A company voluntary arrangement (CVA) is a procedure that allows a company to settle its debts by paying only a proportion of the amount that it owes to creditors, or to come to some other arrangement with its creditors over the payment of its debts.
The CVA is seen by many as the best rescue tool for a company that is viable going forward if it can unburden itself of some or all or its debt allowing the company directors to trade out of their current financial problems.
Increasing pressure is being placed on those retailers and those in hospitality as a result of the current pandemic which is bringing about an increasing use of CVAs in these sectors.
But a question that arose in the Irish Republic, and one that could have lessons for the UK, is, can retailers and other tenants legitimately use the CVA mechanism simply as a means of re-writing the terms of their leases?
The decision in the Irish Courts in the case of New Look Retailers (Ireland) Ltd v Companies Act 2014, goes as a warning to UK retailers and other companies not to use or to misuse the CVA process to try to force landlords into accepting changes to lease terms.
The Irish Court’s power to appoint an examiner, according to internationallawoffice.com, “is triggered both where a company cannot currently pay its debts and where it is unlikely to be able to pay its debts, at some (unspecified) point in future.”
At the time of its application in August 2020, New Look had cash reserves of €15.6 million. Its application was based on an assumption that the company could go bust in the future.
New Look Retailers (Ireland) Ltd (a subsidiary of the UK company) applied to enter into CVA “examinership” under Irish law to seek rent cuts from its landlords, despite the fact that the company was not insolvent. The Irish High Court however, refused to appoint an examiner. This was, it argued, on the basis that to do so would be “entirely premature”.
The Company has received strong criticism of its attempts to use the CVA insolvency procedure in order to secure rent reductions on its stores, without first trying to negotiate with its landlords.
Resulting from the case was guidance given from the Court that landlords must take steps to negotiate with their landlords and to try to resolve matters and reach a settlement of their differences before they resort to the legal protection afforded by a CVA – a CVA is not intended or designed as a legal mechanism to be used to beat down landlords into submission over a demand for a lower rent.
The New Look Company had been incorporated in 2003 and is a subsidiary of the UK-based New Look Retail Holdings Limited. It has 27 stores in Ireland all operating under long leases.
The company had been making profits over recent years but had suffered heavy losses following store closures during the pandemic. The Company argued in its application that with an estimated turnover down almost 60%, a reduction in its rents for its 27 stores was essential to its survival.
However, the Court rejected the Company’s argument that based on an independent expert’s report they would be insolvent by October 2020, and the Court took into account an opposing report prepared for the landlords by Grant Thornton that showed the Company would have the funds to pay its debts.
The Court used its discretion to refuse the petition to appoint an examiner, the Judge ruling that it would be premature to appoint an examiner as the alternative of negotiating with landlords had not been pursued
The Irish case has obvious implications for the use of CVAs England. According to internationallawoffice.com, CVAs are a tool for creditors and distressed companies to reach a genuine, negotiated compromise and should not be used opportunistically by tenants to rewrite tenancy agreements.
In the New Look case, the tenant’s failure to even attempt to negotiate with their landlords at the outset prevented the Court from allowing the application to appoint an examiner. Given that the country has gone into further lock-down restrictions, and these issues are likely to persist for some time, the outcome of this case should be borne in mind by retailers and other commercial tenants.