Following hot on the heels of the New Look CVA challenge and the Virgin Active restructuring plan sanction hearing, the Regis salon business CVA challenge was the third of a trilogy of cases where the Court was asked to look at the thorny issue of a rescue plan which allegedly treated landlords unfairly.
Whether such rescue plans in the retail and leisure sector are a product of their times and will disappear once the landlords' rights to enforce for non-payment of rent is returned and/or there is growing market demand for floor space is certainly a possibility. However the challenges have left us with a greater understanding of the scope and use of these restructuring tools.
The landlords 21 grounds of challenge were unsuccessful save on one discreet ground, namely that the treatment of the parent company shareholder as a critical creditor who would therefore be unimpaired was not objectively justifiable. As a result the CVA was revoked, but the practical impact was of limited value as the CVA had terminated early as a result of the company's administration.
One issue that remained live was whether in the circumstances of a finding that the nominee was in breach of duty in allowing such a term to be proposed, whether the nominee should retain their fees. In this instance and in the absence of bad faith or egregious conduct which might have otherwise restricted recovery, and as the nominees work was of value, no order requiring repayment of their fees would be made.
It is of note that the despite the termination of the CVA the challenge had continued in order to establish a meaningful precedent. The court felt this been provided by New Look and questioned the utility of the Regis challenge. From the New Look and Regis case we can however draw the following conclusions.
1.The Court was seen to be reluctant to draw up rigid rules as to what is and what is not viewed as unfairly prejudicial. Each case must be assessed on its own merits.
2.The potential unfairness in sanctioning a rent reduction, while allowing a tenants continuing right of occupation, is mitigated by giving the landlord an effective right to terminate. As an aside the one rigid rule that has emerged from the Debenhams case and the subsequent challenges is that the rescue plan cannot interfere with the Landlords property rights. However the replacement of the right of forfeiture for non-payment of rent (compromised within the CVA) by a right to termination is perhaps already straining this rule.
3.A uniform discount applied to all landlord claims in calculating voting right (i.e. an assessment of what loss would be suffered/whether the premises could be re-let) was in the Regis case found to be unjustifiable. On the facts of the case this was not however deemed to be a material irregularity. Criticism of the uniform discount was such that in the future those proposing a CVA would be advised to ensure that they have evidence to justify such an approach or they will need to approach each landlords claim on an more granular basis.
New Look Appeal
It should be noted that the New Look judgment is to be appealed. The grounds being:
That a CVA should be a composition or arrangement with all creditors, whereas the 'retail' CVA are a series of different arrangements with differing sub-classes of creditor, neither intended or permitted under the original legislation.
Secondly there was insufficient 'give and take' between the ordinary unsecured creditors, the compromised landlords and the senior note holders, such that it was wrong to apply a vertical comparator test (i.e. would the landlords be better or worse off under a relevant alternative insolvency process) as it was simply a modification of contractual rights that was being sought in the CVA.
That the swamping of the vote by a self interested and unimpaired majority was unfair. That a unilateral rent reduction which permits the tenant a continuing right of occupation is unfair and that in any event a rent reduction was not the same result (nor better) than under a relevant comparator as in such instances the landlord would have a better right of negotiation.
With the New Look appeal and result of further challenges awaited in regards to the Cafe Nero and Clarks shoes CVA awaited it is clear that there is still much to play for.