A new deal for New Look

Company voluntary arrangements were introduced to help rescue companies in financial distress, so that they can continue trading for the benefit of creditors as a whole. But companies are devising increasingly complex arrangements, which treat creditors – and landlords in particular – differently. Lazari Properties 2 Ltd and others v New Look Retailers Ltd and others [2021] EWHC 1209 (Ch); [2021] PLSCS 96 concerned a CVA approved by the creditors of New Look, a retail business operating from over 400 stores in the UK, whose trade has been seriously damaged by the pandemic. Key points A company voluntary arrangement has survived a root-and-branch attack by disgruntled landlords The court ruled that the differential treatment accorded to disparate groups of creditors was justified in all the circumstances of the case But the landlords have been granted permission to appeal The CVA formed part of a wider restructuring, designed to save the company from administration, following projections it would run out of cash. But landlords, disgruntled by the treatment to which they had been subjected, launched what Mr Justice Zacaroli described as a “root-and-branch attack” on the arrangement – which, if successful, would affect CVAs more generally. There were three prongs to the attack. Jurisdiction The landlords claimed that the arrangement was not within the scope of section 1(1) of the Insolvency Act 1986 because there were separate deals with different creditors, as opposed to a single arrangement involving all the creditors. Indeed, the landlords themselves had been subdivided into different groups. The rights of the owners of a distribution centre, which was essential to the company’s survival, were substantially unimpaired. But the remaining landlords were more seriously compromised. Arrears of rent and other sums were written off. Some were asked to accept turnover rents and other changes going forward to help restore poorly performing outlets to profitability, while the treatment of others reflected the company’s assessment that their sites were not financially viable. However, the judge ruled that differentiation between groups of creditors is within the scope of section 1(1). Furthermore, although the word “arrangement” suggests that there must be an element of “give and take”, there had been sufficient “give and take” between New Look and the various creditor groups to satisfy this relatively low jurisdictional hurdle. The final element of the jurisdictional challenge rested on provisions enabling New Look to relinquish occupation and terminate its liabilities to landlords. The landlords (relying on Discovery (Northampton) Ltd v Debenhams Retail Ltd [2019] EWHC 2441 (Ch); [2019] EGLR 47 argued that the provisions interfered with their property rights, which was impermissible. But rent is not an essential requirement of a demise – the leases would continue to run and New Look would remain liable for business rates unless and until the landlords accepted surrenders, which they were not obliged to do. Material irregularity Zacaroli J rejected the landlords’ challenge to the methods used to value their claims for voting purposes. Furthermore, although New Look ought to have provided more information to its creditors beforehand, there was no material irregularity because access to further information would not have made a material difference to the way in which the creditors had voted. Unfair prejudice The court applies two tests, described in Prudential Assurance Co Ltd v PRG Powerhouse Ltd [2007] 3 EGLR 131 as the “vertical” and “horizontal” comparators, when considering the fairness of an arrangement. The former compares the position of creditors under the CVA with their position in the event of the most likely alternative insolvency process, and the latter involves a comparison between creditors to establish whether any imbalances can be justified – for example, by the need to pay essential suppliers to secure business continuity. Both tests were satisfied. The secured creditors had given up rights as part of the wider restructuring and the benefits they obtained were referable to their security interests. The landlords would receive a better return under the CVA than if New Look were to go into administration, and the decision to pay unsecured creditors in full was necessary for business continuity. Was the switch to turnover rents, coupled with the release of “keep open” covenants and other changes to the leases, “unfairly prejudicial” due to the differential treatment accorded to disparate groups of creditors? Or was it unfair in itself because it was a “fundamental reallocation of commercial risk”? The judge accepted that differential treatment is a cause for enquiry, but ruled that it is not necessarily unfairly prejudicial for the purposes of section 6(1) of the 1986 Act. And Debenhams had established that rent reductions are not in themselves unfair. Zacaroli J indicated that he disagreed with, or rejected, the notion, supposedly established by Debenhams, that it is unfair to reduce rents below market rates, but accepted that long-term rent reductions, without an option to terminate, might be unfairly prejudicial if achieved by votes from creditors who do not suffer the same treatment. However, the landlords had been offered a commercial choice between terminating the leases or allowing them to continue at reduced rents and on modified terms. Postscript Landlords will undoubtedly feel that financial pain should be more evenly distributed among creditors. But the court did acknowledge that it might be unfairly prejudicial, were claims of a sub-group of creditors to be compromised as a result of votes cast by creditors whose rights remain – albeit justifiably – unimpaired. However, that was not the case here. The CVA was not imposed on a minority by a self-interested majority and would have been approved, even if the votes of unimpaired creditors were to be discounted. So the landlords lost their legal challenge but have been granted permission to appeal. Allyson Colby is a property law consultant Picture © Jack Dredd/Shutterstock