A New Look for Retail Business Voluntary Agreements
On Monday, Zacaroli J delivered his highly anticipated judgment in Lazari Properties (2) Limited (and others) v New Look Retailers Limited (and others).
The owners of New Look have challenged New Look’s CVA and raised a number of arguments that some believe could be the end of CVAs as we know them. In particular, the owners of New Look have argued that CVAs have gone far beyond their intended use and have sought to challenge the jurisdictional basis on which certain CVAs are implemented.
The main arguments were as follows:
the proposal did not constitute a compromise or arrangement within the meaning of paragraph 1 of the Insolvency Act 1986, as it included several “arrangements” on different terms with different groups of creditors (i.e. offered different terms , as is often the case with retail CVAs);
CVA did not provide enough give-and-take (eg profit sharing or other opportunity for owners to share the increase);
the CVA was unfair because the majorities required at the meeting of creditors were met with the votes of creditors intact; and
the granting of a new right to New Look to terminate the leases was an inappropriate infringement of the property rights of the owners.
The owners of New Look have also raised various other arguments relating to unfair harm and material impropriety.
Zacaroli J rejected the owners’ challenge on all grounds, potentially dealing a fatal blow to owners trying to prevent the use of CVAs as a restructuring tool, believing that:
a CVA providing for different treatment of different subgroups of creditors is not outside the scope of section 1 (1) of the Insolvency Act 1986;
it is not in itself unfairly prejudicial that there is a difference in treatment or that statutory majorities are achieved by the votes of “intact creditors” (in particular, since discounting healthy creditors for the purposes of statutory majorities would be in fact a rewrite of the 2016 insolvency rules). However, this could be a factor in determining whether there is unfair prejudice – there was none in this case because the majority vote was obtained by the votes of the holders of the senior secured notes that the judge found to be impaired creditors and that the difference in treatment was justified;
there was enough “give and take” in the CVA. Judge Zacaroli made it clear that the “give and take” requirement was a “relatively weak jurisdictional hurdle”, stressing that the “give” should only be as good as what the creditors concerned would get in the relevant alternative which is. often a formal insolvency such as administration (i.e. the vertical comparator test is passed); and
the new right of termination granted to New Look did not infringe the owners’ property rights because it gave them the opportunity to agree to an assignment, but did not oblige them to accept it.
The dominant theme of New look is that the issues of fairness and material irregularity are based on the facts of a particular CVA and that the CVA must be considered as a whole, striking the appropriate balance and taking into account all the circumstances. Zacaroli J insisted a lot that landlords had the right to terminate the lease and repossess if they did not like the terms of the CVA and it is up to them (not in court) to assess the character. fairness of certain “exercise the choice that the CVA presents” (ie decide to terminate or not) – emphasizing the importance of the right of termination to meet a challenge of equity.
Zacaroli J also clarified whether a CVA can reduce rent below market rent, confirming that there is no general principle that would prevent this. Following the decision of Debenhams there was a difference of opinion on this point.
The decision in New look, reassures businesses (especially retailers) who in recent years have used CVAs to help restructure rent commitments that a CVA is still a viable and useful restructuring tool. However, advisers will need to ensure that the right balance is struck and that the “give and take” is fair in the circumstances of that particular business.
The judgment in Regis (also a challenge from the owner to a CVA) is expected imminently and we will provide more detailed commentary on the key takeaways from both cases once this becomes available.
The judgment sanctioning the restructuring plan of Active virgin (returned yesterday) has dealt a further blow to landlords who, with the approval of the plan, will see their rent arrears cleared. Will this pave the way for other companies to use a restructuring plan instead of a CVA to manage rental debts? We will have to wait and see, but this could become the preferred route if we seek to avoid the risk and the (significant) cost of a possible CVA challenge. We will also provide an update on this matter shortly.
© Copyright 2021 Squire Patton Boggs (US) LLPRevue nationale de droit, volume XI, number 133