CVAs: where are we now?

The company voluntary arrangement was introduced by the Insolvency Act 1986, following a recommendation in the 1982 Report of the Review Committee on Insolvency law and Practice (the Cork Report), which advocated a “rescue culture” and identified the need for a streamlined procedure to restore companies to profitability to the longer-term interests of creditors. The principal purpose of a CVA is well known: the survival of a company as a going concern by way of a reorganisation of its debts, and at the same time ensuring a better outcome for its creditors as a whole than they would receive in an administration or liquidation. Notwithstanding the appeal of the CVA, and the fact they have been around for nearly 40 years, it is only in more recent years they have risen to prominence in a string of high-profile cases, following criticism from landlords who complained of unfair and prejudicial treatment in comparison to other classes of creditors. Picking on the landlord The statutory rules do surprisingly little to curtail what a company is able to propose by way of a reorganisation of its debts. Many debtor companies sought to take full advantage of this in early CVA proposals, which included terms such as: the stripping of guarantors; imposing a moratorium on a landlord’s right to forfeit; and forcing landlords to accept surrenders. Such provisions undermine basic tenets of property law: an example of the modern conflict between the law of tenure and the law of contract. However unfair such terms were to landlords, once 75% of all creditors (by value) had approved the proposal, landlords were deemed bound. It was unsurprising when some landlords challenged CVA proposals under section 6(1)(a) of the Insolvency Act 1986 as being unfairly prejudicial. Such challenges succeeded in shaping and redrawing the boundaries of what a CVA proposal is, and more specifically, is not able to do, in relation to leases. The current position? Typically, in a retail CVA, the debtor company’s leases will be organised into categories by reference to the financial performance of the business, with the most profitable sites paying full rent, marginal stores seeing sizeable rent reductions and unprofitable stores closed. A CVA that differentiates between members of the same class in this way does not constitute unfair prejudice: Cazaly Irving Holdings Ltd v Cancol Ltd [1995] EGCS 146 (commonly known as Re Cancol). To seek a balance for those landlords forced to take a reduction in rent, a CVA will typically include a landlord’s termination right, whereby the landlord can elect to either call for an assignment, surrender or may forfeit the relevant lease by serving notice within a specified timeframe. Such provisions may work from a simple contractual analysis, but there are a number of complications readily identifiable to a property lawyer, and which may serve to defeat the landlord’s ability to end the lease. The first pitfall for a landlord will be the notice provisions of the CVA. A landlord will generally have to serve a notice in the correct form within the specified timeframe permitted by the CVA. Even if a correct notice has been given under the CVA, it may not be valid to terminate a lease. For example: An option to surrender in a CVA amounts to an agreement to surrender. If the lease is protected under the Landlord and Tenant Act 1954, such an agreement is rendered void by section 38, unless the relevant notice is first served on the tenant in accordance with section 38A. Such notices cannot practically be served before the CVA is approved. If a landlord elects to forfeit, there must be an underlying breach entitling the landlord to do so. Issues of waiver may also arise where a landlord has accepted rent following the approval of the CVA. A new form CVA will likely contain confirmation from the company that it will not seek to challenge any forfeiture or seek relief. It is doubtful whether such a clause is enforceable, or whether a court would have regard to it when deciding whether to grant relief. Following Discovery (Northampton) Ltd v Debenhams Retail Ltd [2019] EWHC 2441 (Ch); [2019] EGLR 47, it is now clear that a CVA cannot abrogate the landlord’s proprietary rights. A CVA cannot, therefore, fetter the landlord’s right to forfeit, nor can it force a landlord to accept a surrender. A right to vary the lease to insert a tenant break would arguably also be void. Modern CVAs often contain provisions permitting the company to terminate its liabilities under a lease and, as an incentive to the landlord to accept a surrender, typically offer a contribution towards the company’s dilapidations liability. The treatment of guarantors under a CVA has seen the most litigation. Historically, some CVAs were used as a device for guarantee stripping. Prudential Assurance Co Ltd v PRG Powerhouse Ltd [2007] 3 EGLR 131 established that a CVA could not, as a matter of contract, operate to release a guarantor as the guarantor was not a party to the proposal and held that such a provision unfairly prejudiced landlords. A similar conclusion was reached in Mourant & Co Trustees Ltd v Sixty UK Ltd (in administration) and others [2010] EWHC 1890 (Ch); [2010] 2 EGLR 125. It is now difficult to envisage a scenario whereby a court would sanction the complete release of a guarantor, but CVAs often seek to limit the liability of guarantors by, for example, writing off pre-CVA debts. Landlords still need to remain alive to the fact that a CVA may impact their recourse to a guarantor. CVA proposals now look markedly different from those which a landlord may have expected to see in 1986. What remains unchanged, however, is their unpopularity. Many landlords still feel, perhaps with reason, that they are getting a raw deal compared to other classes of creditors. Forty years on, we still expect to see challenges and changes. Mario Betts is a managing associate at Stephenson Harwood and Elizabeth Fitzgerald is a barrister at Falcon Chambers Image © Mark Thomas/Shutterstock