New Look : CVAs Remain in Fashion

Introduction

Mr Justice Zacaroli gave his decision in the long awaited challenge to the New Look CVA on 10 May 2021.

In summary,  a group of New Look Landlords challenged the CVA.  The CVA, which was part of a wider restructuring including a Scheme of Arrangement that had been approved by the Court, required many retail Landlords to accept a compromise position whereby claims for rent arrears were released in full, and the contractual obligation to pay rent was replaced with an obligation to pay turnover rent, based on a fixed percentage of net sales  for a 3 year period.  Importantly, the CVA did allow landlords the option to terminate the leases.

This is an important case that is worth consideration by Practitioners; not least because it is the only second reported challenge to CVAs (the first being in connection with Debenhams Retail Limited in 2019).

The Challenge and Decision

The Landlords challenged the CVA on a number of grounds.  Firstly, they argued that a CVA in the terms proposed did not constitute “a composition or arrangement within the meaning of s.1 of the Insolvency Act 1986”.  They said, in fact, the CVA proposed involved separate arrangements with different groups of creditors and it was not competent.  They also argued that properly understood it was not allowable to interfere with Property Rights of Landlords.  The Court undertook a detailed survey of the historic law on composition and ultimately concluded that in fact the CVA proposed was a competent composition or arrangement within the meaning s.1 of the Insolvency Act 1986; and therefore the jurisdiction challenge failed.

There was also challenge in terms of s.6 of the 1986 Act on the basis that there had been both material irregularity in the CVA being agreed, and also that the CVA constituted “unfair prejudice” in respect of the applicant landlords.  Again the Court rejected these challenges. 

It is worth noting that the Court took time to explain, that while certain matters were fact specific, the ability of Landlords to terminate their leases was critical in deciding there was no unfair prejudice, as was understanding the true comparator for this CVA, being a Pre-pack Administration or similar, in circumstances where the company would have had no money to continue to pay any rent.  The fact that assets were made available by senior lenders was predicated on the Scheme, the CVA and wider restructuring proceeding.

Advice to Officeholders

This decision may well be a blow to Landlords.  It does remind officeholders, however, that challenges can be made and while CVA wording is becoming more standard, which is helpful, the specific facts of particular cases must be properly considered to ensure there are no material irregularities and no unfair prejudice.  Landlords will be concerned that this decision further undermines leases as an investment, but the Court was keen to point out that the loss of the investment was not consequent on the CVA but rather upon the insolvency of the company.  CVAs therefore remain an important part of the Practitioner’s toolkit in advising on restructuring options.

BBM Solicitors specialise in advising IP’s in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal (emb@bbmsolicitors.co.uk).This briefing note is current as at 11 May 2021 and is our understanding of the position described at that date. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).