Company Voluntary Arrangements: A Dive in the Penalty Box?
Landlords and Retailers Row Over Company Voluntary Arrangements. Is CVA Reform Needed?
Have you heard the one about the property agent, the carpet retailer and the legal threat issued by the latter to the former? This recent row was about whether company voluntary arrangements are being misused and it seems that landlords and retailers are at each other’s throats over the issue. In this article, our insolvency practitioners look at why the ‘rumbling debate’ over Company Voluntary Arrangements blew up recently when a partner at Knight Frank wrote a blog post questioning Carpetright’s decision to launch a CVA. We then look at the Football Creditors’ Rule, before concluding with some thoughts about the potential for CVA reform.
The ‘Disagreement’ Between Knight Frank and Carpetright
Stephen Springham, Knight Frank’s head of retail research, asked whether Carpetright’s CVA plan was a case of “genuine distress or a dive in the penalty box”, pointing out that the retailer had made £14.4m in pre-tax profits in the previous year. Carpetright’s legal director fired off a warning and the post was taken down.
Mr. Springham went on to ask whether Company Voluntary Arrangements were becoming a “lifestyle choice”, rather than a vital restructuring tool saving jobs and businesses. He suggested that we are seeing a ‘drifting away from the premise upon which CVAs were originally conceived’.
The Original Premise for Company Voluntary Agreements
A CVA is an insolvency procedure that allows a company that is facing significant financial distress, but with an otherwise healthy and sustainable business model, to avoid administration or liquidation by renegotiating its liabilities.
In recent months there has been a spate of high profile CVAs along the high street – Toys R Us, Byron Burger and Carluccio’s, for example, whilst House of Fraser’s proposal is awaiting creditor approval- where the focus has often been on negotiating with landlords to reduce the rents on the better performing outlets, whilst closing-down the poorer performing ones.
Stephen Springham’s point was that rather than being the last resort to avoid liquidation and closure, there was some evidence to suggest that CVAs were becoming a strategic option, a ‘lifestyle choice’, rather than a necessity where the only alternative was liquidation.
Our view is that this is a misunderstanding of the CVA procedure because while a company proposing a CVA is often insolvent this is not, in fact, a pre-requisite to enable a CVA to be used.
Nevertheless, there is a growing feeling that reforms are now needed for CVAs, and this is something that we will address in our next CVA article. It is a debate that has rumbled on for some time now, especially when it seems that not all creditors are treated favourably, in much the same way as the long running, but currently quiet ‘Football Creditors’ Rule’ debate, which also has the CVA at its heart.
The Football Creditors’ Rule and CVAs- Different Treatment for Different Creditors
The ‘Football Creditors’ Rule’ requires football-related debts, including transfer fees to clubs and contractual commitments to players be paid in full ahead of ‘unsecured creditors’ e.g. HMRC, small local businesses, local schools and the St. John’s Ambulance Service if a Football League club enters insolvency (the Premier League’s rules are almost identical to this).
Insolvent clubs (in fact the companies which own the clubs) invariably enter an Administration as this is an extremely speedy process and the company then gains the protection of the moratorium, and then exit this via a CVA to restructure their debts, respecting the Football Creditors’ Rule and continue trading either as the original entity or more commonly a new entity which has purchased the club. However, approval is needed from the Football League for the club to remain in the league, which is dependent upon the CVA complying with the Football Creditors’ Rule. It is this preferential treatment of some creditors that is the focus of the debate.
Equal treatment of each class of creditor ‘Pari Passu’ is fundamental and enshrined in the UK’s insolvency law and practice. Any deviation from this is, quite rightly in our view, subject to great scrutiny and even criticism.
However, the case of the Football Creditors’ Rule shows that it is perfectly possible to treat creditors differently and succeed. In this case, if a CVA is approved, the club can fulfil its fixtures, and this, it is argued, protects the integrity of the competition.
The creditors who are treated less favourably are understandably none too impressed. In the case of the Football Creditors’ Rule, HMRC is a notable creditor that comes second to football related creditors. This was largely dealt with when the Football League announced in June 2015 that the purchaser of an insolvent football club would be required to pay creditors a minimum of 35 pence in the pound over three years (or 25 pence on transfer of share), or face a further 15 point deduction at the start of the season following the insolvency.
This is one reason the Football Creditors’ Rule debate has quietened down although club failures have also slowed massively and that may well be the more important fact. Clearly the rule has been modified and a guaranteed dividend for the non-football unsecured creditors makes the football creditor rule operate more fairly.
In the case of the current high-profile retail Company Voluntary Arrangements, it is often the landlords who are treated less favourably.
To Conclude – A Thought About Different Types of Creditor in CVAs and the Potential Direction of Reform
The beauty of a CVA is that while there are statutory requirements it is, in truth, a binding agreement between a company and its creditors which can be whatever the parties agree to. In other types of processes, for example a liquidation, we often find it quite difficult having to explain to an employee or a small creditor (who will be very unlikely to have credit insurance) that the secured lenders will take most of the available money and/or that they will be treated the same, as far as unsecured non-preferential claims are concerned, as much larger or even multi-national companies.
We understand this is not the case in every jurisdiction, as anecdotally we have been informed that elsewhere small or artisan creditors may have preferential treatment, which seems fair at first glance at least.
There are always winners and losers in insolvency procedures, and this is certainly the case with Company Voluntary Arrangements. However, perhaps looking at the impact of a loss sustained by a creditor is of greater importance, in considering reform, rather than simply the quantum amount of money legally payable to creditors. Also, as with the reform of the Football Creditors’ Rule, perhaps landlords are suffering unfairly, although it is rather difficult to equate big retail landlords with people selling programmes at football matches or even HMRC for that matter.
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