CVAs have their limits – but landlords have more to worry about

COMMENT: Company voluntary arrangements are an essential rescue tool, and we should all be promoting them. While some landlord communities feel aggrieved, there is no need to change legislation to remedy this. However, landlords could and should feel angered by other government actions that will hit them even harder than other stakeholders. I read with interest the article by Melanie Leech, the well-respected chief executive of the British Property Federation, entitled “The abuse of CVAs must end”. I agree with a large number of her comments, but I disagree with her proposition that legislative changes are needed. One of the most useful things about CVAs is their flexibility. They can propose literally anything to seek the rescue of the debtor company. Another great advantage is their approval by the creditors. Liquidations and administrations are forced upon creditors and, quite frequently, forced upon the debtor company too. The liquidators and administrators usually sell the assets quickly, and the creditors have no input into this process. This can lead to complaints of perceived unfairness, or a lack of transparency, especially with pre-packs. CVAs avoid this. The main limitations to CVAs are their inability to limit secured creditors’ rights of enforcement without their consent, nor can they propose that unsecured creditors get paid any dividend unless preferential creditors are paid in full. Challenging the arrangement As a CVA can propose anything, the Insolvency Act 1986 includes a right for a creditor to challenge its approval. There are two ways to challenge a CVA. One is material irregularity – usually on the basis that the proposal does not include all relevant details, or the meeting was improperly called or votes counted. The second is unfair prejudice. The court may look at how the creditor is treated in the arrangement as opposed to no arrangement, for example, so a CVA that sought to reduce the rent to below market rate would be considered unfairly prejudicial, and also how the creditor is treated compared to other creditors (vertical and horizontal comparisons). Leech argued that the CVA regime “leaves it wide open to abuse and to the unfair prejudice of a single class of creditors”, which can only be solved by a change in legislation. I do not believe this to be true. If the CVA is unfairly prejudicial to a class of creditors, the law already exists for it to be successfully challenged. However, I can understand landlords’ reluctance to make such an argument in court. As well as the difficulties in proving its case, even if successful, this could lead to the failure of the CVA, the debtor company being placed into administration, and the landlord recovering even less. But this is true for every creditor wishing to challenge a CVA. All unhappy creditors will naturally undertake the vertical comparison, and assess their likely recovery in the CVA compared to their view of the likely alternative if their challenge is a success. Crown preference The government has responded to Covid-19 with unprecedented support for many businesses. Once we are out the other side of the pandemic, the main unsecured creditors for most debtor companies will be government for unpaid taxes and loans, and landlords for unpaid rent. In the 2018 Autumn Budget, the government announced it would re-introduce Crown preference for (mostly) PAYE, VAT and employee’s NICS. This came into force on 1 December 2020. It would seem that everyone aside from the Treasury believed this was an error and bringing it into force during the pandemic makes its consequences even worse. The government’s own projections showed only £185m of revenue would be made from this change in status, while UK Finance believed £1bn of funding would be lost to debtor companies because of the impact this has on a bank’s likely floating charge recoveries. To continue with this short-sighted measure when debtor companies are in dire need of more funds is foolish in the extreme. In addition, as CVAs cannot propose payment to ordinary unsecured creditors unless preferential creditors are paid in full, it means few will even be attempted given the difficulties that will be faced in gaining approval. Why would any unsecured creditor vote in favour of waiting around for a few years for a meagre dividend whilst the company tries to make enough money to pay off the taxman? It also makes landlords the unwitting stooge of the pandemic. By reintroducing Crown preference, the government’s assistance has led to increased preferential debts that will be repaid at the expense of the other unsecured creditors, primarily landlords. It is landlords, forced to sit on their hands for the last year and with significant rent arrears, that will be obliged to bear the brunt of the many anticipated insolvencies. Stewart Perry is an insolvency partner at Fieldfisher Picture © Fieldfisher