Lazari Properties 2 Limited and others v New Look Retailers Limited, Butters and another  EWHC 1209 (Ch)
The High Court has rejected challenges by landlords of the terms of the Company Voluntary Arrangement (“CVA”) approved in respect of the trading company which operates the New Look high street stores.
The directors of New Look Retailers Limited (“New Look”) made a proposal for a CVA in August 2020 due to trading difficulties experienced during the Covid-19 pandemic. The Proposal was approved by a majority of 81.6% of creditors in September 2020 as part of a wider restructuring exercise, which also involved a separate scheme of arrangement of its secured finance creditors, owed more than £600 million.
The terms of the CVA proposal divided New Look’s creditors into several categories including four covering different classes of landlord. Another category was for one class of secured creditors whose rights had been altered by the linked scheme of arrangement but were not affected at all by the terms of the CVA. This class were owed £441 Million.
Under the CVA the rights of the landlords of New Look’s stores were modified by the release of unpaid rent in full, the imposition of a turnover rent for a period of three years at least and terms preventing landlords from terminating leases except on 150 days’ notice. New Look was also granted a right to terminate on 90 days’ notice. The rights of other landlord categories (those of New Look’s central distribution centre in particular) were unaffected by the CVA. Landlords of the stores with debts of £85 million voted against the Proposal but were easily outvoted by the others including the unaffected classes of creditors.
The landlords challenged the CVA on the following grounds:
1. The CVA proposal was not a composition or arrangement within the meaning of section 1(1) of the 1986 Insolvency Act (“the Act”)
The CVA was not within the meaning intended by the insolvency legislation, because it involved different classes of creditors who were to receive different treatment. It was a series of agreements with different groups of creditors on fundamentally different terms.
The CVA was not an arrangement because it did not contain “give and take” between the parties.
A CVA cannot modify landlords’ proprietary rights by providing New Look with a new right to terminate.
2. There were Material Irregularities
The landlords’ claims were miscalculated for voting purposes and there were omissions and inaccuracies in the Proposal.
3. The Landlords were Unfairly Prejudiced
• The CVA was approved by the votes of creditors whose rights were unimpaired by the CVA.
• Creditors whose claims were compromised received differential treatment from those that were not.
• Modifications to the terms of the leases were unfair.
The Judge reviewed the development of legislation concerning insolvent arrangements with creditors and case law following the introduction of the CVA procedure in Part 1 of the 1986 Act, which he considered to be a fundamental change in regime. He decided that a CVA providing for differential treatment of different categories of creditors is not outside the scope of section 1(1) of the Act – it was an arrangement, regardless.
The Judge accepted that the CVA procedure was underpinned by principles of good faith and equality. The fact that approval of a CVA is achieved by the votes of unimpaired creditors will be important in deciding whether unfair prejudice exists, but it did not make such approval immediately unfairly prejudicial.
The Judge did not set an inclusive test as unfair prejudice would depend on all the circumstances of the case. However, he highlighted four points of special relevance:
1. whether there is a fair allocation of assets between compromised creditors and other sub-groups of creditors, including a consideration of the source of the assets and whether the assets would be available in an alternative insolvency process. For example, approval by the votes of a class of creditors receiving a greater proportion of assets ordinarily available to all unsecured creditors may point to unfair prejudice.
2. the nature and extent of the differential treatment, the justification for that treatment and its impact on the outcome of the meeting. It was unlikely to be unfairly prejudicial if CVA creditors were impaired in different ways, or creditors which were left unimpaired were small, in number and value yet sufficient to tip the scales in favour of the CVA.
3. the extent to which other impaired creditors voted in favour; and,
4. the fact that a restructuring plan might achieve the same outcome does not preclude the possibility of unfair prejudice.
The Judge considered the New Look CVA against these points and concluded that it was able to satisfy each.
Dealing with the other challenges, the judge found that the CVA did have adequate “give and take” so as to be considered an arrangement. It did not compromise proprietary rights by reducing rent to nil, as the leases would remain in place unless terminated by the landlords themselves.
As to the claim of unfairness in the modifications to the Leases, the judge held that any potential prejudice to the landlords was sufficiently addressed by offering them a right to terminate in return for imposing lease modifications, provided that the notice period was better than that which the landlord would receive in an administration or liquidation. In essence, the landlords were afforded a choice of whether to abide by the CVA terms or to take the property back.
The New Look case was heard by Mr Justice Zacaroli who also dealt with a similar challenge by the landlords in the CVA approved by the creditors of Regis UK Limited (“Regis”). The cases were heard in successive weeks with the same team of lawyers acting for the landlords and the lawyers for New Look were permitted to observe the Regis case. Mr Justice Zacaroli’s judgment in the Regis case is yet to be delivered.
The decision in New Look offers long-awaited guidance for landlords and insolvency practitioners as to the lawfulness and fairness of CVAs used to restructure lease liabilities. The decision in the Regis case is likely to differ only as the terms of the Regis CVA dictate after the application of the same principles. The decision is a setback for landlords and is likely to increase the use of CVAs as a rescue procedure for retailers and other companies operating businesses using multiple leased premises.
The decision involved a detailed consideration of the terms of the CVA and any other decision in respect of a similar CVA will turn on the detail of terms offered in the proposal. Directors considering a proposal will need to continue to take special advice as to the fitness of the terms they should include to deal with landlord’s rights. Conversely landlords faced by tenants’ CVA proposals must carefully consider their rights. Ultimately, they are likely to be offered a stark choice – accept the terms of the CVA or recover possession and look for a new tenant.