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Cash Flow & Forecasting Insolvency Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

High Court CVA clarification for landlords

High Court ruling for landlords on CVARecently in the High Court landlords challenged the validity of the CVA (Company Voluntary Arrangement) that was approved for the High Street Debenhams retail chain.
The store chain had announced that its restructuring plan based on the closure of 50 stores and rent reductions for up to 100 others.
Major shareholder Mike Ashley, owner of Sports Direct, had sought to challenge the CVA after the board of Debenhams rejected his offer to buy the chain for £200 million. His shareholding was wiped out when the company went private as part of the rescue and restructuring deal, which was approved by 80% of its landlords.
Although Ashley withdrew his own challenge to the CVA, he continued by backing a legal challenge from Combined Property Control Group (CPC) as landlords who owned several properties.
According to CMS Law the five grounds of the CPC challenge were:

  1. Future rent is not a “debt” and so the landlords are not creditors, such that the CVA cannot bind them;
  2. A CVA cannot operate to reduce rent payable under leases: it is automatically unfairly prejudicial;
  3. The right to forfeiture is a proprietary right that cannot be altered by a CVA;
  4. The CVA treats the landlords less favourably than other unsecured creditors without any proper justification;
  5. There is a material irregularity: the CVA fails to adequately disclose the existence of potential “claw back” claims in an administration.

Items 1, 2, 4 and 5 were rejected by the High Court, although item 3 was upheld, meaning that the landlord retains the right of re-entry and to forfeit a lease and therefore this right cannot be modified by a CVA.
This means that if they choose to, landlords can take back their property, although in the current perilous circumstances in the retail sector it is questionable if this would be in their interests given the difficulties they might have in finding an alternative tenant and their liability for rates even when the property is vacant.
The findings did however leave open the prospect of a challenge over the reduction in the rent value if it could be proven that it was below the current market value.
Given the growth in the use of CVAs to exit unwanted leases and reduce rent in the struggling High Street retail sector, the High Court judgement is to be welcomed, both for those retailers hoping to survive by restructuring their businesses onto a hopefully more sustainable footing by reducing their overheads, and for landlords, who now have some clarity about their position in such cases.

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Banks, Lenders & Investors Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

Joined-up Thinking on Retail?

Everybody and his wife has an opinion on what should be done to revive the UK’s High Streets and retail.
They range from the defeatist “the High Street is dead” thanks to online shopping to the Portas Pilots that have given 27 towns in England approximately £100,000 each to try out new ideas.
We’ve had the pop-up shop idea, policy changes on planning, calls for a review and reduction of business rates and calls for the scrapping of town centre parking charges.
Now Bill Grimsey, former Chief Executive of Wickes has decided to do what he calls an alternative review of the High Street, after calling all of the above “tinkering at the margins”. He believes what’s needed is a complete solution encompassing health, education, housing and leisure as well as shopping.
K2 Business Rescue agrees.
People define the High Street in different ways but what’s really needed, we believe, are integrated communities that put less emphasis on shopping as a destination activity. 
For example it used to be the case in the City of London that there was nothing but acres of offices. There was nowhere one could pop out to buy a shirt, or a gift, or perhaps a few groceries. That has changed and it’s a principle that can be applied in High Streets around the country.
Stop press:  Latest to come from a review of Portas Pilots is a proposal to allow more empty shop to residential conversions in town centre side streets to stimulate footfall.  http://tinyurl.com/nj2knoy

Categories
General Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

A Business in Difficulty Can Terminate its Property Leases and be Fair to Landlords

In April 2009 the retailer JJB successfully proposed a CVA designed to save 250 stores and 12,000 jobs. It has become the model for subsequent CVAs in the retail sector.
The proposal included closing 140 unprofitable stores but made available a fund of £10m for the landlord creditors of these premises, equating to a payment of approximately six months rent and JJB also made a significant compromise in bearing the substantial costs of the business rates of the unprofitable stores.
No leases were ‘torn up’ by the CVA and it was left to individual landlords to decide whether they wished to accept a surrender, consent to an assignment or forfeit the lease. The landlords as a group recognised that there was a substantial risk that JJB would go into administration, with a loss of their payments of rent or business rates for the closed stores and appreciated being consulted in a transparent process and being offered a genuine compromise.
It often happens that the core of a struggling business is viable and it need not go into administration if it can be restructured to focus on the parts that are profitable.
That can be beneficial to the creditors too, because they will then see some return on what they are owed, as the above example illustrates. In many cases the creditors will include landlords who own the property or properties from which the business is trading.
The forced termination of a lease can only be done by a liquidator following a company’s liquidation. If a company goes into administration and is sold the Administrator can also force termination of those leases no longer required.
However, in the JJB illustration negotiation with the landlords to terminate some leases was made possible by proving to them how much they would receive in the event of a liquidation and showing that the alternative offer set up using a Company Voluntary Arrangement (CVA) was better than liquidation.
Forcing a change in the terms of a lease is extremely difficult and the courts will want to test whether or not a landlord has been treated fairly as a creditor in a CVA, regarded as vertical and horizontal tests.