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Company voluntary arrangements: the BHS case study

Posted on 31 March 2016

Company voluntary arrangements: the BHS case study

BHS's recent financial difficulties have created headlines and caused some consternation among the landlord community. BHS is the latest of a number of high profile retailers who are seeking to restructure its business by proposing a Company Voluntary Arrangement (CVA) to its creditors. This arrangement can have serious implications for landlord creditors in particular.

A CVA is where a company enters into what is effectively a contract with its creditors, with the objective of avoiding an insolvent liquidation. CVAs are typically initiated by the directors of the company who circulate a proposal to creditors and shareholders for their approval. The proposal must be put to a vote, and approved by at least 75% in value of the company's unsecured creditors and by over 50% of shareholders.

Once approved, the CVA binds all persons who were entitled to vote, whether or not they did so, and all persons who would have been entitled to vote if they had notice of the meeting at which the proposal was voted on.

This means that creditors who vote against the proposal will potentially be bound by its terms. An insolvency practitioner supervises the CVA and its implementation.

CVAs have advantages: (1) they result in a company being relieved of its pre-CVA unsecured liabilities; (2) unlike some other formal insolvency procedures, CVAs do not require Court sanction and can therefore be cheaper; and (3) they can be combined with administration.

Conversely, the disadvantages of CVAs include: (1) the need for 75% of unsecured creditors to vote in favour; (2) the fact that they do not bind secured creditors; and (3) there is (except in limited circumstances) no moratorium on claims brought against the company.

Landlords can be particularly affected by CVAs, and the BHS plan is a good example of this, as it is heavily dependent on reducing rental payments on expensive leases.

BHS's CVA was approved by creditors and shareholders on 23 March. BHS has 164 stores. The CVA provides that different landlords will be treated differently as follows:

  • for 77 stores, all rent and other lease liabilities will be paid in full;
  • for 47 stores, rent reductions of between 50% and 75% are being sought; and
  • for the 40 remaining stores, BHS are proposing rent reductions of 75%. If these are not agreed then these stores will close and the landlords will be forced to find new tenants.

The treatment of landlords contrasts with that of BHS's other unsecured creditors, who will be paid in full under the terms of the CVA.

Whilst CVAs allow for different classes of creditors to be treated differently, there is some scope for landlords to challenge the proposals even if a CVA is approved. A challenge could be based on the argument that a class of creditors has been unfairly prejudiced. Some challenges have been upheld by the Courts in the past, where CVAs involved attempts to release parent company guarantees given to landlords.

Whilst BHS's CVA may appear to unfairly single out landlords, the company's management argue that some of the properties are over-rented, meaning that the company's only chance of survival is for it to pay these landlords what BHS considers to be the true market value rent.

At the time of writing, it is not yet clear if any creditor is planning to bring an unfair prejudice challenge.

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