The company voluntary arrangement (CVA) is an insolvency process that has raised significant concern amongst commercial property owners in recent years about their use by tenant companies to change lease terms, write off arrears and recalculate future rental liabilities. Some property owners feel that they have been unfairly targeted by CVAs, particularly in the retail and casual dining sectors, to the benefit of other creditors.
This is the context for a research paper commissioned by the Insolvency Service and published on 28 June 2022. The central question asked of the researchers was “Are landlords equitably treated, compared to other creditors, in large business CVAs…?” to which the answer was “broadly” yes they were. But what are the details behind this broad conclusion, and what should property owners take from the report? Here are 10 key takeaways:
- Landlords are almost twice as likely to have their rights compromised in a CVA than any other class of creditor. In the sample set of CVAs that the researchers considered, property owners were compromised in 93% of cases. The next most compromised class was intercompany creditors at 51%.
- Average compromises for property owners compare “favourably” with other creditors. A key reason for the researchers concluding that property owners were “broadly” treated equitably when compared with other creditors was that they were subject to an average compromise of 43% as compared to 44% for non-critical trade creditors, 48% for inter-company creditors and 39% for local authorities.
- But the level of compromise for property owners may be much higher than the report suggests. As the researchers put it, the report “does not tell the full story” because it focuses solely on the compromise of future rents and not on other losses suffered by property owners, such as conversion to turnover rents and the compromise of rent arrears, service charge and dilapidations. The report concludes that “the overall rate of compromise in relation to landlords is likely to be understated”.
- The impact on property owners is skewed by unimpaired “Category A Landlords”. The average compromise for property owners was 43% but “this is an average across all landlords, including those whose debts were not compromised”. The average across compromised “Category B, C and D Landlords” was 64%.
- The dataset is small. According to the report, 747 companies proposed CVAs during the target period of 2011 to 2020. The researchers only looked at “large” businesses in the retail and food and beverage sectors, bringing the number down to only 82. From these, 59 CVA proposals were obtained and analysed – of these, the researchers (a team of financial consultants) were themselves involved in the production and/or supervision of 8 (or 14%) of the proposals. No CVA proposals were considered for the years 2011, 2013, 2014 or 2015.
- The impact of vote discounting was not considered. One of the key “checks and balances” in place, according to the report, to ensure that CVA proposals were equitable was that 75% by value of creditors must vote in favour in order for a proposal to be approved. The researchers found that the proportion of creditors approving the proposals was generally 85% or more of those voting. They concluded that this “suggests that landlords probably offer their support, given that landlords generally account for a large proportion of the claims for voting purposes”. However, this overlooks the fact that property owners’ votes are typically heavily discounted, sometimes by as much as 75%, which was found to be an irregularity in the recent case of Carraway Guildford (Nominee A) Limited v Regis UK Limited .
- “Vote swamping” was not considered. The report does not break down the votes for CVA proposals to see how many were approved on the strength of unimpaired and/or non-property owner creditors voting in favour. This ought to be a key consideration given the court’s finding in the recent case of Lazari Properties 2 Limited v New Look Retailers Limited  that “There would be strong grounds to conclude it was unfairly prejudicial where a CVA, which compromises the claims of a sub-group of creditors, is achieved only because of the votes of large swathes of creditors who are unaffected by the CVA”. Unfortunately, the researchers did not undertake an analysis of creditor votes because “it was not within the scope of this research, and it would likely be a time-consuming exercise”.
- But it might be the subject of a future consultation. The researchers do, however, suggest that any proposed change in the law to exclude uncompromised creditors so as to avoid vote swamping should be the subject of consultation with stakeholders/industry.
- CVA proposals are long and impenetrable. According to the researchers, CVA proposal documents were “extremely lengthy and legalistic”, some up to 300 pages long. Even their “own CVA experts struggled at times to fully understand the returns to the various classes”. They recommended executive summaries, standardised tables and the inclusion of post-CVA balance sheets.
- Greater consultation was recommended. The researchers also recommended a change to insolvency guidance to require company directors and their nominees to consult with the British Property Federation, on behalf of their property owner members. If implemented, some care will be needed to avoid the potential for abuse, given the experience in Regis where the nominee was “criticised for siding with the Company in its “negotiation tactics” with the British Property Federation in advance of the CVA, during which the Company put forward a proposal including provisions described as “aggressive” with the intention of making “concessions” in order to persuade landlords to vote in favour”.