Focus on Restructuring Processes: CVAs and Liquidation in the context of Carillion

In recent months certain restructuring processes have gained quite some notoriety in press headlines in connection with a number of UK businesses. This article provides secured lenders with a brief recap on the key points to note in relation to CVAs (Company Voluntary Arrangements) and what Liquidation means in the context of Carillion. 

Retail CVAs 

• What is it? A CVA is a procedure under the Insolvency Act 1986 allowing a company in financial distress to enter into a legally binding arrangement or compromise with its unsecured creditors. It is a flexible process initiated and driven by the company involving its proposed licensed insolvency practitioner who acts as a nominee in assisting the company to put the proposal together and a supervisor of the process following approval. A CVA must be approved by 75% in value of unsecured creditors who attend a creditors’ meeting for that purpose of whom at least 50% in value are unconnected to the company (to prevent a shareholder or group company controlling the process to the detriment of creditors). 

• Why landlords? Landlords are usually unsecured creditors and retail tenants can use a CVA to restructure the rental obligations or even the terms of its leases to the detriment of its landlords. Nevertheless, landlords can prove supportive where they recognise the alternative is a liquidation process likely to result in non or partial payment and a vacant premises. The process became popular for retail companies following the successful CVA of JJB Sports in 2009 which took effect without the need to resort to administration or the suspension of trading in its listed shares. The end of 2017 saw CVA’s effected or suggested for Toys R Us, House of Fraser, New Look, and potentially other companies with significant leasehold obligations such as restaurant chains. 

• Effect on lenders/secured creditors: the CVA process represents a compromise between a company and its unsecured creditors. It cannot affect any obligations or a lender's security without its specific consent. It is usually in the interests of the secured lenders for a successful CVA to reduce a borrowers’ underlying rental payments or enhance lease terms. However, a secured lender, with its advisors, will play a significant part in the strategy leading to the CVA and will usually need to give their consent. More importantly the lender will be concerned to understand the borrower’s financial distress and the likelihood of the CVA being accepted or rejected by unsecured creditors. In those circumstances the secured lender will have an alternate strategy, often the appointment of administrators, in order to protect its interests depending upon whether there is an existing or anticipated default under the facilities. Any suggestion of a CVA on the part of the borrower will cause a secured lender to review their security and facilities package and engage with the borrower as a matter of urgency if they have not already been consulted. 

Carillion – liquidation/special managers 

• What is it? A liquidation represents the termination of a company’s business and is not intended as a rescue process. It is not like an administration where it is anticipated that the company may continue trading so that parts of the business can be rescued or sold. In the Carillion case, the liquidation of one entity will not affect the subsidiaries or sister companies which can be separately sold or funded as appropriate. The Government has established a website explaining that taxpayers cannot be expected to bail out a private sector company but nevertheless indicating that all public sector services will still be delivered. 

• Why Liquidation and not Administration? In this case the Official Receiver (an officer of the Insolvency Service controlled by the Secretary of State for Business, Innovation and Skills) will retain the appointment rather than (as is more usual) arranging for a licensed insolvency practitioner from a private firm such as PwC to take full control. Instead, PwC partners have been appointed as Special Managers, being officers under the Insolvency Act 1986 who have bespoke powers given to them by the court to undertake tasks at the instance of the Liquidator. This was the inevitable result of the failure of a suggested restructuring process during which it is reported that key lenders were not prepared to provide further finance. The use of a liquidation sends a strong message that the government is also not prepared to support the company generally albeit it has a clear stated intention to ensure that the Special Managers are funded and mandated to continue with government contracts. 

• How does it affect secured lenders? A liquidation will usually crystallise a lenders’ fixed and floating charge security and a liquidator will liaise with the secured lender to agree the terms upon which assets can be sold and the applicable fees of such process. We can only speculate that in the Carillion matter the secured lenders must have decided not to block the appointment of a liquidator by their own appointment of an administrator. Again, a prudent secured lender should seek advice in relation to all but the simplest liquidation to ensure its position is protected. It may decide that it would prefer to appoint its own officeholders to deal with such assets and the Insolvency Act has relevant provisions in that regard. 

**Our acclaimed financial restructuring team is renowned for handling the most complex assignments of institutional lenders, bondholders and alternative credit providers, with significant experience across a broad range of sectors including CVAs, Liquidations and Administrations.