Voluntary arrangements from UK companies: 10 key takeaways for landowners from government research | Hogan Lovells

Corporate Voluntary Arrangement (CVA) is an insolvency process that has raised serious concerns among commercial property owners in recent years about its use by corporate tenants to change tenancy terms, write off arrears and recalculate future lease liabilities. Some landlords feel they have been unfairly targeted by CVAs, particularly in the retail and casual dining sectors, to the benefit of other creditors.

This is the background to a research paper commissioned by the Insolvency Service and published on June 28, 2022. The central question posed to researchers was “Are owners treated fairly, relative to other creditors, in large company CVAs…?” to which the answer was “widelyYes they were. But what are the details behind this overall conclusion and what should owners take away from the report? Here are 10 takeaways:

  1. Homeowners are almost twice as likely to have their rights compromised in a CVA than any other category of creditors. In the sample of CVAs the researchers looked at, owners were compromised 93% of the time. The second most compromised class was that of intercompany creditors at 51%.
  2. Average compromises for homeowners compare “favorably” to other creditors. One of the main reasons the researchers concluded that the owners were “widelytreated fairly compared to other creditors was that they were subject to an average compromise of 43% compared to 44% for non-critical commercial creditors, 48% for business-to-business creditors and 39% for local authorities.
  3. But the the level of trade-off for landowners may be much higher than the report suggests. As the researchers put it, the report “doesn’t tell the whole storybecause it relates only to the compromise of future rents and not to other losses suffered by landlords, such as the conversion of turnover into rents and the compromise of rent arrears, rental charges and obsolescence. The report concludes that “the overall rate of compromise vis-à-vis owners is likely to be underestimated”.
  4. The impact on landowners is skewed by intact “Class A owners”. The average compromise for homeowners was 43% but “this is an average over all owners, including those whose debts have not been compromised”. The average among “compromised B, C and D category owners” was 64%.
  5. The data set is small. According to the report, 747 companies offered CVAs during the target period of 2011 to 2020. The researchers only looked at “large” companies in the retail and food and beverage sectors, which which brought the number down to just 82. Of these, 59 CVA proposals were obtained and analyzed – of these, the researchers (a team of financial consultants) were themselves involved in the production and/or overseeing 8 (or 14%) of the proposals. No CVA proposal was considered for the years 2011, 2013, 2014 or 2015.
  6. The impact of vote discounting has not been taken into account. According to the report, one of the key “checks and balances” in place to ensure CVA proposals were fair was that 75% by value of creditors must vote in favor for a proposal to be approved. Researchers found that the proportion of creditors approving proposals was typically 85% or more of those who voted. They concluded that thissuggests landlords are likely offering support, given that landlords typically make up a large portion of claims for voting purposes”. However, this ignores the fact that owners’ votes are usually heavily discounted, sometimes as much as 75%, which turned out to be an irregularity in the recent case of Carraway Guildford (Nominee A) Limited v Regis UK Limited [2021].
  7. “Voting congestion” was not taken into account. The report does not break down votes for CVA proposals to see how many were approved based on intact and/or non-owner creditors voting in favor. This should be a key consideration given the court’s finding in the recent case of Lazari Properties 2 Limited v New Look Retailers Limited [2021] this “There would be good reason to conclude that it was unjustly prejudicial when a CVA, which compromises the claims of a subgroup of creditors, is only obtained because of the votes of large sections of creditors who are not not affected by CVA”. Unfortunately, the researchers did not undertake an analysis of creditor votes because “It was not part of this research, and it would probably be a time-consuming exercise.”.
  8. But that could be the subject of a future consultation. The researchers suggest, however, that any proposed changes to the law to exclude uncompromised creditors to avoid vote flooding should be subject to stakeholder/industry consultation.
  9. CVA proposals are long and impenetrable. According to the researchers, the CVA proposal documents were “extremely long and legalistic”, some up to 300 pages. Even their “own CVA experts have sometimes struggled to fully understand the returns of different classes”. They recommended executive summaries, standardized tables, and the inclusion of post-CVA reviews.
  10. Further consultation was recommended. The researchers also recommended a change to the insolvency guidelines to require company directors and their agents to consult the British Property Federation, on behalf of their member owners. If they are implemented, certain precautions will be necessary to avoid the risks of abuse, taking into account the experience Regis where was the candidatecriticized for siding with the Company in its “negotiating tactic” with the British Property Federation ahead of the CVA, during which the Company presented a proposal including provisions described as “aggressive” with the intention to make “concessions” in order to convince owners to vote in favor”.

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