The pros and cons of an increasingly commonplace option are examined by Alan Meek, head of corporate insolvency and restructuring at law firm Morton Fraser.
Over the past few years, company voluntary arrangements (CVAs) have become the go-to remedy for retailers facing falling footfall, business uncertainty and unsustainable, expensive fixed costs on the high street.
It was not all that surprising, therefore, that Arcadia Group, facing all of the usual current woes of retailers but additionally burdened with a considerable pension deficit, proposed CVAs earlier in the summer.
The particular woes of Sir Phillip Green and his retail empire have been hard to avoid over the past few years. The manner in which control of a fatally distressed BHS (with a hefty pension deficit) was passed to an inexperienced and underfunded new management team prior to its insolvency subsequently drew an almost unprecedented level of personal criticism of Sir Philip and his wife and put them, and indeed their personal and public behaviours, firmly in the public eye.
Faced with more distressed businesses to deal with, it is not surprising that Arcadia therefore chose to go down a route (CVAs) that, while not free from controversy, at least had the merit of being reasonably transparent, public and also the kind of thing other retailers have proposed to save troubled retail chains.
One does wonder whether Arcadia – whose brands include Topshop, Miss Selfridge and Dorothy Perkins – would have proceeded down the CVA route if the offloading of BHS had turned out less unhappily for the Greens.
Indeed, one wonders why the Greens decided to do what they did with BHS rather than doing what they are now doing with the Arcadia Group companies. One would be tempted to say that the outcome for BHS had a CVA been proposed and when BHS was still part of the Green’s group of companies could ever have been worse than what happened to it under the control of Mr Dominic Chappelle.
A more favourable outcome for the business, its employees and its creditors may have been overlooked in order to attempt to minimise the costs to be borne by the BHS shareholders.
Arcadia’s CVAs can be seen as part of the continuing struggle between retailers and landlords as to who should bear the pain of falling high -street sales across the UK. It is a balancing act of course – landlords need retailers and retailers need landlords – and so whenever a CVA proposal is put forward, the question is, “can the affected landlords be persuaded (or in the absence of persuasion, forced) to accept the cuts that are being proposed?”
There are two elements to the answer to that question – (i) can enough creditors be persuaded to vote in favour of the CVA; and (ii) even if the answer to (i) is “yes”, does the CVA avoid being “unfairly prejudicial” to any affected creditor? Landlords have undoubtedly become more amenable to accepting the principle of CVAs but have simultaneously become more nuanced about their responses to CVAs.
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Previously, one might have expected an affected landlord to simply vote against the CVA. Now, sophisticated landlords are far more likely to engage with the proposing management and seek to have the proposals amended to more closely meet the requirements and (hopefully) realistic objections of landlords. Where agreement cannot be reached on an acceptable form of proposals, landlords are clearly now prepared to challenge CVAs in court.
This, in turn, means that those companies who are proposing CVAs have to be more realistic about what they are offering to landlords and have to be cognisant of the very real risk that proposals will be challenged even if approved by creditors at the initial CVA meetings.
CVAs are not a bad thing per se. They can be the best solution for all parties.
The alternatives to CVAs can include desperate measures and full insolvency (the “offloading” and subsequent administration and closure of BHS for example) which may lead to greater prejudice and loss for landlords and other stakeholders.
However, if a retail chain considers that its costs are unsustainably high and that a reduction in rent/the number of trading outlets is the only way to proceed that will give it a reasonable chance of survival as a profitable entity, CVA is not the only way forward. It is possible to have negotiations with landlords outside of a CVA to seek an agreed reduction (permanent or temporary) or surrender of lease.
But there are difficulties with that kind of approach – any landlord agreeing to such proposals will have to get something in return and in larger chains it may be commercially impossible to progress many different simultaneous negotiations across the portfolio.
An outcome whereby only some landlords are amenable to variations is unlikely to be a sufficient answer to a retailer’s problems. The attraction of a CVA is that allows all landlords to be dealt with at the same time and avoids the risk of only partial “buy-in”.