Balancing act

When a tenant enters administration, the remedies of the landlord become severely limited.  The consent of the court or administrator is needed before it may take further proceedings or otherwise enforce its remedies.

Landlords also feel that they suffer from the use of pre-packs – where a company is placed into administration and its business/assets are immediately sold in a deal arranged prior to the administration. The buyer in a pre-pack typically occupies any leased premises as a licensee without consent, leaving landlords with a third party as tenant who they may never have wished to have occupying their property.

Landlords also complain that the use of company voluntary arrangements (CVAs) by distressed retailers is unfair and exploitative. The Miss Sixty case is helpful but its facts were somewhat extreme.  CVA proposals are usually more balanced in their impact on creditors and once a CVA is approved, there are only limited grounds of challenge. Plus any challenge is time-consuming, costly and risky.

Notwithstanding landlords’ concerns, there are many people who believe that the existing insolvency procedures are outdated and force struggling companies to go bust.

Outside of a statutory process, current options for companies seeking a restructuring require a consensus, meaning that creditors and shareholders have a veto over any restructuring.  Tenants argue that such a veto can be used to hold the company (and other stakeholders) to ransom.

In recognition of these concerns, the coalition government issued a consultation document last Autumn setting out its proposals for a new restructuring moratorium.

The proposals involve a new fast-track judicial process for viable but distressed companies, as an alternative to administration, based on the American ‘Chapter 11’ system. It would provide those companies with the option of a protected breathing space, during which a restructuring could be negotiated and agreed.

There are three key elements to the proposals.

- There would be an ‘automatic stay of enforcement’ of debt by creditors against the company while the management remains in place and attempts to negotiate a restructuring  deal.

Landlords, as well as other creditors, would continue to be paid as their debts fall due, but landlords would not be permitted to forfeit leases by peaceable re-entry and creditors would be unable to commence any legal proceedings, enforce their security or file winding up petitions.

Although the directors would be subject to a range of obligations and penalties to deter misconduct or abuse, the power given to the management over the process is likely to raise some concerns, as it was presumably they who previously lead the business into the severe financial difficulties in the first place.

- Debts incurred by the company during the moratorium would have ‘super-priority’ status over other unsecured creditors in any subsequent insolvency process.  In the US a market has specifically developed for this type of ‘rescue’ funding.  There is however some lack of clarity as to how such ‘super-priority’ would operate in practice.

- Once a company has proposed a restructuring plan, it will be need to be sanctioned by the court.  Creditors will be able to raise objections at the court hearing.  If the court sanctions the plan, it will appoint an independent insolvency practitioner as ‘monitor’ to safeguard the interests of creditors during the moratorium. However, the monitor would not be able to control or direct the company.  The monitor could be challenged by the directors, creditors, or any other person affected although the evidential burden of such a challenge is likely to be heavy and onerous, and raises doubts about how many challenges would be successful.

These proposals raise a number of significant issues for landlords and other creditors, particularly relating to the level of supervision of the company’s directors, the role of the monitor and the relationship between the proposed moratorium procedure and the existing insolvency procedures.

The detail of these proposals will therefore be crucial to their success. A close analysis of the proposals will be necessary to ensure that adequate protection for landlords and other creditors is maintained against the backdrop of preserving companies that are capable of being turned around.