Mutated CVAs are creating zombie high streets

Mutated CVAs are creating zombie high streets
Company voluntary arrangements (CVAs) have become a popular restructuring tool for companies with large property portfolios seeking to reduce liabilities to landlords. Morgan Garfield of Ellandi

considers the impact on landlords and the potential changes that need to be made to ensure all creditors are fairly dealt with.

What is the issue?

These zombie companies are not only a curse on landlords, but also place solvent retailers at a disadvantage.

CVAs were intended to be a process whereby creditors as a whole can voluntarily decide to support the restructuring of a business, reducing its liabilities to support its survival, and where all creditors benefit through greater recoveries than are likely from administration and liquidation.

A CVA requires 75% in value of unsecured creditors to support a CVA (and not opposed by more than 50% of independent creditors), the idea being that all unsecured creditors are treated equally.

The mutated CVA, as adopted recently, does not treat all equal ranking creditors equally. It specifically targets landlords, but uses the unaffected unsecured creditors to get 75% acceptance.

The key role of the CVA adviser has become to cram the landlord’s collective claim down to less than 25% of the voting creditors, and to ensure they get no effective say in the process.

This is inequitable and against the spirit of the CVA legislation.

The insolvency community has cynically applied a positive concept, intended to preserve jobs and encourage entrepreneurship in the UK, to become a tool that benefits existing shareholders and secured creditors, who in turn may have bought distressed debt cheaply.

The test for a CVA

The property industry should be asking for an urgent review of the CVA legislation to ensure that all unsecured creditors are genuinely treated equally, and that no sub-group of unsecured creditor is materially disadvantaged opposite others.

We should also ask that companies proposing a CVA have to meet ce

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About the author:

Anna joined the Restructuring and Insolvency team at Lexis®PSL in August 2013 from Berwin Leighton Paisner where she was a senior associate in the Restructuring Team.

Anna has worked on a number of large scale restructurings primarily in the UK market acting on behalf of lending institutions.

Recent transactions include the restructuring of a UK hotel chain and the administration sale of part of the Connaught group. Anna has also spent time on secondment at The Royal Bank of Scotland and trained at Clifford Chance qualifying in 2007.