At a Glance
The court ordered the revocation of Regis’ company voluntary arrangement on unfair prejudice grounds, specifically, because the company’s shareholder had been permitted to vote on the CVA in respect of an intercompany debt claim, whilst that debt was left unimpaired.
A blanket 75% discount on landlords’ claims for voting purposes was not justified, but was not a material irregularity given it did not impact the outcome of the vote.
A requirement for landlords exercising a termination right to terminate all their leases could potentially have constituted an unfairly prejudicial fetter — but the court held that a modification letter validly removed this constraint.
The revocation of Regis’ CVA is of little practical effect, given the CVA had already terminated (upon the company’s entry into administration). The judgment dismissed all but one of the applicant landlords’ claims of unfair prejudice and/or material irregularity. Although the implications of this case — together with the seminal judgments in New Look and Virgin Active — will need to be considered carefully when structuring future CVAs, it will not diminish the popularity of the CVA as a flexible restructuring tool.
We discussed the implications of these landmark cases in a webinar on 18 May with expert speakers; a recording is here. On 1 June, join expert speakers to discuss the state of the retail market and market implications of these cases; for more information and to register, see here. Our alert on New Look is here and on Virgin Active, here.
Key terms of the CVA
|Company||Regis UK Ltd|
|Proposal Date||October 2018; automatically terminated October 2019 upon the company’s entry into administration|
|Approval||c. 79% (by value, of all unsecured creditors voting)|
Divided creditors into various categories:
Challenges, court’s rulings and key takeaways
The applicant landlords unsuccessfully argued that inadequate disclosure around (a) antecedent transactions and (b) the statement of affairs and the estimated outcome statement, constituted a material irregularity. Non-disclosure will constitute a material irregularity only if there is a substantial chance that the non-disclosed material would have made a difference to how creditors voted at the meeting.
|The CVA proposal did not adequately disclose antecedent transactions in 2017 and 2018 (which might have been vulnerable to challenge as transactions at an undervalue)||
No material irregularity
For 2017 transactions, there would in fact have been no sustainable claims under the relevant statutory provisions (given the company’s solvency at the time), and more extensive disclosure would have revealed that there was no material prospect of the claims succeeding
For 2018 transactions, the CVA proposal ought to have identified the possibility that a particular transaction might give rise to the possibility of a claim as a “transaction at an undervalue”. However, failure to disclose this was not a material irregularity, in part because the circumstances demonstrated a potential defence to such a claim. Accordingly, there was no substantial chance that creditors would have assessed the CVA differently had the CVA proposal addressed the possibility of such a claim
|The statement of affairs and the estimated outcome statement were materially inaccurate or complete, for various reasons||
No material irregularity
Unfair prejudice — treatment of intercompany/shareholder claims
The applicant landlords successfully argued it was “unfairly prejudicial” for a claim owed to the company’s shareholder to be categorised as a “Critical Creditor” and paid in full. The court revoked the CVA on this basis and held that the nominee’s report on the CVA proposal was below the standard expected in this regard (in recommending that the CVA proposal be put to the creditors’ vote, when the inclusion of the shareholder’s claim as a Critical Creditor was unfairly prejudicial to the applicant landlords), as explored further below.
The key question was whether treatment of intercompany/shareholder claims could be objectively justified. A common justification for paying a creditor in full is that it is necessary to do so because that creditor’s ongoing support for the company is critical to the success of the CVA, and it will not provide that support unless its existing debt is paid.
|The treatment of Regis Corporation and the company’s sole shareholder as “Critical Creditors” constituted unfair prejudice||
75% discount of landlords’ claims for voting purposes
The court held that applying a blanket 75% discount to landlords’ claims in respect of future rent for voting purposes was not justified. However, this was not a material irregularity as it had no impact on the outcome of the meeting.
In contrast, in the recent challenge to New Look’s CVA, the court concluded that a discount of 25% to landlords’ claims in respect of future rent for voting purposes was justified, where the claim of each landlord had been estimated by reference to the circumstances of the particular lease (see our Alert).
|The discounting of the landlords’ claims by 75% for voting purposes constituted a material irregularity or unfair prejudice||
Fairness of modifications to lease terms
The applicant landlords unsuccessfully argued that various modifications to lease terms were unfairly prejudicial. However, the court held that a requirement for landlords exercising a termination right to terminate all their leases could potentially have constituted an unfairly prejudicial fetter, and that the supposed benefit of Regis’ profit-share fund3 was illusory.
|Various modifications (primarily rent reductions) to the lease terms were unfairly prejudicial||
|Whether the alleged unfair prejudice was sufficiently mitigated by the grant of new termination rights to landlords or the availability of a profit-share fund||
Breach of duty by the nominees
The applicant landlords alleged that the CVA nominees (individual insolvency practitioners who oversee the CVA proposal) had acted in breach of their duties.
The court held that the “critical focus” in considering whether a nominee has complied with their duties is the nominee’s report to the court (which is the nominee’s only function under the insolvency legislation). The court ultimately held that any reasonable nominee ought to have taken certain matters into consideration before accepting that the shareholder was properly to be treated as a Critical Creditor. In that “one limited respect”, the conduct of the nominee did fall below the required standard. However, the court did not make an order to deprive the nominees of their fees.
Revocation of CVA
Even though Regis’ CVA had already terminated (automatically upon its entry into administration), the court held it nonetheless had jurisdiction to revoke the CVA. The remedy of revocation is discretionary, not automatic. The court decided to make an order revoking the CVA.
Regis is the third in a trio of landmark cases in the distressed tenant-landlord context in the past fortnight; see our alerts on New Look here and Virgin Active here. Although the practical effect of the revocation of Regis’ CVA is limited, the key takeaways described above — together with those in New Look and Virgin Active — will drive the next wave of potential compromises.
1. Namely, assuming that each of the premises would be re-let at 85% of the contractual rent after a six month void period and a six month rent-free incentive period.↩
2. The court held that the fact that the same discount had been used in most retail CVAs since 2011 was not relevant to whether it amounted to a material irregularity, as in no case had the reasonableness of the discount used been tested in, or resolved by, a court.↩
3. Namely, 20% of the company’s net profits for the next two years, above £250,000, subject to a cap of £200,000.↩
4. Carraway Guildford (Nominee A) Ltd & others v Regis UK Ltd & others  EWHC 1294 (Ch) at ↩