House of Fraser is just one of the latest high street giants seeking to restructure their debts to avoid falling into administration or liquidation using an insolvency process called a Company Voluntary Arrangement (CVA).
The British Property Federation (BPF) has recently spoken out about this trend and said too many companies are abusing CVAs. So what exactly is a CVA and what should you do if you are a landlord that has been affected? A CVA is a formal legally binding agreement between a company and its creditors, usually between 2 to 5 years in duration, designed to assist a potentially insolvent company to put in place a regulated re-structuring or rescue plan.
The catalyst for a CVA is usually serious cash flow difficulties and the selling point to creditors is that this process should provide a better ‘return’ than a more formal administration or winding up procedure. In a CVA, the focus is on the rescheduling of debt and future payments (for example rents). However, in the case of leased premises a CVA can also seek to introduce amendments to lease terms to the benefit of the tenant company but potentially to the detriment of the landlord.
In simple terms 75% of the creditors by value need to vote in favour of the proposal and if passed the CVA effectively binds all creditors, irrespective of their voting preferences. It is also highly likely that a CVA will incorporate a moratorium preventing any form of debt recovery or enforcement action being taken even by those landlords who do not wish to be bound by its terms.
For the landlord there are a number of issues to consider:
- What are the terms of the proposal?
- How does it deal with existing arrears? More importantly, what are the proposals going forward in terms of rent and other obligations?
Girlings recently advised on the Prezzo Limited CVA proposal which identified no less than seven different landlord ‘categories’ each with varying proposals. Landlords must understand what aspects of the proposal directly affect them and gauge from a commercial perspective what this will mean in practice. It can be a complicated process and in the current economic (and political) climate we are likely to see an increase in use of the CVA which can have advantages compared to formal insolvency procedures.
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