Proposing a Company Voluntary Arrangement (CVA) is currently a popular option for companies facing financial difficulties. Creditors of companies such as BHS, Prezzo, Toys R Us, Maplin, Byron Burgers and New Look have all recently agreed to the companies operating under CVAs. Several other retailers are rumoured to be likely soon to follow suit.
The aim of a CVA is to help a company overcome its financial difficulties and continue to trade, and that objective is achieved by reducing the company’s outgoings. With rent often being one of the biggest of these, CVAs can often have a considerable impact upon landlords.
The impact of CVAs on creditors can be complex and well advised landlords should act with caution before approving them. The decision of the High Court in a recent case concerning the BHS CVA raises interesting questions about a company’s obligations following a CVA’s failure.
As is usually the case, one of the terms of the BHS CVA was that BHS’ landlords would accept a reduced rent. The CVA terminated, and BHS went into liquidation. The question for the court was whether Prudential, as one of BHS’ landlords, could claim the full amount of rent due under the lease and, if so, from what date?
The BHS CVA expressly stated that upon its termination “the compromises and releases effected under the terms of the CVA shall be deemed never to have happened, such that all Landlords and other compromised CVA Creditors shall have the claims against [the Company] that they would have had if the CVA Proposal had never been approved (less any payments made during the course of the CVA)”.
Prudential claimed that in light of this clause it should therefore receive all of the rent which fell due while the CVA was ongoing (not only the compromised amount), and that some of that should be as an expense of the administration.
The High Court ruled in Prudential’s favour, finding that the rent concession was only ever a temporary regime and that BHS had to repay the rental discounts which it had agreed with Prudential. While much of the judgment is fact specific, it made the following points of general application:
If in doubt, we recommend that you seek legal advice. CVAs are long, complex documents, often hastily drafted, and their provisions can be open to interpretation. While landlords may be keen to minimise their losses at the outset and try to avoid void periods, they should concurrently consider the other possible long term results of approving such concessionary arrangements.
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