The Insolvency Service has released its report on CVAs (the “Report”), which was commissioned in response to the significant concerns raised by the commercial property sector in recent years and the legal challenges launched by landlords against a number of CVAs.
In findings which are likely to be a further disappointment to landlords, the Report concludes that landlords have been, broadly, equitably treated under the CVA Proposals reviewed. The Report’s suggestions are limited to the length and clarity of each CVA Proposal and better consultation, falling significantly short of what landlords had hoped for.
The outcome is that landlords remain in the unsatisfactory position that companies can continue to use CVAs as a way of divesting unprofitable units, which they freely contracted for, with only the option of taking court proceedings to challenge a CVA available, a time consuming and costly exercise. After the raft of unfavourable court decisions, whether landlords have the appetite to pursue further challenges without any prospect of reform remains to be seen.
Based on a sample of 59 CVA Proposals, the Report answers three key questions posed by the Insolvency Service as follows:
“How do outcomes for landlords in large business CVAs from either Retail trade, Accommodation or Food and beverage service activity compare to other creditors?”
The Report analyses the rent reductions provided for under the CVA Proposals for future rent only, and finds that the level of compromise for compromised landlords in categories B – D ranges from 46% to 85%, which compares favourably with the compromise given to other key categories of creditor (Intercompany 81%, Local Authorities 82%, non-critical trade creditors 88% and HMRC 89%).
Likewise, the Report also finds that the average level of compromise for all landlords is only 43% when including those landlords whose debts were not compromised under the CVA Proposal, which again compared favourably to the average level of compromise given to the other key categories of creditor (Intercompany 48%, Local Authorities 39%, non-critical trade creditors 44% and HMRC 23%).
The Report does recognise that the analysis of the level of compromise becomes more nuanced when considering CVA Proposals which split landlord creditors into categories (which is of course the position under most CVA Proposals) and also acknowledges that there are additional areas of compromise imposed on landlords including a move to turnover rent, rent arrears, service charge and dilapidations, which have not been assessed as part of the Report. The conclusion reached to this first question is therefore not the full picture for landlords.
“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 focusses largely on answering this question and identifies as “checks and balances” to the CVA Proposal system the ostensibly high voting thresholds which must be met to approve a CVA Proposal, the various grounds on which to challenge a CVA Proposal and the discretion for the insolvency practitioner to admit landlord claims for unliquidated damages for voting purposes at a higher value than £1.
The Report notes there is some criticism in respect of the level of discount applied to the value of unliquidated elements of a claim but states that investigating this aspect of the CVA Proposals was not within the scope of the Report. Likewise, the Report does not consider complaints around “vote swamping” (where the requisite majority is reached by reason of the votes of a notional class that is treated more favourably) and simply notes that the CVA process does not fully address this issue.
Indeed, the Report states that, as commercial landlords are able to vote for the value of outstanding debt together with the unexpired elements of their lease, they typically have larger claims and associated voting power than other unsecured creditors.
This observation appears misconceived and does not reflect the reality that companies: (1) often (pre-Covid) discharged most (if not all) of their rent debt before making a CVA Proposal in order to limit compromised landlords’ voting power or (2) the fact that a CVA Proposal will usually contain a significant discount on any future lease liability which can entirely distort the voting power of compromised landlords. Neither does this reflect the fact that CVAs can be structured so as to give more weight to the Category A landlords (by leaving rent debt unpaid and/or carefully selecting the number of landlords placed in this category) whose rights are compromised least by the CVA and who are therefore most likely to support the CVA Proposal, together with other uncompromised trade creditors who will vote in favour.
“If such a finding is made, to identify what specific levers in the framework are causing this issue and how”
The Report concludes that landlords have broadly been equitably treated by the CVA Proposals and it is suggested that the single most relevant lever that drives complaint is the lack of clarity in the drafting of the CVA Proposals. It concludes that the presentation of CVA Proposals could be standardised and improved. It is also noted that there could be increased consultation with the BPF in instances where landlords are being compromised by a CVA Proposal and where certain criteria is met (e.g. where there is a certain number of leases/landlords being compromised by the CVA Proposal).
Whilst clarity and consistency across CVA Proposals would no doubt be welcomed by landlords, we would observe that it is not the formatting of CVA Proposals which has formed the basis of legal challenges brought by landlords in recent years, but the effect of the provisions in the CVA Proposals.
Click here for the Report.
Any hope for a report which would shine a light on the way in which CVA Proposals have been structured and the disproportionate effect on landlords have been dashed. The Report has simply added another hammer blow to landlords following recent court decisions, though there may be some small solace in certain principles which came out of the New Look and Regis decisions, that vote swamping could indicate unfair prejudice (which will hopefully dissuade companies from adopting an inappropriate approach to the calculation of claims for voting purposes) and the end of the 75% blanket discount to the calculation of landlords’ future claims.
Whilst the Report accepts that it may understate the level of compromise for landlords, it is regrettable that it offers little more than superficial observations on incomplete statistics and does seem to be an opportunity missed to comprehensively analyse the issues faced by landlords in CVAs. Without that deeper analysis, the Report offers limited value and has effectively ended landlords’ hope of any legislature intervention in the CVA process.