A recent decision in the High Court has rejected a challenge from landlords to a major high street chain to the validity of a Company Voluntary Arrangement (CVA) in which they feel they have been subject to undue impairment.
Despite objections from landlords, the courts have recently ratified the CVA that had been agreed to assist New Look Retailers Ltd following financial difficulties accelerated by the coronavirus pandemic. The aggrieved landlords had challenged the agreed CVA on various grounds after finding themselves at a detriment, whilst other categories of landlords included in the CVA remained unimpaired.
What are CVAs?
Put simply, CVAs are a form of insolvency procedure that involves an agreement being reached between a company and its creditors when faced with serious financial difficulties. Under the supervision of an insolvency practitioner, known as the nominee, the directors of a company may propose a CVA to its shareholders and creditors.
The proposals typically involve the rescheduling or reduction of a company’s debts through a number of arrangements aimed at balancing the interests of different parties.
The proposals must be voted on by way of a decision procedure in which the company’s creditors and shareholders decide whether to approve the proposals. A CVA will be approved if 75% of creditors who respond vote in favour of it, unless more than 50% of unconnected creditors vote against the proposals. Once agreed, a CVA binds all unsecured creditors of a company and does not affect the rights of preferential or secured creditors.
A CVA can only be challenged on the limited grounds of unfair prejudice or material irregularity, both of which are questions of fact and judged on a case-by-case basis.
The New Look Case
The recent case involving New Look (Lazari Properties 2 Ltd and others v New Look Retailers Ltd) involved a challenge to the CVA agreed in late 2020 as part of a larger restructuring of the company.
Under the terms of the agreement, unsecured creditors were split into a number of different categories such as:-
- Category A landlords, who were responsible for the distribution centres;
- Category B landlords, who were landlords for stores that were currently being leased to New Look above market value; and
- Category C landlords, who were landlords for stores that New Look had vacated, or were in the process of vacating.
The practical effect of the CVA meant that Category A landlords were unimpaired by the CVA, with rent being paid monthly instead of quarterly. Category B landlords had rent reduced to being a percentage of the stores annual turnover whilst Category C landlords would not be paid any rent arrears, and would be paid full contractual rent for a maximum of two months after which they would receive no rent or service charge.
The Category B and C landlords, who constituted 41% of the eligible votes, challenged the CVA on both grounds of unfair prejudice and material irregularity as well as a further claim that the CVA was void because it did not constitute a composition or arrangement under the Insolvency Act from which CVAs are derived. The main thrust of the argument relies on the issue that the CVA was passed using votes of the wider creditor constituency, despite some categories of this constituency not suffering detriment as a result.
The challenge was rejected on all grounds by the judge who emphasised that inequality of creditors does not necessarily equate to unfair prejudice. It was also stated that although CVAs are at their core underpinned by the principles of good faith and equality, unimpaired creditors that vote in favour of a CVA that treats other creditors differently does not necessarily equate to a lack of good faith.
A number of similar challenges have been heard in the courts this year, whereby retail landlords have challenged the validity of restructuring arrangements that seek to reduce rent liabilities. Unfortunately for retail landlords these challenges, such as one brought against a Restructuring Proposal (under the Corporate Insolvency & Governance Act 2020) involving Virgin Active, are being rejected.
The judgement in the New Look case did provide a glimmer of hope in making it clear that similar circumstances could potentially give rise to an unfairly prejudicial retail CVA. When assessing what could make a CVA unfairly prejudicial, emphasis should be placed on applying a general principle of equality and ensuring that the statutory majority who voted in favour of a CVA shared sufficiently similar rights with the minority voting against.
In this instance the courts rejected what they referred to the “root and branch attack on the use of CVAs”, finding that they remain to be an effective instrument to assist companies in financial turmoil, and on consideration of the facts this CVA was proportionate and not more disadvantageous to the Landlords than other insolvency procedures may have been. The Landlords have however been granted leave to appeal to the Supreme Court, where the New Look Landlords hope to receive a judgement more in their favour so the points raised are still open to challenge.
If you are a landlord or a tenant and want to discuss CVA’s or anything else in this article please contact a member of the team.