The High Court dismissed landlords’ challenges to the terms of New Look’s company voluntary arrangement (CVA) last week in a ruling that has sparked lively debate within both the landlord and restructuring sectors.
The landlords challenged the CVA by way of three main limbs:
The jurisdiction challenge: it was alleged that the CVA wasn’t so much a composition of New Look’s debts but a collection of separate agreements with different groups of creditors, and therefore did not constitute an arrangement appropriate for section 1(1) of the Insolvency Act 1986 (IA 86).
The material irregularity challenge: the landlords challenged the CVA on the grounds that there were inaccuracies/omissions in the proposal and failings in the calculations used for landlord voting.
The unfair prejudice challenge: it was claimed that the vote in favour of the CVA was secured only because those whose claims were unimpaired by the CVA outweighed those who stood to lose from it. It was therefore argued by the landlords that the creditors whose claims were compromised received differential and unfair treatment.
The court dismissed all claims and the resulting conclusions were as follows:
The jurisdiction decision: in his ruling, Mr Justice Zacoroli emphasised that just because a CVA allows for differential treatment amongst the different sub-groups, it doesn’t mean that it will automatically fall outside of s1(1) of IA 86. It was ultimately not agreed that CVAs are limited to arrangements where all creditors can consult together with a shared common interest.
It was also explained that whilst the Cork Report did seemingly initially intend CVAs to be used in more simplistic circumstances than those applying to New Look, it didn’t follow that large companies/more complex CVA proposals should be inherently excluded from its jurisdiction.
The material irregularity decision: it was decided that the omissions did not amount to material irregularity and the judge added that he did not think the vote choices of the affected creditors would have changed had any of the alleged failings been corrected prior to the vote.
The unfair prejudice decision: it was decided that a CVA is not necessarily unfairly prejudicial just because the majority in favour is achieved from the votes of the unimpaired creditors.
The court pointed out that section 4 of IA 86 appears to have been drafted with an awareness that a single arrangement may involve different treatment of creditors, and yet it still demands uniform measures regarding notice of the proposal vote and of the voting itself. It will therefore be necessary to consider the nature and extent of any differential treatment when weighing its potential unfairness, as well as any justification for it and its potential impact, on the outcome of the proposal vote meeting.
In considering whether there is unfair prejudice, it was confirmed that it is necessary to consider whether there was a fair allocation of assets available within the CVA as spread between the compromised creditors and the other subgroups (and even where there wasn’t, to consider if a different allocation was realistically possible).
The votes of creditors in individual voluntary arrangements (IVAs) who had been offered preferential treatment were disallowed in the cases of National Westminster Bank plc v Kapoor  and Gertner v CFL Finance Ltd . The judge noted that these rulings should not be applied as precedents here as in each ‘there was something in the arrangement, beyond mere preferential treatment, to make it objectionable’. In any event, he noted that claims involving IVAs should not necessarily be applied to subgroups in CVAs.
Further, it was clarified that the rulings that confirmed unfair prejudice in Mourant & Co Trustees Ltd v Sixty UK Ltd  and Prudential Assurance Co Ltd v PRG Powerhouse Ltd  (where similarly, the unimpaired creditors made up the required majority) were not determinative in themselves and, somewhat surprisingly, the court veered away from making a comparable decision.
This judgment will no doubt be an unwelcome one for landlords, firmly steering courts in the direction of weighing the circumstances as a whole and against applying any blanket rules or tests. In doing so, the court looked closely at many of the aspects of CVAs that landlords find unattractive and rejected challenges on those grounds.
The fundamental change introduced into leases by this CVA from a fixed rent to a turnover rent was not deemed unfair because landlords had the right to opt out by terminating their leases. Unless reversed on appeal, this gives considerable scope for fundamental re-writing of future lease obligations as part of a CVA.
This judgment may be seen as contributing to the ‘rescue culture’ which may be repeated to a more dramatic extent in cases over the coming months and years, due to the current state of businesses following the pandemic. It will undoubtedly be a bitter pill to swallow for landlords who, in many cases, have seen rent arrears skyrocket and their ability to enforce severely curtailed over the past year by other Covid-19 linked restrictions, with many having negotiated concessions with tenants in good faith without contemplating what the potential effects of a disadvantageous CVA might be.
Where possible, landlords may increasingly seek third party guarantees from entities outside of any group structure in order to help protect their position in the event of the insolvency of a tenant. Now more than ever, landlords should keep a close eye on their tenants in the hopes of noticing any early signs of financial distress and may wish to consider larger than standard deposits to further mitigate any potential future losses. As always, a prompt assessment of the facts and obtaining early advice can be crucial in determining whether a landlord might face throwing good money after bad in the event of a defaulting tenant.
In light of these issues, it will be interesting to see how the applicants fare in their appeal, for which they were granted permission in a further hearing on 14 May. They have focused their arguments to include a revisiting of their jurisdiction challenge, as well as challenges concerning the unfairness of the majority vote outcome and of rent reductions on landlords in general. It will become clear in time whether this appeal will lead to a judgment that is more advantageous to the interests of landlords or those of financially impaired tenants.
This article has been co-written with Lara Wylder, a trainee solicitor in the commercial dispute resolution team.