Member Article

Not something a landlord wants to hear. But what does it mean? Before a landlord can consider what remedial action is available against a defaulting tenant, it needs to understand the reason for the default.

Where a tenant is insolvent, the precise nature of that insolvency needs to be established. It is this that will inform the landlord of the nature of the regime, the focus of the practitioner involved, and, above all, the implications it has for what the landlord can and cannot do.

There are four regimes for corporate insolvency:

• liquidation
• administration
• CVA
• receivership

Liquidation - may be compulsory or voluntary. Sometimes it can be solvent, but that will not be the case where a tenant company is compulsorily wound up.
Whatever its origins, the focus of a liquidation is the termination of the company. Its assets are realised, distributed, and then the company is struck off.

Administration - is principally a rescue remedy, although that may not be immediately apparent from recent press reports. Its primary purpose is the rescue of a company as a going concern. If that is not achievable, its aim is to achieve a better result for creditors than would be achieved in a winding up or a return to secured and preferential creditors.

When Woolworths went into administration it was with a view to the company being sold.

It meant that the stores remained open and the staff employed. It allowed the administrators to trade the stock. At the eleventh hour the brand has been revived with a sale of the name, its online business and the Ladybird clothing label to Shop Direct. A liquidation would have prevented trading, and therefore damaged goodwill.

CVA - stands for company voluntary arrangement. It is an alternative rescue remedy, but one which allows directors to retain control over the company's business. Essentially, it comprises an agreement between a company and its creditors whereby debts are released in exchange for an agreement to pay some or all of those debts over time.

Receivership - entails the enforcement of security. LPA receivers are appointed under a fixed charge and administrative receivers under a floating charge. Their duty is to the mortgagee or debenture holder as creditor, and their focus is to realise the secured debt owing to that creditor.

So, each of these regimes has a distinct focus, and it follows from this that there is a significant variation in the powers and duties of the practitioners involved. In turn, this affects what a landlord is able to do in terms of exercising some control over its investment.

For example, as soon as an administration is initiated a moratorium arises, preventing court proceedings being started or continued, distress being levied, forfeiture of any lease or the enforcement of any security without the consent of the administrator or the leave of the court. It allows an administrator to rescue, reorganise or realise a company's assets without having to deal with the attempts of creditors to enforce their rights.

Small companies can benefit from a short, optional moratorium in order to put proposals for a CVA to their creditors. No moratorium is available for larger companies with a CVA.

No moratorium arises in a liquidation, and different rules about what action can be taken apply to different types of liquidation.

Other significant differences between the regimes arise around whether the practitioner concerned is likely to pay rent or might be forced to do so (by the Court as a last resort), and whether they have the power to disclaim onerous contracts - typically a commercial lease - and so to divest the insolvent company of its liabilities.

 

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