Lazari Properties 2 Ltd v New Look Retailers Ltd

This judgment concerns a challenge to a company voluntary arrangement under Part 1 of the Insolvency Act 1986 in which a retail tenant sought to reduce future rent obligations and modify leases. The court rejected the applicants' threefold challenge that (1) the proposal fell outside the jurisdiction of section 1(1) IA 1986 because it comprised separate deals with distinct creditor groups, (2) there were material irregularities in voting valuation and disclosure, and (3) the Compromised Landlords were unfairly prejudiced.

Key legal principles applied:

• The court held that a CVA may provide for different treatment of different creditor sub-groups and is not, for that reason alone, outside the scope of section 1(1) IA 1986.
• In assessing unfair prejudice under section 6(1)(a) the court must consider both the vertical comparator (what creditors would receive in the relevant alternative such as administration/liquidation) and the horizontal comparator (treatment between creditor groups); the fact that unimpaired creditors voted for a CVA is an important factor but not conclusive.
• Votes of secured creditors who are given different practical treatment as part of an integrated wider restructuring (including a scheme of arrangement) may legitimately be decisive where their treatment stems from their security and the wider restructuring; the court should assess fairness in all the circumstances.
• Material irregularity under section 6(1)(b) requires a substantial chance that better disclosure or a correct voting valuation would have altered the outcome; here valuation methodology, discounts and disclosure omissions did not reach that threshold.

The principal operating company New Look faced acute distress following the COVID-19 pandemic and proposed a restructuring package comprising bilateral amendments to facilities, a scheme of arrangement for senior secured note holders and a company voluntary arrangement dated 26 August 2020 which sought to vary leases with landlords by, among other things, substituting turnover-based rent for contractual rent for specified categories of stores, and to give landlords termination options. The CVA was approved at a creditors' meeting on 15 September 2020.

The applicants were a number of landlords who challenged the CVA on three grounds: (i) jurisdiction — that the Proposal did not amount to a composition or arrangement under section 1(1) because it effectively contained separate deals with different creditor groups and lacked sufficient give and take; (ii) material irregularity — alleging defects in voting valuation and in the Proposal’s disclosure; and (iii) unfair prejudice — contending that compromised landlords were unfairly disadvantaged, particularly because the statutory majority was obtained by the votes of unimpaired creditors including the SSN Holders.

The court framed the legal issues as (a) whether a CVA can lawfully comprise different deals with different groups of creditors, (b) when differential treatment produces unfair prejudice, and (c) when omissions or procedural choices in voting and disclosure amount to a material irregularity.

The judge reviewed authorities on historical compositions and schemes, the principles of good faith and equality, and relevant post-1986 authority on IVAs and CVAs, and adopted a fact-sensitive approach. The court concluded that:

• A CVA need not be confined to arrangements in which all creditors form a single class as would be required for a Part 26 scheme; Parliament deliberately provided a different, more flexible CVA process that includes all creditors.
• The presence of different deals under a CVA is not per se beyond jurisdiction or inherently unfair; the court must weigh vertical and horizontal comparators, the source of benefits, the justification for differential treatment, and whether compromised creditors are getting at least what they would in the relevant alternative.
• Termination rights and the option for landlords to accept a distribution were relevant mitigants; reduction of future rent is permissible so long as fairness is assessed in context (including whether landlords could choose to terminate and how the vertical comparator pans out).
• The SSN Holders’ voting position was not void: their position had to be seen in the context of the wider interdependent restructuring (including the Scheme and bilateral creditor agreements) and the SSN Holders were, in substance, accepting a different package as part of that wider restructuring; they did not obtain assets that should have been available to unsecured creditors.
• Valuation methodology (including a 25% discount applied to landlords for voting purposes), the treatment of dilapidations and the break premium approach, and the non-disclosure points identified did not amount to material irregularities because they were either transparent, did not alter the result or were not likely to have changed creditor votes.

The court therefore dismissed the applicants’ challenge and held that, on the facts, the CVA and the wider restructuring were lawful and not unfairly prejudicial or materially irregular.

The applicants' application is dismissed. The court held that: (1) a CVA may lawfully provide for different treatment of different creditor sub-groups and that does not render the Proposal outside the scope of section 1(1) IA 1986; (2) unfair prejudice under section 6(1)(a) requires a fact-sensitive assessment using vertical and horizontal comparators and, applying those tests, the Compromised Landlords were not unfairly prejudiced; (3) the alleged material irregularities in valuation, voting and disclosure did not meet the threshold in section 6(1)(b) and would not probably have changed the outcome.