As another UK retailer succumbs, real estate lawyers are pondering what this means for a scheme of protection often challenged by landlords. Here, Reed Smith’s Katherine Campbell reflects on the issue.
‘Last week, Joules, a fashion group was the latest retailer to succumb to insolvency. Having failed to get the investment it needed to stay afloat or sufficient support to pursue its alternative rescue strategy of a Company Voluntary Arrangement (CVA), it was left with no alternative but to go into administration.
With over 130 shops and outlets, the outlook for its landlords is bleak unless a buyer can be found who will take on these premises. Luckily, there are a few circling, but could this news still mark the beginnings of a landslide in the UK, with companies on the edge of solvency clinging on for dear life?
We currently have a frightening combination of factors at play, as we reach the end of 2022. Our domestic economy is in crisis, with inflation and interest rates climbing to crippling proportions for many consumers and businesses alike. Soaring global energy and food costs add to the cost-of-living crisis, and with the withdrawal of government support to businesses who managed to survive the pandemic, there seems to be a perfect storm brewing, particularly for the high street retailer.
In the first half of 2022, the rise in company insolvencies was largely driven by Creditors' Voluntary Liquidations (CVLs) with CVLs accounting for 89% of all company insolvencies in England and Wales between Q1 2021 and Q2 of 2022. T
This was a direct result of the myriad of smaller businesses that went insolvent during the pandemic. However, we also saw several CVAs, together with a new form of restructuring arrangement, both used for larger organisations, such as New Look and the Virgin Active Group.
Both forms of arrangement are suitable for retailers who have multiple sites and believe they can rescue the business. It allows them to operate to preserve the valuable outlets, whilst enabling the closure of non-performing sites. Unsurprisingly, therefore, there have been many challenges to these arrangements by landlords, who feel unfairly treated in comparison to trade creditors, as they are unilaterally forced to take back their properties.
As a result of these multiple economic factors at play, it will be interesting to see if the CVA will ever have a resurrection.
The number of CVAs has dropped off sharply since the height of the pandemic, with only 29 recorded in Q3 2022.
Changes to rules in 2020, making HMRC a preferred creditor in a CVA has undoubtedly contributed to this fall and, with the squeeze now well and truly felt on the high street, it seems sadly inevitable that we will see fewer successful arrangements and more insolvencies as we enter a bleak winter.’
