Restructuring and insolvency analysis: New Look Retailers Ltd (NLR) creditors have approved a corporate voluntary agreement (CVA) which has had a disproportionate impact on a number of NLR owners. Compromised owners have challenged the CVA on many grounds. In dismissing the claim, Judge Zacaroli held that the CVA was valid, notwithstanding that it sought to deal with different creditors in different ways, and that challenges under section 6 of the insolvency (IA 1986) had failed. The case is significant because it decisively reinforces the courts’ reluctance to interfere with efforts to restructure the struggling retail sector, particularly in the face of the coronavirus (COVID-19) pandemic, even when these disproportionately affect landlords. It represents a clear indication of the primacy of the rescue culture over the rights of owners. Written by Alaric Watson, Barrister at Hardwicke. Lazari Properties 2 Ltd v New Look Retailers Ltd [2021] EWHC 1209 (Ch)
What are the practical implications of this case?
Many landlords were concerned about the trend of recent CVAs, particularly (but not exclusively) in the commercial sector, to increasingly interfere with landlords’ rights under commercial leases (a trend that the coronavirus has exacerbated ). Sir Alastair Norris’ decision in Discovery (Northampton) Ltd and others v Debenhams Retail Ltd and others [2020] EWHC 1430 (Ch) had been a disappointment.
In this case, the applicants expressly invited the judge to deviate from Debenhams and say that the CVA was invalid because of its differential treatment of owners. The judge refused to do so (not only did he not consider Sir Alastair Norris to be manifestly wrong, but in fact fully endorsed the decision). Prior to this assertion, there had been a sense that interference with owners’ rights in the manner proposed by this CVA might well be susceptible to attack and that the safest course for such a debtor might be in under Part 26A of the Companies Act 2006 (CA 2006). It is likely that the decision of New look will encourage corporate debtors facing unsustainable obligations under their leases to take the voluntary arrangement route rather than assume they would need to use Pt 26A.
What was the background?
NLR is an apparel retailer with over 400 stores and 10,000 employees. Like other companies of this type, its business, already in decline before 2020, had been devastated by the effects of the coronavirus pandemic. NLR had massive liabilities, in respect of loans and security for senior secured notes (SSN), which were secured by a debenture (the loans taking priority over the SSN). Since the start of confinement in March 2020, it had ceased to be able to remunerate its owners (other than a contribution based on revenue during the brief respite from confinement in the summer of 2020). It became clear that NLR faced an administration with no prospect of a dividend to unsecured creditors by October. NLR offered a CVA, as part of a wider restructuring program for the group, which differentiated its creditors, in that its debts to the owners of two distribution centers (deemed vital to the business) and to commercial creditors and employees were largely to be satisfied, but landlords of commercial premises (particularly those deemed unsustainable) would have to suffer the consequences, with future rent from continuing leases reduced to a turnover rent, with reduced obsolescence contributions and a right of termination after a certain period granted to NLR. The CVA was approved in October with the support of SSN holders (as they were not guaranteed).
The compromised lessors challenged the CVA, on the grounds that it could not constitute a valid CVA within the meaning of IA 1986, s 1 since it was in reality a series of different arrangements treating the creditors in a manner unequal (the points of jurisdiction), that there was unfair prejudice inherent in the differentiation between creditors and an unjustified interference with the rights of the owners (the points of unjust prejudice), and that there had been material irregularities in the understatement of the future debts of the owners and in the material omissions and inaccuracies in the proposal (the points Points of irregularity).
What did the court decide?
In a thorough judgment (330 paragraphs), including a detailed review of relevant case law, the court dismissed the claim. Jurisdiction points failed: while good faith and equality were central tenets of voluntary arrangement regimes under the IA 1986, they did not preclude treating creditors differently in various circumstances; a difference in treatment required an investigation, but was not in itself sufficient to invalidate a CVA; although a voluntary arrangement (such as a scheme under CA 2006, Pt 26) cannot compel an owner to accept an assignment (see Re Instant Cash Loans Ltd [2019] EWHC 2795 (Ch), [2019] All ER (D) 212 (Oct)), the CVA did not do this but rather allowed the tenant to cease being obligated to pay the rent (which did not in itself invalidate the leases).
Similarly, the points on unfair hardship failed: neither the differential treatment of certain owners nor the fact that creditors relatively untouched by the CVA allowed the proposal to be approved constituted unfair hardship in itself; on a vertical comparison, the owners would be worse off under one administration and the difference in treatment, on a horizontal comparison, was justifiable; landlords had the right to determine leases if they considered the terms as amended by the CVA too distasteful.
The points of material irregularity also failed on the facts: there had been no material non-disclosure and the convener’s decision under rule 15.31(3) of the Insolvency Rules (England and Wales ) of 2016 had been irrefutable.
To what extent might the principles used in this case be relevant to Part 26A restructuring plans aimed at compromising owners’ claims through an interclass crash?
This case did not involve CA 2006, Pt 26A, but it drew instructive parallels between the two regimes. It was delivered just two days before the judgment of Snowden J Re Virgin Active Holdings Ltd and other companies [2021] EWHC 1246 (Ch), which sanctioned a restructuring plan under CA 2006, Pt 26A which piled up the rights of certain owners. It is clear from the two judgments that many of the same principles will be at play under each regime and also that the two regimes are not as far apart as they might have seemed prior to these judgments.
On May 14, 2021, the judge authorized the owners to appeal.
Case details
- Court: Insolvency and Companies List (Chancery Division), Business and Property Courts of England and Wales, High Court of Justice
- Judge: Mr. Justice Zacaroli
- Judgment date: May 10, 2021
