Credit Management September 2019

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OPINION Zero to Hero With more distressed retailers making use of CVAs, is history in danger of repeating itself? AUTHOR – Duncan Grubb GIVEN the number of high profile retail Company Voluntary Agreements (CVAs) that happened over the last three years (including New Look and more recently Arcadia) it’s quite difficult to remember that there was a time when it looked as though the CVA had run its course as a recovery tool. The use of CVAs by multi occupancy retailers who had got themselves into difficulties, but whose investors still considered the underlying businesses to be sound, was one of the big insolvency stories of the credit crunch. However, once the commercial landlord community realised that the CVA was being used as a simple mechanism for exiting underperforming leases while virtually all other classes of creditor were being left unscathed, it was only a matter of time before prejudicial CVA proposals were either voted down by the creditors (Stylo) or successfully challenged and overturned in the Courts (Powerhouse). This resulted in increased collaboration between the insolvency and landlord communities (via the British Property Federation), and where CVAs were still the preferred recovery option there was considerable effort made on both sides to arrive at proposals that genuinely attempted to rescue the struggling retailer. This meant not trimming rents to ridiculously low levels with an eye on increased profits for the ‘rescued’ retailer further down the road, thereby gaining an advantage over the competition. These events all seem like ancient history now, and it appears that the combination of a few benign years in the early teens, and a shift of focus to the potential misuse of connected party Pre- Packs, have caused the lessons of the past to be all but forgotten. RESCUE REMEDY So once again the CVA is the ‘go-to’ remedy for retailers that need a way out of business decisions which were negotiated in good faith, by professional people with their eyes wide open; and which resulted in legally binding contracts. Only now, it appears that the willingness of the landlords to engage with the insolvency community in the past has been misinterpreted in the present by some insolvency firms as a green light to drive through even Engagement between the two parties therefore needs to be re-energised with full CVA proposals being put on the table at an early stage in the process more prejudicial CVA models. One only has to look at the recent highprofile situation where initially there was insufficient support from the landlords for the CVA to be approved. In an unusual turn of events, the CVA meeting was adjourned and the vote delayed, with an improved offer then being put to the creditors and subsequently voted through. Regardless of the good intentions on both sides and the need to resolve a difficult situation quickly, these events clearly demonstrate that there was more money available to the landlords, but it was only offered when it looked like the proposal would be voted down. It does, therefore, look like we are back to square one with some distressed retailers using a CVA to try to go from zero to hero via their landlords’ bank accounts – notwithstanding the insolvency practitioners’ obligation to achieve the best result for the companies’ creditors. It must of course be remembered that with all insolvencies there is a certain amount of pain to be shared, and most creditors accept this, however there is once again a justifiable feeling among landlords that this pain could, and should, be shared more equally among all creditor groups. I also feel that much of the negativity surrounding the recent crop of retail CVAs could have been avoided if the good relationship built up during the crunch years between the insolvency firms and the landlord community had been maintained at its previous level, preventing either side from becoming complacent. Engagement between the two parties therefore needs to be re-energised with full CVA proposals being put on the table at an early stage in the process for both scrutiny and modification, rather than just as a box ticking exercise very late in the day, which is where we seem to be at the moment. The insolvency firms will, of course, say that landlords can always vote down a CVA if they don’t like it, and this is true. However not all landlords are equal; some having more units than others and in better locations. The more desirable units will often be left virtually untouched in exchange for that landlord’s support for the CVA, while less desirable (read less profitable) units will be severely compromised. Given that they are all individual businesses struggling to compete in the marketplace it’s a big ask for landlord companies to forego an individual advantage for the greater good; however I still believe that by working together to sensibly challenge prejudicial CVA proposals, the landlord community can regain the influence and rights of objection which seem to have drifted away. I therefore urge all landlords unhappy with a CVA proposal to work together with a unified voice and hold out for better deals where achievable and appropriate – it worked before so there’s no reason why history shouldn’t repeat itself again. Duncan Grubb is Director of Duncan Grubb Consultants and author of ‘Credit Management for Property Professionals – The Fine Art of Not Losing Money’. The Recognised Standard / www.cicm.com / September 2019 / PAGE 22
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Credit Management September 2019

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