A second look at New Look?
On 26 August 2020, a company voluntary arrangement (the "CVA") was proposed (the "Proposal") by New Look Retailers Ltd ("New Look").
It was approved by its creditors on 15 September 2020. However, the CVA was challenged by various landlords of New Look who opposed the Proposals' terms. The Claimant's grounds of challenge were considered by the Zacaroli J, in the case of New Look Retailers Ltd.
This is not the first time a high-street retailer has entered into a CVA to the detriment of the Landlords in comparison to other creditors. Nevertheless, landlords will be concerned by the dismissal of the Claimants' challenges in New Look Retailers, as well as similar findings in the case of Re Regis UK Limited (also heard by Zacaroli J) and Re Virgin Active Holdings Ltd (a Part 26A restructuring case). The decision in New Look is now being taken to the Court of Appeal.
The Key Facts
The CVA was part of a wider restructuring of the New Look group.
New Look's secured debts included "SSN Notes" of £441m. The unsecured debt included rental and service charge liabilities, trade debts and employee debts.
Under the Proposal and reflective of other retail CVAs, New Look's creditors were categorised and their claims dealt with as follows:
- "A Landlords": landlords of New Look's distribution centre, premises considered critical to the Group's continued operations. The A landlords' debts were largely uncompromised by the terms of the CVA. 100% of the A Landlords supported the Proposal.
- "B Landlords": landlords of stores where either (i) the property costs were considered above-market or (ii) moving to a turnover-based rent would make the stores more viable. The Proposal provided that:
- B Landlords' rent arrears claims (but not service charges) would be released in full.
- In future, B Landlords would receive a turnover rent instead of the rent provided for in the leases for a 3 year period, followed by either a turnover rent or the market rent (whichever is higher).
- B Landlords were given an option to terminate their leases if they found the modified terms unacceptable.
B Landlords gave a mixed response to the CVA Proposal, with only one sub-group giving 75% support for the CVA. The rest supported the CVA by either less than the requisite 75% or less than 50%.
"C Landlords": landlords of stores which were to be vacated because they were not viable for New Look.
- Rent arrears owed were compromised in full, although insurance remained recoverable whilst New Look remained in occupation.
- C Landlords were also granted the option to terminate their leases.
- 55% of C Landlords opposed the Proposal.
"K Noteholders": the holders of the unsecured portion of the SSN Notes.
- The K Noteholders were entitled to vote in the sum of £273.4m. A secured creditor may vote in a CVA in respect of the unsecured portion of its debt, so this was a big vote and a deciding factor in approving the Proposal.
- K Noteholders' claims were generally unaffected by the CVA.
- K Noteholders (unsurprisingly) all supported the Proposal.
Other classes of unsecured creditors: including employees and trade creditors. In general terms, key creditors for the ongoing trading of New Look were identified and paid in full to keep the business operating.
Based upon a turnout of 81.4%, the CVA was passed by the requisite 75% majority of creditors and implemented. Predictably, the supportive creditors were those whose claims were not compromised heavily, including K Noteholders. Creditors whose rights were heavily compromised, including B and C Landlords, were more likely to oppose.
The Court accepted that, if the CVA had not been approved then the most likely alternative outcome for New Look's business would be a pre-pack administration following a short period of marketing, resulting in a return to unsecured creditors of £0.1p in the £.
The Claimants' Grounds of Challenge
The "Jurisdictional Challenge"
The New Look CVA wasn't a composition or arrangement within s1(1) IA 1986; on its true analysis it was several separate arrangements with different groups of creditors.
There wasn't enough "give and take" between New Look and the creditor groups.
New Look's new termination right exercisable against B Landlords and C Landlords interfered with their property rights.
Court Response: This challenge failed. The Court found that the fact that the Proposal treated different groups of creditors differently did not take it outside s1(1) IA 1986. The Court was also unpersuaded by any perceived lack of "give and take" by New Look, because the CVA offered a better outcome than administration (the likely alternative if the CVA failed). New Look's new termination rights also had not interfered with the landlord's property rights; landlords were not obliged to accept surrenders of their leases.
The "Material Irregularity Challenge"
There were irregularities in the calculation of landlords' claims for voting purposes.
There were omissions and inaccuracies in the Proposal, such as K Noteholders receiving equity as part of the wider group restructure and a management incentive plan.
Court Response: this challenge was also unsuccessful. Landlord's claims had been calculated in accordance with the Insolvency Rules 2016, which only require the chair of the CVA meeting to give unascertained claims a £1 value, unless he/she decides to give a higher estimated minimum value. The fact that landlords' claims for future rent had been discounted by 25% did not lead to a "material irregularity" as it had been applied to all landlords equally (Re Regis followed this and the Court found that a much sharper 75% discount in that case was unjustified but not materially irregular). The non-disclosures in the Proposal should not have occurred but did not lead to a material irregularity either.
The "Unfair Prejudice Challenge"
The requisite 75% majorities for the approval had been obtained only by reliance on the votes of creditors whose claims were not impaired by the CVA.
Creditors whose claims were compromised received different treatment to those whose were not.
The modifications to the terms of the leases were unfair.
Court Response: this challenge also failed. Whilst it is an important consideration on the question of unfair prejudice if a Proposal passes by relying upon votes of those creditors whose claims are treated differently to those prejudiced, that alone does not mean the prejudice suffered is unfair. As for the modifications to the terms of the leases, under the Proposal the Claimants were given the right to terminate their leases if they felt the modifications to their leases unfair.
Landlords are frequently at a disadvantage compared with other creditors when their tenants become insolvent. A bank who grants a £5m rolling facility to a retailer will typically benefit from security which grants them advantages as a creditor compared with a landlord who has leased premises for £5m, notwithstanding the parity of the two investments. For example, a CVA cannot restrict a secured creditor's ability to enforce its security without that creditors' consent. Furthermore, in a liquidation / administration context secured creditors would be paid, in accordance with their security, before the unsecured creditors.
In CVAs such as New Look's and Regis', the disadvantage of landlords is further exacerbated because future rents are effectively undervalued for voting purposes whereas the unsecured debts to lenders can be decisive. This can be seen in New Look by comparing the position of B and C Landlords with that of K Noteholders. It is understandable why landlords see this as unfair, and will be a source of disappointment that notwithstanding this is not necessarily "unfair prejudice".
The Court of Appeal's decision will therefore be very important for landlords. We do not know the basis upon which this is being pursued, but there are a number of issues which arise from the High Court Judgment which may be suitable grounds for appeal. For instance:
Even a prejudicial CVA Proposal may be better for landlords than no CVA, if no CVA would lead to a swift shut-down of the retailer's business, followed by a sale of business/assets with minimal or no return to creditors. In New Look Retailers, the Judge focused upon the likely alternative (a swift shut-down) when determining whether the Proposal was unfairly prejudicial for the Claimants. However, just because a no-CVA alternative may be more detrimental for landlords does not mean:
- That the terms of the Proposal are fair.
- That the Proposal could not be modified in order to be less prejudicial to landlords, whilst remaining acceptable to other creditors.
Similarly, in both New Look and Re Regis, the Judge held that there was no unfair prejudice to landlords where the landlords are given the right to terminate their leases. This gives landlords the option to recover their premises if they think the modifications to their lease imposed by the Proposal is unfair.
However, a right to terminate is an imperfect remedy in circumstances where the Proposal is much more favourable to other creditors than landlords: landlords are effectively being given a take take-it-or-leave-it offer rather than a more balanced alternative CVA. A better remedy would be for the Court to assess whether there could be a modified proposal which is fairer to landlords and also acceptable to other creditors. However, the Court may be reluctant to redraft a Proposal which has already been supported by the majority of creditors.
A new look at New Look in the Court of Appeal may lead to consideration of these issues and a better outcome for landlords. Until then, it seems that CVAs on the high street will continue to sound alarm bells for landlords.