2018 has been the year of the CVA, and every high-profile CVA launched this year in the retail and casual dining sectors has met with increasing vocal criticism from landlords, who complain that the way they are being used is unfair.
The HoF CVA, which was launched on 6 April 2018, captured the interest of the national media. It was speculated that this CVA would be the last straw for landlords. When, contrary to expectations, the CVA was passed, many therefore assumed that was the end of it and that landlords didn't want to fight what they perceived to be a losing battle. It seems we were wrong, and an as yet unidentified landlord or landlords has applied to challenge the HoF CVA in the Court of Session in Scotland, since the CVA was proposed under Scottish law.
Once a CVA has been passed and the result has been filed at court, creditors have a 28-day period to challenge the CVA on grounds of either unfair prejudice or material irregularity.
If the landlords win, the CVA will fall away. Based on pre-CVA statements made by HoF, it is highly likely that HoF would then enter administration. Administration would probably lead to a similar outcome in terms of store closures and redundancies as under the CVA.
The wider repercussions for the real estate industry depend very much on the reasons why they win. It could end the use of CVAs to shed unprofitable sites or make it harder to achieve the requisite creditor majorities.Alternatively, if the decision is based on a technicality it might have no impact at all.
We understand that the HoF CVA is being challenged on both unfair prejudice and material irregularity grounds. Landlords’ unfair prejudice arguments have been well rehearsed over the past few months. What will be interesting to see is the basis of the material irregularity challenge, and whether it includes a challenge to the way that the chairman calculates landlords’ claims for voting purposes which, it has been suggested, is more art than science. Most CVAs provide that a landlord’s claim for the future rent payable under its lease is calculated by applying a discount to the full rent payable for the remaining term, representing the time it is estimated it will take the landlord to find a new tenant (and applying assumptions around rent free periods and rental value that such tenant will pay) as well as by other relevant factors, then applying a further 75% discount to represent the fact that the landlord claim is unliquidated. This 75% discount is applied regardless of whether the landlord is a Category A landlord (who suffers no loss of rental income at all) or a Category C landlord (who will suffer a large rent haircut for a period and then have its remaining lease liability discharged in full after 7 months) notwithstanding that crystallisation of the Category C landlord’s claim into a liquidated claim is an inevitability.
Why might the landlords win? The legal principle underpinning the use of CVAs to compromise future rent is itself not settled, and the creative extension of those principles in the recent crop of CVAs has also not been thoroughly tested in court.
So what happens to the HoF CVA while this is all being sorted out by the Scottish Court of Session? In the short term, the answer is nothing! The compromises contained in the HoF CVA came into effect immediately from the date that it was approved by creditors at the relevant creditors’ meetings (22 June 2018). There is a good reason for this: if the effectiveness of the CVA had been delayed until the expiry of the 28 day challenge period, the company would have had to pay its full rent on the June quarter day, which it could not afford to do.
Indeed, the only material reference to the 28 day challenge period in the HoF CVAs (at Clause 33.2(a)) is to give the Supervisors the power to deal with a challenge. Termination of the CVA is only expressly contemplated if the company enters administration or liquidation or fails to comply with certain limited obligations under the CVA (such as providing access to books and records to the Supervisors at KPMG).
So the consequences of the CVA will be down to the Insolvency Act 1986 which essentially provides that the court has three options:
- Find that the grounds for challenge have not been satisfied by the application, and the challenge is dismissed, following which the CVA will continue until completed or terminated in accordance with its terms;
- Find that the grounds for challenge have been satisfied and revoke the decision approving the CVA, following which you would expect (given the references made throughout the CVA), that the HoF entities would enter administration as the transaction with C Banner and associated financial injection would likely fall away; or
- Find that the grounds for challenge have been satisfied and suspend the decision approving the CVA or give directions for the summoning of further meetings to consider a revised proposal by the directors of HoF.
Given the cost, time and disruption associated with a revised proposal, options 1 and 2 look the most likely consequences.
Of course, there is also the possibility that the directors of HoF or a funder decide this is all too difficult, uncertain and not worth it and put HoF into administration without waiting for the Scottish Court to decide.
So is the HoF CVA now a house of cards doomed to collapse? Whatever the outcome the CVA saga continues and may have many more surprises in store.