Creditors approve JJB CVA - 27 April 2009

The creditors of sports retailer JJB Sports plc (“JJB”) have approved its proposed company voluntary arrangement (“CVA”). This is the first major use of a CVA by a UK-listed business to avoid administration. Previous attempts by retailers to use the procedure to reduce their exposure to unprofitable stores have largely been unsuccessful. Earlier this year, the CVA proposed by shoe store group Stylo was voted down by the company’s landlord creditors.

The CVA proposal

JJB confirmed that it had proposed a CVA on 26 March, in what was said by JJB chairman, Sir David Jones, to be an attempt to create a more stable platform for the revitalisation of its core sports retail business. It is understood that JJB’s lenders agreed to extend a standstill agreement on their loans to the group until the CVA could become effective.

On the March quarter day, JJB paid its rental liabilities (understood to be circa £20 million) in full, both in relation to its 250 open and its 140 closed stores. JJB was seeking approval from its landlords for a one-year variation of the terms of its leases to allow monthly rent payments. Otherwise, in relation to the stores which were to remain open, JJB was not proposing to vary lease terms or rents.

Under the CVA, JJB wanted to reduce its £15 million per annum rental liabilities on the closed stores. Landlords of the closed stores were offered two-thirds of the rent due for the remainder of the terms of their respective leases. JJB was reported to have £10 million to meet its rent liabilities on those stores.  Half of this would be paid out to landlords in October, the rest in January 2010, which would equate to roughly six months’ rent. All other obligations under the leases were to be discharged.

CVAs generally

A CVA is a procedure^[1] that enables a company to reach an agreement with its creditors about how its debts are to be repaid. The procedure is commenced by a proposal, often by the directors of the company. The proposal (which is a detailed document setting out the terms of the CVA) is considered by an insolvency practitioner, who submits a report to the Court as to whether, in his or her opinion, it has a reasonable prospect of being approved and implemented, whether meetings of the members and creditors should be called and when such meetings should be held. In practice, the insolvency practitioner assists the directors in preparing the proposal.

After the proposal has been drawn up and the report submitted to the Court, separate meetings of the members and creditors are summoned to decide whether to approve the proposed CVA, with or without modifications. There is no moratorium in the period before the meetings are held except in the case of certain small companies, who do benefit from a restriction on the actions of creditors against the company in the same way as a moratorium granted on an administration.
Members vote by simple majority in value (of those present and voting on the resolution). Creditors will approve the proposed CVA if a majority in excess of three-quarters in value of those present vote in favour of it, and more than 50% of creditors unconnected with the company vote in favour. If there is a mismatch in the decisions of the members' and creditors' meetings, the decision of the creditors will take precedence.

Once approved, the CVA is binding on all unsecured creditors who either were or would have been entitled to vote at the meeting to consider the proposal, even if some did not have notice of the meeting. No CVA can affect the rights of a secured creditor, who can still enforce its security unless it agreed not to do so. If the proposal is approved, the insolvency practitioner becomes the supervisor of the CVA. The powers and duties of the supervisor, and the extent to which the directors remain involved in the business, will be set out in the proposal.

A creditor may apply to the Court for an order challenging the outcome of the creditors' meeting where the CVA unfairly prejudices his or her interests, or if there has been some material irregularity in relation to that meeting. The CVA of PRG Powerhouse Ltd^[2] was overturned for unfair prejudice in 2007. The landlords of Powerhouse’s closed electrical stores were to only receive a small dividend; all other creditors were to be paid in full.

The vote

Today, JJB’s CVA proposal has been approved by 99% of the voting creditors. The supervisor of the CVA is quoted as saying that the CVA will protect nearly 12,000 jobs.

Conclusion

This ground-breaking restructuring demonstrates that, despite the failures of Stylo and Powerhouse, CVAs can work if they are attractive enough to all parties.  In the Powerhouse case, all of the burden was placed on some of the landlords, who were no better off than on an administration. The six months’ rent offered by JJB was much more attractive, particularly when compared to some of the returns landlords have seen as unsecured creditors of companies in administration.
It is of particular significance given the call by the UK government in last week’s Budget for a consultation on the company rescue regime. The Insolvency Service will be consulting on:

1. the provision of absolute priority status over all other creditors to any new funding provided to companies in CVAs or administration; and
2. extending the moratorium on creditor action against small companies trying to agree a CVA to medium and large companies. The lack of a moratorium has been a significant drawback to opting for a CVA over administration.

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Footnotes

1. Under Part I of the Insolvency Act 1986.
2. Prudential Assurance Co Ltd v PRG Powerhouse Ltd