A New Look for retail company voluntary arrangements (“CVAs”)?
On Monday, Zacaroli J handed down his eagerly anticipated judgment in Lazari Properties (2) Limited (and others) v New Look Retailers Limited (and others).
The New Look landlords challenged the New Look CVA and raised a number of arguments which some believed could be the end of CVAs as we know them. In particular, the New Look landlords argued that CVAs had gone far beyond the use for which they had been intended and sought to challenge the jurisdictional basis upon which some CVAs are implemented.
The key arguments were that:
the proposal did not constitute a compromise or arrangement within s1(1) of the Insolvency Act 1986 because it included multiple “arrangements” on different terms with different groups of creditors (i.e. splitting landlords into classes A, B1-6, C etc, who are offered different terms as is common in retail CVAs);
the CVA did not provide sufficient give and take (e.g. profit sharing or some other ability for landlords to share in the upside);
the CVA was unfair because the requisite majorities at the creditors meeting were met with the votes of unimpaired creditors; and
the granting of a new right to New Look to terminate the leases was an improper interference with the landlords’ proprietary rights.
The New Look landlords also raised various other unfair prejudice and material irregularity arguments.
Zacaroli J rejected the landlords’ challenge on all grounds, potentially serving a fatal blow to landlords trying to prevent the use of CVAs as a restructuring tool, holding that:
a CVA providing for differential treatment of different sub-groups of creditors is not outside the jurisdictional scope of section 1(1) of the Insolvency Act 1986;
it is not inherently unfairly prejudicial that there is differential treatment or for the statutory majorities to be achieved by votes of “unimpaired creditors” (particularly as discounting unimpaired creditors for the purposes of the statutory majorities would effectively be a rewrite of the Insolvency Rules 2016). However this could be a factor in determining whether there is unfair prejudice – there was none in this case because the majority vote was secured by the votes of the senior secured note holders who the judge found were impaired creditors and the differential treatment was justified;
there was sufficient ‘give and take’ in the CVA. Zacaroli J made it clear that the requirement for “give and take” was a “relatively low jurisdictional hurdle”, highlighting that the “give” is only required to be as good as the relevant creditors would get in the relevant alternative which is frequently a formal insolvency such as administration (i.e. that the vertical comparator test is passed); and
the new termination right granted to New Look did not interfere with the landlords’ proprietary rights because it gave the landlords an opportunity to agree a surrender but did not require them to agree to it.
The overriding theme from New Look is that questions of fairness and material irregularity turn on the facts of a particular CVA and the CVA must be looked at in the round, with the appropriate balance being struck and all circumstances taken into account. Zacaroli J placed a lot of emphasis on the fact that the landlords had the right to terminate the lease and recover possession if they disliked the terms of the CVA and it is for them (not the court) to assess the fairness of certain clauses “in exercising the choice the CVA presents to it” (i.e. deciding whether to terminate) – highlighting the importance of the right to break in meeting a fairness challenge.
Zacaroli J also cleared up the question of whether a CVA can reduce rent to below market rent, confirming there isn’t a general principle that would prevent that. Following the decision in Debenhams there has been divergence of opinion on that point.
The decision in New Look, provides comfort to companies (particularly retailers) who in recent years have used CVAs to help restructure rent liabilities, that a CVA is still a viable and useful restructuring tool. However, advisers will need to ensure that a fair balance is struck and the “give and take” is fair in the circumstances of that particular company.
The judgment in Regis (also a landlord challenge to a CVA) is expected imminently and we will provide more detailed commentary on the key takeaways from both cases once this is available.
The judgment sanctioning the restructuring plan for Virgin Active (handed down yesterday) saw another blow to landlords who as a consequence of the plan being sanctioned will have rent arrears wiped out. Will this pave the way for other companies to use a restructuring plan instead of a CVA to manage lease liabilities? We will have to wait and see, but it could become the preferred route if seeking to avoid the risk and (significant) cost of a potential CVA challenge. We will shortly be providing an update on this case as well.