A new look at restructurings: a trio of recent cases and their impact on landlords
Thankfully, a trio of significant recent cases, New Look1, Virgin Active2 and Regis3, have provided helpful and timely guidance regarding the use of such processes.
The cases each involve landlords’ challenges to restructurings which have sought to compromise their claims against distressed tenants. Almost all of the challenges by the landlords have been rejected by the Court, although permission to appeal the New Look decision to the Court of Appeal has been granted.
In New Look, landlords challenged the CVA on various grounds relating to unfair prejudice and material irregularity. Each of the challenges failed, with the key takeaways being:
- Differential treatment of creditors by a CVA: is not inherently unfairly prejudicial as long as it is justified. The Court will take into account the wider circumstances when considering this point.
- Voting claims discount: the application of a discount to landlords’ future claims for voting purposes (in this case a 25% discount) was not a material irregularity.
- A change to turnover rent: is not unfair provided that landlords receive a break right, so that they can opt to recover their premises rather than accept the compromises effected by the CVA.
- Market rent and break rights: there is no general principle that a CVA cannot reduce rent below ‘market’ for the notice period during which break rights can be exercised, provided landlords receive a break right and a better result than the vertical comparator (which in New Look’s case was an administration).
- “Vote swamping”: is not unfairly prejudicial, although this will be assessed on a case-by-case basis. Here, the senior secured noteholders (SSNs) voted the unsecured portion of their claims which contributed to a successful vote for the CVA. The landlords argued that this constituted unfair prejudice on the basis that the votes of an unimpaired class of creditor were being used to cram down the landlords, as an impaired class. Whilst the rights of the SSNs were not affected by the CVA, the SSNs rights were being impaired in a parallel scheme of arrangement by exchanging secured debt for a minority equity interest. The Court held that it was not unfairly prejudicial for the SSNs to carry the vote on the basis that they were also being impaired as part of a wider restructuring.
On 14 May 2021, the landlords were given permission to appeal the judgment to the Court of Appeal and so a number of these points may be reopened.
On 12 May 2021, the Court sanctioned Virgin Active’s restructuring plan. The key takeaways are as follows:
- Differential treatment of creditors is permitted: a restructuring plan can subject landlords and other creditors to differential treatment in the same way as a CVA.
- The position of “in the money” and “out of the money” creditors: the Court will give little weight to the position of “out of the money” creditors provided that the legal conditions to the restructuring plan are met. This will be a critical distinction going forwards.
- Valuation: will be key in determining the “no worse off” test and the Court will be concerned not to permit a lengthy valuation dispute. In this case, there was no competing valuation evidence from the landlords and so the Court only assessed the company’s valuation as the only available evidence before it.
- Market testing: there is no obligation to undertake a market testing process particularly in an uncertain market where it is unclear how this would be funded.
- It is for the “in the money” creditors to decide how the company’s value should be divided up: this can involve assets being diverted to “out of the money” creditors/shareholders if justified. The position is however likely to be different if value is diverted from “in the money” creditors to “out of the money” creditors.
In Regis, the CVA challenge by the landlords was made on slightly different grounds to New Look and all but one of the challenges succeeded. Whilst this led to the revocation of the Regis CVA, this has little practical impact given it had already terminated in late 2019. Certain grounds of challenge were also specific to certain aspects of Regis’ CVA which do not necessarily feature in other CVAs.
Some of the key takeaways from this case include:
- Non-disclosure of information: will only constitute material irregularity if the non-disclosed material (here it related to antecedent transactions) would have impacted the way in which creditors voted at the meeting.
- Inaccurate information: it was argued that the Statement of Affairs and Estimated Outcome statement were inaccurate in identifying a terminal administration as the relevant alternative. The Court held that identifying this as the alternative was reasonable in the circumstances and did not amount to material irregularity.
- Grounds of unfair prejudice and material irregularity regarding modification to lease terms: these arguments were dismissed for the same reasons as covered in New Look.
- Voting claims discount: the 75% blanket discount applied to landlords’ future claims constituted an irregularity (compared to a discount of 25% in New Look). However, the discount did not impact the outcome of the vote, so was not “material”.
- Treatment of intercompany/shareholder claims: the CVA was revoked on the basis that treatment of an impaired intercompany loan as a “critical creditor” which was not compromised by the CVA was not justified given that the claims of other impaired creditors (i.e. landlords) were being compromised.
What is next for landlords?
The decisions reaffirm that the Courts are clearly on the side of the company proposing a CVA or restructuring plan, the terms of which are within the parameters set by previous Court decisions, and that landlords are able to be treated differently to other creditors, particularly where they are “out of the money”. However, what constitutes material irregularity or unfair prejudice will need to be assessed on a case-by-case basis, rather than applying any blanket tests.
Restructuring plans and CVAs are therefore here to stay to facilitate the rescue of insolvent companies. It will be interesting to see how the use of CVAs and restructuring plans continue to develop following the lifting of the temporary support measures introduced by the Government to help companies survive the Covid-19 pandemic and the outcome of the appeal to the New Look judgment.
We cover some of the themes covered in this article in more detail in Planning a way out of lockdown – the UK’s new restructuring procedure and its applicability to the mid-market - Macfarlanes and Time to pay the piper now that lockdown is lifting? Considerations for landlords and tenants facing a mounting pile of rent bills - Macfarlanes
This article was co-authored by trainee solicitor Rhian Edwards.
1 Lazari Properties 2 Limited and Ors and New Look Retailers Limited  EWHC 1209 (Ch)
2 Re Virgin Active Holdings Ltd, Virgin Active Ltd and Virgin Active Health Clubs Ltd  EWHC 814 (Ch) and  EWHC 1246 (Ch)
3 Carraway Guildford (Nominee A) Ltd & others v Regis UK Ltd & others  EWHC 1294 (Ch)