British Home Stores (BHS) first opened its doors to shoppers in 1928. It quickly became a favourite with the public and firmly anchored its place on the High Street, fast becoming a household name.
BHS started 2016 with 164 stores and during the course of the year has been through a Company Voluntary Arrangement (’CVA’) and administration, with the last store closing in August and 11,000 jobs lost. It now only survives as an online presence employing a fraction of former staff and with a continuing controversy over the company’s pension liabilities and the running of the business in recent years.
The battle for BHS’s survival started with the CVA proposal and the company’s many landlords, including property giants such as Intu, Land Securities and Scottish Widows, braced themselves for the worst. In this article Kiran Notay looks at what a CVA can potentially achieve and landlord and tenant perspectives on such a procedure.
What was the purpose of the BHS CVA?
BHS entered a CVA on 23 March this year, approved by 95% of its creditors. A CVA is an arrangement between a struggling company and its creditors, pursuant to which the rights of certain creditors are compromised. A CVA is often used as a tool to pay creditors a reduced sum, or to defer payments to creditors until certain targets are met. As far as landlord creditors are concerned, it has also been used to adjust rental payments from quarterly to monthly and to render the quantum of rent dependant on the performance of the tenant’s underlying business.
BHS had a substantial property portfolio; the terms of many of its leases were agreed decades ago when the property market was booming, however in the current climate its rent bill was proving to be unsustainable. The purpose of the CVA was to reduce the level of BHS’ debts, in particular by lowering the company’s rent bill by switching to monthly rather than quarterly rental payments. This was seen as a means of improving liquidity, to revive the business and to prevent the company from entering a formal insolvency procedure. However, the CVA as a restructuring tool was unsuccessful in this case and the company entered administration at the end of April.
CVAs can in the right circumstances be a successful method of rescuing struggling businesses; however, there are instances where they simply delay the inevitable administration or liquidation of companies that are no longer viable. When faced with the prospect of entering into a CVA, there are both positive and negative aspects to consider, depending on what side you are on.
What are the advantages and disadvantages of a CVA?
Advantages
- Existing directors retain control
The board of directors and shareholders remain in control of the company (albeit under the supervision of an insolvency practitioner), though their existing management and operational practices may be subject to change. The existing management board are arguably best placed to oversee the evolution of the business, having a heightened experience and knowledge of running the company. - Lower management costs
The costs of entering into a CVA and managing the process are lower than that of entering into administration or liquidation. That said, CVAs are often proposed by a company in administration. - Creditors’ action stayed
Although there is no automatic statutory moratorium against creditor action (other than for small companies), it is typically a term of the CVA that all legal action by unsecured creditors is put on hold. Repayment demands are stayed and the company is given room to recover, safe in the knowledge that they cannot be hounded for repayments by what could be a lengthy line of creditors. However, a CVA binds all unsecured creditors, whether they voted in favour or not. - Prospect of greater recovery
If successful, a CVA should result in a better recovery for unsecured creditors than would have been achieved in an administration or liquidation.
Disadvantages
- Existing directors retain control
The board of directors retaining control can be seen as the individuals responsible for the company’s problems in the first place remaining in charge. - Secured creditors are excluded
Secured creditors, such as banks are not bound by the CVA, leaving the company’s continuing survival still open to an element of risk. - Adverse effect on credit rating
The company’s credit rating is negatively affected, making it more difficult to obtain credit and negotiate new agreements and supplies. - Longevity of a CVA
Typically a CVA will run for around 3-5 years; not all creditors will be willing to wait for that period of time to see their debts repaid. - Risk of failure
A CVA will fail if the company is unable to comply with its terms. This may be because the company could not raise a requisite level of capital or could not fulfil its regular repayments due to unanticipated trading conditions; if this happens then the company is likely to enter a formal insolvency procedure to resist action by its creditors.
How can a CVA be a useful tool for tenants?
The primary advantage of a CVA is its flexibility, enabling parties to agree realistic and commercially viable solutions. There is little limitation as to what directors can propose; this flexibility can be advantageous to creditors too, allowing for categorisation between unsecured creditors thus seeking to compromise the claims of only those creditors (such as landlords) who are posing a threat to the continued existence of the business.
Once approved, a CVA will bind all of the company’s unsecured creditors, even those that voted against it. The terms of a CVA are subject to directors agreeing not to unfairly prejudice the interests of any creditor and so as not to impact the rights of secured or preferential creditors without their consent.
A CVA can override an existing lease already in existence and re-formulate its terms and covenants. This suspends the contractual position between the landlord and tenant, for the benefit of the tenant and often at the immediate expense of the landlord. A CVA could potentially reduce rent, provide for surrender of a lease and/or remove a landlord’s right to forfeit a lease for breaches existing at the date of the creditors meeting.
Once bound by a CVA that includes a term such as a moratorium on creditor action, a creditor cannot embark upon recovering any debt that falls within the scope of the CVA or enforce any rights for payment of such debts. For a landlord, this would mean that it could not exercise any right to recover arrears of rent that were due prior to approval of the CVA; the tenant’s liability for future rent and other sums due under the lease will be payable under the terms of the CVA.
For CVAs that do not collapse into formal insolvency procedures such as administration, the directors can retain control of the company subject to adhering to the terms of the CVA and under the watchful regulation of an appointed supervisor. For prominent companies with a strong brand presence and public image, this can present any restructuring in a more positive way; the directors are seen as still holding a form of authority, the company is not prevented from trading in its shares and the overall value of the business is protected to an extent.
What should landlords consider when faced with a proposed CVA?
For landlords facing their hands being tied by a CVA, there can be both risk and reward. Some businesses consolidate and emerge stronger, with landlords’ positions secured in the form of regular long term rental income (though this is usually reduced) and a revived tenant. Other businesses will fail and enter formal insolvency processes, leaving landlords with losses in the short term – including non-payment of rent and potentially vacant properties with rates liabilities. However, a landlord may have the right to recover possession of their property if it is not being used by the insolvent company and arrange for it to be re-let or redeveloped.
At the CVA proposal stage, if a landlord creditor feels unfairly prejudiced by the CVA, it can apply to the court for an order directing that the CVA is revoked or revised. If there is a factual material irregularity in the conduct of meetings convened to approve the CVA that causes a creditor’s claim to be de-valued, there is also ground to challenge the CVA.
Challenges by a landlord must be submitted strictly within 28 days of approval of the CVA being reported to court, so landlords have to act swiftly in the period between the CVA being proposed and approved.
If the circumstances allow and a landlord does not wish to approve the terms of a CVA, it may be able to take action against its tenant to regain possession of demised premises prior to the CVA being approved. This allows it to avoid being tied in to the terms of the CVA and being free to deal with the property, for example if it has another prospective tenant lined up, offering better terms than those the CVA is likely to offer.