Mutated CVAs are creating zombie high streets
Posted by Estates Gazette on 11th May 2018
These zombie companies are not only a curse on landlords, but also place
solvent retailers at a disadvantage.
CVAs were intended to be a process whereby creditors as a whole can
voluntarily decide to support the restructuring of a business, reducing its
liabilities to support its survival, and where all creditors benefit through
greater recoveries than are likely from administration and liquidation.
This concept requires 75% of unsecured creditors to support a CVA, the idea
being that all unsecured creditors are treated equally.
The mutated CVA, as adopted recently, does not treat all equal ranking
It specifically targets landlords, but uses the unaffected unsecured
creditors to get 75% acceptance.
The key role of the CVA adviser has become to cram the landlord’s collective
claim down to less than 25% of the voting creditors, and to ensure they get no
effective say in the process.
This is inequitable and against the spirit of the CVA legislation.
The insolvency community has cynically applied a positive concept, intended
to preserve jobs and encourage entrepreneurship in the UK, to become a
tool that benefits existing shareholders and secured creditors, who in turn may
have bought distressed debt cheaply.
The test for a CVA
The property industry should be asking for an urgent review of
the CVA legislation to ensure that all unsecured creditors are genuinely
treated equally, and that no sub-group of unsecured creditor is materially
disadvantaged opposite others.
We should also ask that companies proposing a CVA have to meet certain
prescribed tests in terms of transparency and shared risk/consequence as part of
a CVA proposal.
I would suggest that these include:
■ Up to date accounts at time
■ Pro-forma balance sheet and
projected P&L post CVA
■ Fully costed turnaround plan
with third-party validation that the turnaround is credible
■ Individual store trading
figures provided to allow analysis of true rent affordability on a shop-by-shop
level, and transparency that landlords are being treated fairly
■ A structure whereby the
shareholders and other creditors are also taking a reduction in their
liabilities and/or committing genuine fresh risk capital (this should not be a
senior secured equity cash injection that ranks ahead of other creditors, as
proposed in many CVAs)
■ A clause whereby any landlord
has an option to take back a lease immediately post-CVA – this should apply to
stores that are not having rent reductions as well as those that are. This would
create a disincentive to tenants trying to cherry-pick stores, they could find
they lose good stores in addition to dropping bad ones. It would hopefully mean
that only companies in genuine distress would risk a CVA.
■ That any store where the rent
is reduced is no longer deemed to have security of tenure within the Landlord
and Tenant Act 1954. This would give a landlord the option to recruit a better tenant
at a genuine market rent in the future.
These steps would facilitate genuine corporate restructurings, which is a key
part of fostering a true enterprise culture in the UK, while stopping the
current practice of rather cynical “non-restructurings” that prejudice one
creditor class (landlords) while failing to address genuine corporate failure
Stand united against CVAs
The property community needs to urgently request that government reviews the
way CVAs are being used.
However, before we can credibly do this, we must start to oppose CVAs en
There is a quandary here in that landlords with ‘Category A’ stores that are
unaffected by a CVAs need to stand with their fellow property investors, whose
rents are falling and leases being negated, and object to the process in
principle, rather than merely serving their own short term interest.
If we don’t stand united then the CVA bandwagon will roll on and it will be
increasingly used by non-insolvent businesses to shed liability for leases.
This undermines the value of a lease, disadvantages reputable and solvent
businesses and ultimately the investment characteristics of real estate as an
asset class – just think what a WeWork CVA would do to the London office
Retailers such as PoundWorld may simply be following poor precedents used by
others but, as it stands, fails to meet the criteria set out above.
Is this CVA an opportunity for landlords to say “enough is enough”?
It probably won’t stop the CVA being approved, but it would be the first step
towards addressing what has become an increasingly inequitable process.
After all, the industry cannot meaningfully lobby for change when a large
group of landlords allow the undead to walk among us.