The Report sought to answer the following three questions that had been put by the Insolvency Service:

• How do outcomes for landlords in large business CVAs from either the Retail trade, Accommodation or Food and beverage service activity compare to other creditors?
• Are landlords equitably treated, compared to other creditors, in large business CVAs from either the Retail trade, Accommodation or Food and beverage service activity?
• If such a finding is made, to identify what specific levers in the framework are causing the issue and how.

The short answer from the analysis? No: broadly, commercial landlords do not appear to be treated inequitably The analysis also concluded that the CVA remains an important, cost-effective and flexible restructuring tool available to debtors to enable to business to survive as a going concern.

The longer answer is, well, a bit longer, and the true position as to the compromises imposed on commercial landlords could well be understated. It is also likely that further analysis into the impact of CVAs on commercial landlords will be required.

Methodology

The report was asked to consider CVAs between 2011 and 2020 proposed by large companies in the Retail trade, Accommodation or Food and beverage service activities. Of the 5,106 CVAs proposed in that time, the Insolvency Service identified 747 that were proposed by companies in the retail trade, accommodation, and food and beverage sectors. Of these, 82 were proposed by “large” companies,¹.  The  authors of the Report had access to 59 of those 82 proposals and these  formed the basis of the analysis (the “Proposals”). The Report was therefore based on a review of just over 1% of the CVAs proposed in the relevant period and just under 8% of those proposed in the relevant sectors in that period.

Question 1: How do outcomes for landlords in large business CVAs from either the Retail trade, Accommodation or Food and beverage service activity compare to other creditors?

The headline numbers from the Report reveal that commercial landlords were compromised in 93% of the Proposals, compared with intercompany creditors in 51% and trade creditors in 49% of cases.

The level of compromise was more difficult to compare, as landlords were often split into different categories, with critical (or category A) landlords often being kept whole, and non-critical (or category B – D) landlords being significantly compromised. When considering only those landlords that had been compromised, the level of their compromise amounted to 63%, compared with 81% for compromised intercompany creditors and 88% for compromised non-critical trade creditors.

When averaged across all creditors in each class, landlords had an average compromise of 43% as compared to 44% for non-critical trade creditors and 48% for intercompany creditors.

The Report appears to show that whilst landlords were by far and away the class of creditor most frequently compromised under the Proposals, the average compromise for landlords was no greater – and in some cases smaller – than that for other creditors.  However, the Report acknowledges that this level of compromise by compromised commercial landlords is likely to be understated. This is because the Report did not assess the impact of other compromises  often imposed on commercial landlords in the Proposals, such as moving to turnover rent, and compromising rent and service charge arrears and dilapidations. Indeed, the scope was limited to a review of rent reductions for the duration of the CVA / rent concession period.

Question 2: Are landlords equitably treated, compared to other creditors, in large business CVAs from either the Retail trade, Accommodation or Food and beverage service activity?

The Report concluded that, broadly, commercial landlords are treated equitably. In reaching this conclusion, the Report identified a number of safeguards built into CVAs that require them to treat all creditors fairly, including:

• The Nominee: the requirement that a licensed insolvency practitioner be appointed as “nominee” to provide an independent opinion on the Proposal. The Report goes on to say that the nominee is often heavily involved in the drafting process, which may give rise to a perceived lack of independence.

• Voting:

  • The company’s unsecured creditors have the opportunity to vote on the Proposal, with a statutory majority of 75% in value of those creditors who vote being required to vote in favour in order for the Proposal to be implemented. There is a secondary protection here as the CVA will not be implemented even if the 75% threshold has been reached if those voting against it include more than 50% (by value) of all the unconnected creditors whose claims are admitted for voting.  Again the Report acknowledges that this does not exclude the votes of the unconnected but uncompromised creditors and therefore does not fully address the potential issue of vote ‘swamping’, where the CVA is approved through the votes of uncompromised creditors whose  rights are not being affected by its terms.  

  • Over half of the Proposals had received an approval rate of over 85% - which “suggests that landlords probably offer their support, given that landlords generally account for a large proportion of the claims for voting purposes in this sample”.  A non-landlord creditor’s right to vote is based on the value of its claim as at the date of the vote.  For a landlord creditor, the claim is adjusted to take into account  future rent on the unexpired proportion of the lease but a discount is often then applied. Despite this discount, the Report concludes the process of calculating landlord claims “can result in landlords who have relatively small debts due and payable at the time of the CVA having claims for voting purposes that are significantly higher”.   Although the Report notes the practice of discounting a landlord’s claim it does not go into it any further, despite the discount being a hotly contested issue on landlord challenges..

• Termination of lease:  A number of the Proposals allowed a compromised landlord the opportunity to take the premises back, and recent case law (Discovery (Northampton) Limited v Debenhams Retail Limited) has established both that a CVA cannot vary a landlord’s right to take the site back and that where a right to take the property back exists, it is not automatically prejudicial to alter the rents payable.  The landlords’ rights are accordingly similar to the rights of other creditors who are able to terminate their contracts if they prefer not to proceed with the CVA.

• Relevant alternative:  The relevant alternative to the CVA in all of the Proposals was either administration or liquidation, in which the anticipated return to unsecured creditors was between 0p – 3p in the Pound. Each of the Proposals anticipated a materially greater return to creditors, including landlords, in the CVA.  The report doesn’t go on to discuss whether the choice of administration or liquidation was appropriate in all cases or indeed whether an insolvent outcome was inevitable, a challenge that we have seen in a number of restructuring plans.

Question 3: If such a finding is made, to identify what specific levers in the framework are causing the issue and how.

The Report concluded that commercial landlords were broadly equitably treated in CVAs. The Report separately made a number of observations in relation to CVAs generally:

• Variation: The report noted that “the single most relevant lever that drives complaint is the degree of flexibility available when drafting Proposals”, which in turn provides for significant variation to creditor outcomes.

• Length and Clarity: CVA Proposals can be long, repetitive and difficult to understand.  The suggestion is made that each proposal should have:

  • An executive summary that clearly sets out options for each creditor;

  • Standardised tables setting out returns for each creditor, payment dates and where to find information about other creditors in each category;

  • A post-CVA balance sheet and forecast profit and loss account and cashflow for the duration of the CVA, with reference to any profit sharing or upside, or why this has not been included.

• Consultation with Key Stakeholders: the Report suggests an amendment to SIP 3.2 to mandate consultation with the British Property Foundation in certain circumstances prior to the Proposals being launched.

• “Vote Swamping”: in response to the criticism that uncompromised creditors can unduly influence the vote on Proposals, the Report noted that any proposed amendment to the CVA process to exclude the votes of uncompromised creditors from the statutory majorities would “represent a fundamental change to the CVA process and given the low potential return in the relevant alternative … uncompromised creditors may argue that they still have a very significant interest in the voting process.”

Conclusion

It is likely that the Report will not be viewed as addressing all of the criticisms  put forward by commercial landlords, and the British Property Federation has already suggested that further assessment and a more fulsome report is required. It  remains to be seen whether the Insolvency Service will call for further consultation on or assessment of possible amendments to the CVA process, or whether developments in this area will be left to the courts, although given the lack of new CVAs and RPs being launched at the moment it is unclear when such opportunities will arise.

Authored by Alex Snell, James Maltby, and Margaret Kemp.

References

1 A “large” company for the purposes of the Companies Act 2006 is one that meets two or more of the following         criteria: (1) turnover of more than £36m; (2) balance sheet total of more than £18m; (3) more than 250 employees.