High Court CVA clarification for landlords

cva retail Oct 03, 2019

Recently 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:

Items 1, 2, 4 and 5 were rejected by the High Court, although item 3 was upheld, meaning that the landlord...

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Proposed HMRC preferential status a blow to financing and restructuring

The Government last week published its new draft Finance Bill, which includes the proposal to restore HMRC preferential status as a creditor for distribution in insolvency. This was originally granted in the Insolvency Act 1986 but removed by the Enterprise Act 2002.

In summary, HMRC is currently an unsecured creditor ranking equally with suppliers as trade creditors and unsecured lenders for any pay-out to creditors from an insolvent company. The preference would mean they get paid ahead of unsecured creditors leaving less or nothing for most creditors whose support is necessary when restructuring a company.

There had already been considerable consternation expressed by insolvency practitioners and investors after Chancellor Philip Hammond announced the proposal in the Spring, but it seems the Government has decided to press on making only a light amendment to the effect that preferential status will not apply to insolvency proceedings commenced before 6 April 2020.

The...

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UK business rescue culture isn’t working and new proposals won’t work

Since the Cork Report in 1982 that led to the Insolvency Act 1986 (IA86) there have been a number of initiatives that have led to legislation aimed at promoting a rescue culture in UK.

The shift was from a penal approach to insolvency one based on a belief that saving insolvent companies by restructuring offers a better outcome for all concerned than the alternative of simply closing them down.

This can be achieved by putting the company into Administration, where an IP (Insolvency Practitioner) takes over the running of the company, including negotiating with creditors with the aim of saving the company or at least saving the business by selling it to new owners. In addition to benefitting secured creditors Administration also helps save jobs.

The alternative is a CVA (Company Voluntary Arrangement) where the directors effectively reach agreement with creditors for revised payment terms such as “time to pay” and sometimes for a write down of the debt as a condition...

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Why do so many CVAs fail?

cash flow cva insolvency smes Aug 22, 2018

My blog earlier in the year (17 May) asked whether the use of CVAs was “a triumph of hope over reality” as they had been increasing noticeably in the High Street retail sector, which has suffered an escalating rate of insolvencies.

A CVA (Company Voluntary Arrangement) is generally used to help a company in financial difficulties by restructuring its balance sheet and reorganising its operations to survive and trade its way out of insolvency. A key aspect of the financial restructuring is reaching agreement with creditors for payment of a lump sum or regular payments over a defined period which is typically three to five years where the payments may be less than the amount owed.

Instigated by the directors, approval of a CVA requires 75% of unsecured creditors where the payment terms are binding on any dissenting creditors providing they are less than 25%. Generally, the earlier a business enters a CVA the better, although they can be used as a means of dealing with a...

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