CVA battles between landlords and retailers continue
20 May 2021: Over the past couple of years any mention of a company voluntary arrangement (CVA) in the national press was usually in relation to a “controversial” CVA proposed by a High Street retailer or restaurant whereby landlords felt their rights were being adversely affected in relation to the general body of creditors. A CVA can be used by an insolvent company to address or restructure future lease commitments and so landlords can be vocal in their criticism due the significant sums often involved. In a couple of recent CVAs, groups of landlords banded together to launch legal challenges to the respective CVAs and the judgments have been eagerly awaited. Both have been handed down in the last fortnight and whilst each case could be a study of its own, the brief facts are these:-
New Look Retailers Limited
New Look entered into a CVA in September 2020 due to the impact of the Covid-19 pandemic and did so as part of a wider restructuring. The CVA was challenged by landlords and was expedited through the courts due to the significance of the outcome, not only on the CVA itself but on the wider use of CVAs as a restructuring tool. The landlord challenged the CVA on three grounds: (1) that it was not a true scheme of arrangement within the meaning of the Insolvency Act because different classes of creditors would be treated differently and the CVA modified the landlords’ proprietary rights; (2) that the CVA was unfair due to the treatment of creditors and the movement of rents to a turnover based model plus a three-year rent concession period; and (3) that there was material irregularity in the way the CVA was approved as not enough information was provided to the creditors and the discount applied to the landlords’ claims for voting purposes was not fair. The court rejected the landlords’ claims on all counts. The judge found that there was no irregularity in the process to approve the CVA, that landlords retained the right to terminate the leases if they were not happy with the lease modifications proposed, and different treatment of various classes of creditor did not constitute unfairness in this case.
Regis UK Limited
Regis/Supercuts entered into a CVA in October 2018, the terms of which compromised the claims of certain landlords and other creditors. In November 2018, 19 landlords applied to have the CVA revoked on the grounds of unfair prejudice and material irregularity, based on 21 issues in total. The CVA automatically terminated in October 2019 when Regis entered administration. Clearly, therefore, any decision reached would likely be of no practical benefit but the landlords appear to have wanted a ruling nevertheless for “the greater good” by setting precedent. The court ultimately revoked the CVA due to one creditor being treated as critical being unfairly prejudicial but dismissed all other grounds. The applicants had sought relief from the CVA nominees (i.e. that they be ordered to repay their fees if the CVA was revoked) but this was dismissed also. The landlords could therefore be said to have “won” in this case but given the judgment reached in the New Look case (which was handed down by the same judge coincidentally) any impact in the context of retail CVAs generally has fallen away.
These two cases highlight that there are clear avenues open to creditors who wish to challenge a CVA being implemented but a lot can be learned from these cases about the thresholds that must be met for the court to overturn the initial decision of creditors.
If you have any queries about CVAs or any other insolvency process, please do not hesitate to contact any of the BRI management team.