Approximately 16 high street stores have closed their doors every day in the first half of 2019, while only nine opened, resulting in a net decline of 1,234 chain stores on Britain’s top 500 high streets. Many chains entered into Company Voluntary Arrangements to manage their financial troubles, but such arrangements can prejudice the interests of some creditors.
Major chains including Karen Millen, Jack Wills and Bathstore have gone into administration. A number of these administrations followed on from unsuccessful Company Voluntary Arrangements (CVAs). Most recently, Debenhams has entered into a CVA in an attempt to address its financial issues.
What are Company Voluntary Arrangements?
A CVA is an insolvency procedure specific to the UK. The procedure is intended to allow companies to avoid potentially terminal insolvency by coming to a binding agreement or compromise with their creditors.
Typically a proposal for a CVA will include a rescheduling or reducing of the company’s debts, but this may also be part of a more complicated arrangement that balances the interests of many different parties. CVAs have potentially huge cash flow benefits as they allow the core business to trade on and generate income.
What is the Effect of a CVA on Creditors?
If 75% (by debt value) of a company’s creditors vote to approve the CVA, the CVA is accepted. All of the company’s creditors are then bound by the terms of the proposal even if they dissented, and regardless of whether or not they voted.
Once bound by a CVA, a creditor is prevented from taking steps against the company that the terms of the CVA prohibit. Typically these will be drafted to prevent the creditor from recovering any debt that falls within the scope of the CVA other than through an agreed mechanism set out in the CVA; or from enforcing rights against the company that arise from the company’s failure to pay the debt in question in full.
Challenges to CVAs
There are 2 grounds on which creditors may challenge a CVA:
An application to court to challenge a CVA must be made within 28 days of the CVA’s approval by creditors or, in the case of a creditor who was not given notice of the creditors’ meeting approving the CVA, within 28 days of the creditor becoming aware of the decision to approve the CVA.
If the challenge is upheld by the court then it may revoke or suspend the CVA and could order that further creditors’ meetings are called to reconsider the proposals.
The Debenhams CVA challenge
The High Court considered a challenge brought by a group of landlords against Debenhams’ CVA in Discovery (Northampton) Limited and others v Debenhams Retail Limited and others. In this case the landlords sought the CVA be set aside on the basis of both unfair prejudice and material irregularity.
In a victory for tenants, the High Court held that the CVA was not unfairly prejudicial to landlords, even though it (i) reduced rents by 35-50%; (ii) released Debenhams from dilapidations liability; and (iii) shortened the terms of some leases to January 2020.
The CVA was unfairly prejudicial, however, insomuch as it attempted to restrict the landlords’ right of forfeiture. However, this was deemed by the Court to be of little practical benefit, as most landlords will accept a reduced rent in preference of exercising their forfeiture rights and having to find a new tenant for the vacant property. Accordingly, whereas the landlords were successful in challenging the CVA on this ground, it was not sufficient to overturn the CVA; the Court simply ordered that the specific provisions restricting the landlords’ forfeiture rights be deleted
A Note of Caution
As demonstrated by the Debenhams case, even where creditors may be aggrieved by the terms of a CVA, challenges are relatively uncommon and often unsuccessful. This is because proceedings may be costly, the evidential burden is high, and the alternative is administration or liquidation which can be even more catastrophic. Nevertheless, challenge is possible, and should be considered in appropriate circumstances.
  EWHC 2441 (Ch)