Lawbite: CVAs – fit for purpose in an economic downturn?

• United Kingdom

• Real estate
• Real estate dispute resolution
• Real estate litigation - LawBite

10-08-2022

Company voluntary arrangement research report for the Insolvency Service

In light of the Bank of England’s warning on 4 August 2022 that a significant economic downturn is expected, The Insolvency Service’s recent release of the results of its review into the practice of Company Voluntary Arrangements (CVAs) and their effect in particular on landlord creditors seems to have come into even sharper focus.

The result will be of particular interest to those in the retail and hospitality sectors where a number of CVAs have led to challenges from landlords.

The report concludes that whilst landlords are the category of creditor to be impacted most often by CVAs, they are nonetheless broadly treated equitably compared to other classes of unsecured creditors as:

1. they are usually afforded a choice if they are unhappy with the terms: to challenge the CVA, to stay with the CVA terms or to take the property back (usually utilising a termination right introduced by the CVA)
2. they tend to have disproportionately larger voting rights than other groups of creditors – comment was made as to the methodology when valuing landlords claims for future sums such as rent, service charge, insurance, dilapidations, which may become due under the lease which are difficult to quantify
3. the voting does not appear to be skewed by the impact of unconnected creditors

The report acknowledges that the research and conclusions do not fully reflect the adverse effect CVAs might have on a landlord as they did not consider some lease liabilities that may be compromised, including rent and service charge arrears and dilapidations. 

It was also recognised that the existing framework for CVAs allowed a great deal of flexibility where it came to drafting CVA proposals.  This made it difficult for comparison to be made between the various proposals.

Key points:

• a CVA is a procedure under Part I of the Insolvency Act, which allows a company to come to an arrangement with its creditors over the payment of its debts
• CVAs have become increasingly popular as a vehicle for companies to come to arrangements with its creditors over the payment of its debts
• many see CVAs as a valuable and effective tool for the restructuring of companies whilst other have been arguing for some time that CVAs have too often been used as a tactical tool to target landlord creditors to their detriment and/or redraft lease agreements
• it will be interesting to see what the Insolvency Service now choose to do with the report. Given the conclusions it is very unlikely that an overhaul of the CVA regime is on the cards but the conclusion may form the basis for some legislation to tackle some of the issues identified. For example they may choose to address some of the criticism raised in the report as to the length and clarity of proposals and the level of consultation carried out with key bodies/ stakeholders as part of the CVA procedure
• with the Bank of England predicting some tough economic times, many landlords will consider that the Insolvency Service review is too thin and they will remain the most-exposed category of creditor for those businesses looking to restructure as a consequence of an economic downturn