English Court Upholds New Look’s Company Voluntary Arrangement, Following Major Challenge from Landlords

At a Glance

The English court yesterday handed down a judgment comprehensively rejecting landlords’ challenge to the company voluntary arrangement (“CVA”) of New Look. This seminal judgment, which followed an extensive trial, has been eagerly awaited in the restructuring market.

The restructuring market is also keenly awaiting the court’s judgment on the challenges to Regis’ CVA and Virgin Active’s restructuring plan — both high-profile cases focussed on the potential limits on distressed tenants’ ability to compromise landlords’ claims.

We discussed the implications of these landmark cases in a webinar on 18 May with distinguished speakers; a recording is here. On 1 June, join Kirkland speakers to discuss the state of the retail market and market implications of these cases; for more information and to register, see here.

Core takeaways from Zacaroli J.’s judgment in Lazari Properties 2 Ltd & others v New Look Retailers Ltd & others (the "New Look Judgment") include:

• Market rent: There is no general principle that a CVA cannot reduce rent below market rates, or must amend terms no more than is necessary to achieve the purposes of the CVA.
• Importance of break rights: The fact that landlords were granted the right to terminate the leases provided the key answer to their complaints of unfair prejudice (provided that the terms offered to landlords upon exercise of that termination right were at least as beneficial as what the landlords would receive in the alternative to the CVA). “The inability to pay full rent is the consequence of New Look’s insolvency and the reduction in rent and other modifications only apply if the relevant [landlord] does not opt to terminate its lease.” It was not for the court to evaluate the fairness of the absence of a rolling termination right for landlords; instead, that was a factor that each landlord could assess. 
• Voting discount: The application of a discount to landlords’ claims for voting purposes — here, a 25% discount to landlords’ contractual right to future rent for the remainder of the lease — was not a material irregularity.
• Treatment of SSN Holders: The approval threshold for the CVA was only reached by virtue of votes of the holders of New Look’s senior secured notes (the “SSN Holders”), who were unimpaired by the CVA. However, this did not constitute unfair prejudice, as: 
  • it was necessary to see the CVA as an integral part of a wider restructuring, including a scheme of arrangement in which the SSN Holders’ rights were impaired (exchanging secured debt for a minority equity interest in New Look);
  • the different treatment was justified by the fact that SSN Holders were secured; and
  • the fact that SSN Holders voted in respect of the unsecured portion of their claim did not unfairly prejudice the landlords, taking account of all the circumstances.

Key terms of the CVA

Challenges and court’s rulings

The Jurisdiction Challenge

The applicant landlords unsuccessfully argued that the CVA proposal did not constitute a composition or arrangement as required by section 1(1) of the Insolvency Act 1986.

The Material Irregularity Challenge

The applicant landlords unsuccessfully argued that there were material irregularities under the CVA.

The Unfair Prejudice Challenge

The applicant landlords unsuccessfully contended that they were unfairly prejudiced under the CVA. Whether unfair prejudice exists depends on all the circumstances. Four points were particularly relevant on the facts of this case:

1. whether there is a fair allocation of the assets available within the CVA between the compromised creditors and other sub-groups of creditors (which, the court held, necessarily requires the court to consider whether a different allocation would have been possible);
2. the nature and extent of the different treatment, the justification for that treatment and its impact on the outcome of the meeting;
3. the extent to which others in the same position as the objecting creditors approved the CVA; and
4. a finding of unfair prejudice ought not to be precluded merely because the same result might have been achieved in a restructuring plan (under Part 26A of the Companies Act 2006).

The future of CVAs?

The New Look Judgment is resoundingly in favour of the company. Zacaroli J.’s extensive judgment includes commentary which will help shape market practice on future CVAs. For example:

1. The judgment indicates that it is not necessarily sufficient, to avoid a finding of unfair prejudice, that the differential treatment of certain creditors was objectively justified (e.g., because they were critical creditors) and that the compromised creditors are treated more favourably than they would be in the alternative to the CVA. Rather, whether unfair prejudice exists depends on all the circumstances;
2. The judgment raises the question of whether there is a fair allocation of the assets available within the CVA between the compromised creditors and other sub-groups of creditors. This raises the prospect of greater scrutiny by the court of whether an alternative arrangement would have been fairer. This question has consistently been avoided in the context of schemes of arrangement, but is now a key point in the challenge to Virgin Active’s restructuring plan; and
3. The court found that details of (i) the likely value of equity interests to be received by the SSN Holders and (ii) the management incentive plan, ought to have been disclosed to CVA creditors (although ultimately this did not amount to a material irregularity).

The British Property Federation has published a list of “top 10 ‘red flag’ clauses. The New Look Judgment clarifies the permissibility of certain of these (naturally, depending on the circumstances), such as continued rent reductions beyond the expiry of the rent concession period, the possibility of rental discounts to less than market rent, new rights for the company to terminate leases and the compromise of dilapidations claims to a fixed sum.