Whether mentioned in the same breath as House of Fraser or – more recently – Arcadia Group or Debenhams, company voluntary arrangements seem to energise the British business press more than any other insolvency procedure, with the possible exception of pre-pack administration sales. On the relatively few occasions when formal CVA proposals are actually put forward, they can have a serious impact on various creditors including retail landlords, who have in recent years begun to work together more. In my experience, however, CVAs are amongst the most commonly misunderstood procedures in the toolkit of an insolvency practitioner (IP): with the right level of cooperation between stakeholders and in the right circumstances, I am confident they can and should be harnessed as a real force for good, particularly in uncertain economic times.
In order to properly explain a CVA, I have found that I need to break them down into straightforward, factual components capable of being readily understood by a non-insolvency audience. Luckily, I had an opportunity to do just that earlier this month, alongside Andrew Watling (an IP with Quantuma) at the Southampton Property Association’s annual conference at the Mayflower Theatre; I thought that the key points arising from this might be of interest to a wider audience, hence this blog.
I was invited to speak at the conference in my capacity as Chair of the Southern Regional Committee of R3 (the insolvency and restructuring trade body), which is a post I took over from Andrew in 2016. The organisers had identified CVAs as a hot topic for property professionals and landlords, which is perhaps unsurprising given the large number of high profile CVA stories over the past 12 months, including one of my favourite headlines, “Landlords vs CVAs: The battle of UK retail” (Ben Stevens, Retail Gazette, 4 July 2018).
Andrew and I explained what a CVA is underneath it all, namely a contract between a genuinely financially distressed company and its unsecured creditors which involves the management remaining largely in place (provided they stick to the terms), and those creditors receiving rather less money against their debts than they would otherwise expect to receive and/or over a longer period of time.
It is certainly a different type of contract in that creditors can be bound by it even if they don’t like its terms or are completely unaware of it at the time. Andrew talked through the circumstances where an alternative procedure would be more appropriate, but it also carries various statutory safeguards including rights of challenge (which are well used on occasion) for those who feel they are unfairly affected by it or whose votes may have been unduly discounted. Importantly, its operation is closely supervised by a qualified professional who is in turn answerable to a professional regulator and/or the courts. Like all contracts, however, CVAs are inherently flexible, meaning that no one size fits all and particular care and attention needs to be given to the detail as and when a proposal is received. A well placed ‘modification’ proposed and accepted as a CVA is passing through the relevant decision procedure (usually now a virtual meeting) can make a real difference to creditor outcomes.
Thanks to R3’s resources, which included a fully authenticated research paper authored by Professor Peter Walton of the University of Wolverhampton and Chris Umfreville of Aston University and published in 2018, I was also able to dispel a few commonly occurring myths about CVAs and the role of IPs in promoting and policing them. Space does not permit me to go into many of these here, but 5 of the most relevant facts I extracted were as follows:
I was also able to reassure delegates that R3 and other key stakeholders in this arena have been progressing high level round table discussions with a view to promoting enhanced understanding and cooperation. Whilst these talks are ongoing we are not able to share the details, but they will hopefully in due course lead to an agreed route towards reforms which could further enhance the effectiveness of CVAs and improve both the success rates and performance against expected outcomes.
Proposals which have already come out of R3’s research and discussions include the introduction of a more useful moratorium to allow IPs, landlords and others more time to discuss terms without fear of immediate enforcement action, limiting the primary duration of a CVA to 3 years, updated regulation to improve creditor outcomes, and steps to drive home to existing management the importance of their using the CVA time constructively to address any behaviours which may have contributed to the financial distress in the first place.
We closed the session by touching upon a raft of legal measures landlords can potentially take at the lease creation or assignment stage to enhance their voting and recovery position as and when one of their tenants might contemplate a CVA, and offering a series of practical tips for minimising the potentially adverse impact of insolvent tenants generally.
CVAs are an often misunderstood and sometimes maligned insolvency procedure which, as my recent presentation to the Southampton Property Association’s annual conference hopefully showed, are capable of drawing very beneficial effects. They will only be appropriate in a small minority of cases, but where they are proposed this will be because there is a qualified insolvency practitioner behind them who believes they can work (and is willing to stake their own fee upon it).
Unfortunately, I have seen a number of businesses forced into liquidation because creditors closed their minds to solutions which would almost certainly have yielded a better outcome for them, sometimes as a matter of policy, occasionally as a result of some ill-considered prejudice against CVAs. Public bodies are not immune to this and I would personally like to see a positive duty upon HMRC and others to explain why they are rejecting proposals if they decide that is appropriate, if only so that other stakeholders may be reassured that the proposal has at least been properly considered.
If you or your company is affected by an actual or potential insolvent event, whether or not a CVA is being talked about and whether via one of your (clients’) tenants, other debtors or something closer to home, please do get in touch. I shall be pleased to help if I can. Similarly, if you would like to know more about the work of R3 in the regions and nationally, let me know and I shall direct your enquiry appropriately.