting a landlord’s claim, it goes no further, although discounting is a hotly debated issue on landlord disputes.
Lease Termination: A number of Proposals allowed a compromised lessor to repossess the premises, and recent case law (Discovery (Northampton) Limited v Debenhams Retail Limited) established both that a CVA cannot change a landlord’s right to repossess the land and that, where a right of repossession exists, it is not automatically harmful to change the rents due. The rights of owners are therefore similar to the rights of other creditors who can terminate their contracts if they prefer not to carry out the CVA.
Relevant alternative: The relevant alternative to CVA in all proposals was either administration or liquidation, in which the expected yield to unsecured creditors was between 0p and 3p in sterling. Each of the proposals provided a significantly higher return to creditors, including owners, in the CVA. The report does not address the question of whether the choice of administration or liquidation was appropriate in all cases or even whether an insolvent outcome was unavoidable, a challenge we have seen in a number of restructuring plans .
Question 3: If such a finding is made, identify which specific framework levers are causing the problem and how.
The report concluded that commercial owners were largely treated fairly in CVAs. The report separately made a number of observations regarding CVAs in general:
Variation: The report noted that “the most relevant lever driving complaints is the degree of flexibility available when writing proposals,” which in turn provides for significant variation in creditor outcomes.
Length and Clarity: CVA proposals can be long, repetitive and difficult to understand. It is suggested that each proposal contain:
A summary that clearly defines the options for each creditor;
Standardized tables showing yields for each creditor, payment dates, and where to find information about other creditors in each category;
A post-CVA balance sheet and projected profit and loss account and cash flow for the duration of the CVA, with reference to any profit sharing or benefits, or why this has not been included.
Consultation with key stakeholders: the report suggests an amendment to SIP 3.2 to make it mandatory to consult the British Property Foundation in certain circumstances before proposals are launched.
“Voting Submergence”: in response to criticism that uncompromised creditors can unduly influence voting on proposals, the report noted that any proposed changes to the CVA process to exclude uncompromised creditor votes from statutory majorities “would represent a fundamental change to the process of CVA and given the potential low yield of the relevant alternative…uncompromised creditors can argue that they still have a very substantial interest in the voting process.
The report is unlikely to be seen as answering all of the criticisms made by commercial owners, and the British Property Federation has already suggested that further assessment and a fuller report is needed. It remains to be seen whether the Insolvency Service will seek further consultation or an assessment of possible changes to the CVA process, or whether developments in this area will be left to the courts, although given the lack of new CVAs and RPs launched at the moment, it is not known when such opportunities will arise.
1 A ‘large’ business for the purposes of the Companies Act 2006 is one which meets at least two of the following criteria: (1) turnover in excess of £36 million; (2) balance sheet total greater than £18 million; (3) more than 250 employees.