In the recent case of Carraway Guildford (Nominee A) Ltd and others v Regis UK Ltd and others  EWHC 1294 (Ch) (17 May 2021) the High Court revoked a Company Voluntary Arrangement (CVA) on the grounds that it unfairly prejudiced landlords by preferring the shareholders’ interests.
This was a hollow victory for the landlords as although the CVA was terminated in 2019, no orders were made against the former nominee/supervisors in relation to the repayment of fees.
By way of background the directors of Regis UK Limited issued a CVA proposal in October 2018 the primary purpose being to reduce the rents on its hairdressing and beauty salons. The proposal was approved with the votes of the parent company and a former parent company in their capacity as unsecured and partly unsecured creditors. The challenge was raised against both Regis and the nominees/supervisors of its CVA on the grounds that it caused unfair prejudice to and material irregularity under section 6(1) of the Insolvency Act 1986. The landlords also claimed that if the nominees/supervisors were in breach of their duties then they should repay their fees.
The CVA was challenged by the landlord on the grounds of material irregularity and unfair prejudice.
The landlord argued that there was material irregularity in the way the CVA was approved for the following reasons:-
- The discount on landlords votes of 75% was applied to their claims at the creditors meeting bearing in mind the court considered a discount of only 25% was reasonable in the New Look case.
- The CVA proposal wrongly identified a shut-down administration as a realistic alternative to the CVA rather than a pre-pack or sale following a period of trading.
- There was not enough disclosure of the history of Regis and various transactions the business had entered into. There was a substantial chance that the non-disclosed material would have made a difference to the way creditors would have voted in the CVA.
- There was an allegation that some creditors should not have been allowed to vote at the creditors meeting as their debts were not valid and the statement of affairs and estimated outcome statements were inaccurate.
The landlords argued that they had been unfairly prejudiced on a number of grounds which included the following: -
- Preferential treatment of the parent company constituted unfair prejudice against the landlords. It treated two creditors the parent company and former parent company as “critical “with their debts unimpaired.
- The discounting of the landlords claims by 75% at the creditors meeting.
- The modification of a number of lease terms and rent reductions imposed on the landlords. They disputed whether this was mitigated by new termination rights and a profit share fund.
- Whether a purported modification of the CVA before it terminated had been effected and mitigated unfair prejudice.
The High Court revoked the CVA. Once unfair prejudice had been established it held that the proper course was to revoke the CVA even though it had already been terminated.
Adopting the same reasoning in the New Look case the High Court rejected all of the above grounds save for the argument raised around the treatment of one creditor as critical.
The grounds for material irregularity were rejected on the basis that either there was no material irregularity due to inadequate disclosure or that any possible irregularity would not have made a difference to the way the creditors would have voted on the CVA. It was held that the correct comparator to the CVA was a shutdown administration. The court was also of the view that it was not appropriate to determine the validity of the debts identified in the statement of affairs and estimated outcomes on the basis they were not represented.
Turning to consider the unfair prejudice grounds argument, the court found the CVA’s treatment of the Regis parent company as a “critical creditor” leaving its claim largely unimpaired constituted unfair prejudice to the compromised landlords. It found that the parent company would be supported by its ultimate shareholder who stood to gain from the CVA. As a result, the CVA would be unfairly prejudicial to landlords by treating one creditor as critical.
On the question of whether the nominee had beached its duties by recommending a CVA, it was held they had however, in the absence of fraud or bad faith it was not appropriate to deprive the nominee of its fees.
This case will give those drafting CVA’s food for thought on how they treat landlords. For example, an ongoing right on behalf of the insolvent company to unilaterally terminate the lease will be ineffective. CVA companies should propose reasonable termination rights which the landlord might actually use and a blanket provision that the landlord must terminate all leases rather than individual leases will not work. Likewise, a profit share agreement will need to have some benefit for landlords in order to mitigate rent reductions Finally a 75% discount to the voting value of landlord’s claims will require significant justification.
Whilst we await the next CVA challenge of which (particularly in the current economic climate) there may well be more, it is likely that the costs of such a challenge will be prohibitive in many cases.
If you have any queries regarding CVA’s or restructuring or other commercial property matters please do not hesitate to contact Chris Mackie on 020 7400 5045 or Stuart Simoes on 020 7831 8888 or another member of either our insolvency or commercial property teams