Restructuring plans – and how they can upset Landlords!

In the world of restructuring it is a long established principle that creditor contractual rights can be compromised. This is if it leads to a better result for the insolvency company and its creditors as a whole.

Landlords are especially vulnerable in this regard. A company with a lot of leasehold outlets, typically retail or leisure service businesses, will have some premises that are performing well but others that are not. To survive, the company must either reduce the rent or walk away from its leases entirely to make outlets profitable. Once the keys are returned to the landlord, they are left with an empty property and all the dilapidations costs.

Company Voluntary Arrangements (CVAs) have been used for many years to restructure landlord liabilities. The insolvent company will spit its leasehold properties into different classes, typically:

• Profitable premises where no lease change is proposed
• Premises that could be profitable if rent is reduced, and a forced reduction in rent to achieve this (the landlord must be given the option of taking the property back)
• Premises that are not profitable even with no rent – the landlord gets the keys back

Why use a restructuring plan?

A problem with a CVA is it requires approval by 75% by value of all creditors, including the claims of landlords. This can be a problem and we are therefore seeing the use of a new procedure introduced in the 2020 Corporate Insolvency and Governance Act: the restructuring plan (RP).

Current examples are Fitness First and Prezzo, both of which are proposing RPs.

The attractive feature of an RP (from the point of view of the insolvent company) is that, for the purpose of approving the plan, creditors are split into classes. As long as at least one class of creditor approves the plan (75% by value as with a CVA) it can be imposed on all others, as long as the court agrees that any dissenting class would not be better off if the plan was not approved – often not a high hurdle to overcome given that the alternative to the RP will be administration or liquidation.

RPs are therefore a very powerful option for restructuring. They require court applications and hearings and are therefore expensive (£100k or more), so they are more for larger companies.

What can we do to help?

We can help on both sides of the divide:

• For insolvent companies we can review their position and options, including the feasibility of a restructuring plan
• For landlords we can review any restructuring plan (or CVA) that they receive. Both are long and complex documents and we can help landlords assess their best option

Our team of experts can help if you receive a CVA or RP or think you might need one. Click here to get in touch.