Best Hope for Survival - using CVAs at BHS
The high street has witnessed a dip in profits as more and more consumers switch to online shopping, and the knock-on effects continue to show.
BHS was a high street staple for a number of years, but, like Woolworths before them – they struggled in the 21st century.
Purchased for merely £1 in 2015 from Philip Green, the new owners tried to turn the business around. The case of the administration of Woolworths is discussed in some detail in the Afin course. BHS, however, went down a different route by pursuing a CVA (“Company Voluntary Arrangement”).
As Afin students will be aware – the terms of a CVA will vary from company to company, and requires 75% of the creditors and 50% of the shareholders to back it. Some of the examples we discuss in Afin are that creditors might accept less pence in the pound for their debts, or they might accept a further delay before receiving their funds.
This BHS example showed how versatile the CVA scheme can be. The retailer was particularly struggling with rent bills and, as such, their landlords agreed to a cut in rent in some BHS stores, to allow the company to continue.
Why did the landlords agree to this?
Well, I think it’s largely because they knew that the BHS stores occupied a large space in many locations – a space that was potentially hard to fill with another paying tenant given the fall in high street trading in recent years. And of course there was the potential that BHS could turn their fortunes around, and be able to pay increased rent in the future.
What’s interesting about that case is that the largest creditor – the BHS pension fund – waived their voting rights in relation to this decision, and as such they allowed the landlords and other creditors to decide on the merits of this CVA. (But with a pension deficit of £571m, there was separate discussions ongoing in relation to the pension fund.)
The end result
BHS did close, but at the end of 2016 the CVA was terminated, resulting in landlords demanding full rent payment, which the court agreed. What this case showed was that a CVA is not necessarily effective in changing the terms of a lease. As more companies face the CVA process in 2018, it will be interesting to see if this becomes the year of restructuring and insolvency.