At the end of April Debenhams proposed a company voluntary arrangement (CVA), which if approved would result in 22 store closures in early 2020.
However, roughly one month later, Sports Direct submitted a legal challenge against the CVA proposed by Debenhams.
What is a CVA?
Although an administrator or liquidator can propose a CVA, in the current climate CVAs are being proposed with the intention of avoiding the company going into administration or liquidation. In this context, a CVA involves a proposal by the company’s directors to its unsecured creditors for a compromise or arrangement in satisfaction of its debts. It should be noted that a CVA cannot affect the rights of a secured lender to enforce its security without its specific consent.
In theory at least, a CVA should produce a better financial return for unsecured creditors than if the company was placed in a formal insolvency procedure. In contrast to other insolvency procedures, the directors remain in control of the business, which continues to operate, subject to the terms of the CVA and under the supervision of an insolvency practitioner. A CVA allows much greater flexibility than insolvency procedures such as administration or liquidation. The company and its unsecured creditors effectively agree when and what percentage of the company’s debts will be paid, which includes amending the company’s lease obligations on retail units. If 75% or more in value of the company’s unsecured creditors vote in favour of the proposals, they become binding upon all of the company’s unsecured creditors, including those who voted against the proposals and/or were eligible to vote but did not receive notice of the proposals.
Debenhams unsecured creditors achieved the 75% threshold in May but this meant that Sports Directs near-30% stake was wiped out. “Given the overwhelming support for the proposals from creditors, including over 80% of landlords, this is an unnecessary distraction as we implement our restructuring plans,” Debenhams executive chairman Terry Duddy said when speaking about the challenge.
Debenhams owner and investment consortium Celine UK spokesperson said: “The CVA provides a platform to deliver a turnaround in the business for which the lending group has committed £200m of new funding and remains supportive.”
Who is challenging the CVA?
The legal challenge funded by Sports Direct is being supported by a private Salford-based landlord owned by the family of property investor Aubrey Weis which owns six properties that are currently leased to Debenhams. Another investment company and major landlord, M&G, has launched its own separate legal action. The cases are likely to be heard together in early-July.
Duddy added: “We believe the challenges to the CVAs to be without merit and will vigorously defend them.”
However, Ed Cook, chief executive at Revo, says of the recent CVA challenges: “We have voiced concerns about how the CVAs are being used to alter lease terms and ultimately close stores, and it is no surprise these actions are now becoming subject to legal challenge. The legislation was not intended to support large corporate entities financially re-engineer their complex businesses. The aim was to support smaller businesses arrange short-term, small scale debt restructures.
“Property owners, including pension funds, are the creditor group bearing most of the pain and in many cases are voting in favour of CVA proposals simply because there is no realistic alternative. Retailers are also being penalised as a result of poorly performing competitors receiving significant cost reductions, and the tax payer is also increasingly being asked to pick up the tab through business rates reductions. With the Government unwilling or unable to intervene, it seems we are reliant on the courts to provide some much-needed clarity on how this legislation should work in the future.”
Arcadia voting on a CVA
At the time of writing, Philip Green's Arcadia group and its 18,000 staff were anxiously waiting for news on whether landlords will accept Philip Greens’ CVA proposal or not. Votes were being counted as landlords behind Top Shop, Miss Selfridge and Burton decided the fate of hundreds of stores.
The Arcadia crisis has put CVAs under the spotlight yet again. Those in favour of them say that it lets fundamentally decent businesses shed underperforming assets and keep running. However, critics say that creditors are kicked in the teeth when their customers use CVAs to escape rental/lease contracts.
In Arcadia’s case, the firm hopes to cut its overall rental bill (which it says is simply too high in today’s retail environment), and close 23 stores with another 27 also earmarked for closure.
Is Brexit to blame?
Brexit has helped to drag Arcadia to the brink of administration, according to City Index senior market analyst Fiona Cincotta. She points out that several retailers have hit serious problems since the 2016 referendum: “Brexit is slowly eroding the confidence and the spending power of the British consumer. The process started fairly discreetly but given that it has now been in place for close to three years it is claiming more and more victims. Notable business failures this year alone include Debenhams, Wine Direct, Patisserie Valerie, OddBins and Jamie Oliver’s chain of restaurants. The list is already long and scary enough without adding the big closures of 2017 and 2018.”
span style="font-size: 12.0pt; font-weight: normal;">However, roughly one month later, Sports Direct submitted a legal challenge against the CVA proposed by Debenhams.
span style="font-size: 12.0pt; mso-bidi-font-weight: normal;">What is a CVA?
span style="font-size: 12.0pt; font-weight: normal;">Although an administrator or liquidator can propose a CVA, in the current climate CVAs are being proposed with the intention of avoiding the company going into administration or liquidation. In this context, a CVA involves a proposal by the company’s directors to its unsecured creditors for a compromise or arrangement in satisfaction of its debts. It should be noted that a CVA cannot affect the rights of a secured lender to enforce its security without its specific consent.
In theory at least, a CVA should produce a better financial return for unsecured creditors than if the company was placed in a formal insolvency procedure. In contrast to other insolvency procedures, the directors remain in control of the business, which continues to operate, subject to the terms of the CVA and under the supervision of an insolvency practitioner. A CVA allows much greater flexibility than insolvency procedures such as administration or liquidation. The company and its unsecured creditors effectively agree when and what percentage of the company’s debts will be paid, which includes amending the company’s lease obligations on retail units. If 75% or more in value of the company’s unsecured creditors vote in favour of the proposals, they become binding upon all of the company’s unsecured creditors, including those who voted against the proposals and/or were eligible to vote but did not receive notice of the proposals.
span style="mso-bidi-font-weight: bold;">Debenhams unsecured creditors achieved the 75% threshold in May but this meant that Sports Directs near-30% stake was wiped out. “Given the overwhelming support for the proposals from creditors, including over 80% of landlords, this is an unnecessary distraction as we implement our restructuring plans,” Debenhams executive chairman Terry Duddy said when speaking about the challenge.
Debenhams owner and investment consortium Celine UK spokesperson said: “The CVA provides a platform to deliver a turnaround in the business for which the lending group has committed £200m of new funding and remains supportive.”
strong style="mso-bidi-font-weight: normal;">Who is challenging the CVA?
The legal challenge funded by Sports Direct is being supported by a private Salford-based landlord owned by the family of property investor Aubrey Weis which owns six properties that are currently leased to Debenhams. Another investment company and major landlord, M&G, has launched its own separate legal action. The cases are likely to be heard together in early-July.
Duddy added: “We believe the challenges to the CVAs to be without merit and will vigorously defend them.”
However, Ed Cook, chief executive at Revo, says of the recent CVA challenges: “We have voiced concerns about how the CVAs are being used to alter lease terms and ultimately close stores, and it is no surprise these actions are now becoming subject to legal challenge. The legislation was not intended to support large corporate entities financially re-engineer their complex businesses. The aim was to support smaller businesses arrange short-term, small scale debt restructures.
span style="mso-bidi-font-style: italic;">“Property owners, including pension funds, are the creditor group bearing most of the pain and in many cases are voting in favour of CVA proposals simply because there is no realistic alternative. Retailers are also being penalised as a result of poorly performing competitors receiving significant cost reductions, and the tax payer is also increasingly being asked to pick up the tab through business rates reductions. With the Government unwilling or unable to intervene, it seems we are reliant on the courts to provide some much-needed clarity on how this legislation should work in the future.”
span style="mso-bidi-font-style: italic;">
strong style="mso-bidi-font-weight: normal;">Arcadia voting on a CVA
span style="font-size: 12.0pt; mso-font-kerning: 0pt; font-weight: normal; mso-bidi-font-style: italic;">
span style="font-size: 12.0pt; font-family: 'Times New Roman'; mso-fareast-language: EN-GB; mso-bidi-font-style: italic;">At the time of writing, Philip Green's Arcadia group and its 18,000 staff were anxiously waiting for news on whether landlords will accept Philip Greens’ CVA proposal or not. Votes were being counted as landlords behind Top Shop, Miss Selfridge and Burton decided the fate of hundreds of stores.
span style="font-size: 12.0pt; font-family: 'Times New Roman'; mso-fareast-language: EN-GB; mso-bidi-font-weight: bold; mso-bidi-font-style: italic;">The Arcadia crisis has put CVAs under the spotlight yet again. Those in favour of them say that it lets fundamentally decent businesses shed underperforming assets and keep running. However, critics say that creditors are kicked in the teeth when their customers use CVAs to escape rental/lease contracts.
span style="font-size: 12.0pt; font-family: 'Times New Roman'; mso-fareast-language: EN-GB; mso-bidi-font-style: italic;">In Arcadia’s case, the firm hopes to cut its overall rental bill (which it says is simply too high in today’s retail environment), and close 23 stores with another 27 also earmarked for closure.
strong style="mso-bidi-font-weight: normal;">Is Brexit to blame?
span style="font-size: 12.0pt; font-family: 'Times New Roman'; mso-fareast-language: EN-GB; mso-bidi-font-style: italic;">Brexit has helped to drag Arcadia to the brink of administration, according to City Index senior market analyst Fiona Cincotta. She points out that several retailers have hit serious problems since the 2016 referendum: “Brexit is slowly eroding the confidence and the spending power of the British consumer. The process started fairly discreetly but given that it has now been in place for close to three years it is claiming more and more victims. Notable business failures this year alone include Debenhams, Wine Direct, Patisserie Valerie, OddBins and Jamie Oliver’s chain of restaurants. The list is already long and scary enough without adding the big closures of 2017 and 2018.”
