Lazari Properties 2 Ltd & Ors v New Look Retailers Ltd & Ors

A company voluntary arrangement may provide different treatment for different creditor sub-groups without falling outside the jurisdiction of Insolvency Act 1986, section 1(1), or necessarily causing unfair prejudice. The fact that approval was secured by votes of unimpaired or differently treated creditors is an important factor, but is not automatically decisive. Fairness depends on all the circumstances, including the vertical comparator, the allocation of assets, the nature and justification of differential treatment, the effect of the votes, and the support among creditors in the same position. A CVA may reduce future rent while the tenant remains in possession where the overall circumstances justify it and the landlord has a meaningful termination option. A CVA cannot itself surrender or otherwise alter proprietary rights in leased property without the landlord’s agreement.

The applicants were landlords challenging a CVA proposed by New Look Retailers Ltd during the restructuring of its retail business following the Covid-19 pandemic. The CVA compromised rent and other lease liabilities owed to certain landlords, while paying other creditors in full or giving secured noteholders different treatment through a linked scheme of arrangement.

The applicants alleged that the CVA was outside section 1(1) of the Insolvency Act 1986, involved material irregularities, and unfairly prejudiced compromised landlords. The issues included differential treatment, voting by unimpaired creditors, valuation of landlords’ claims, disclosure, future rent, and termination rights.

1. Challenges dismissed. The jurisdictional, material-irregularity and unfair-prejudice challenges to the CVA were rejected.
2. A CVA providing different treatment for different creditor sub-groups is not, for that reason, outside section 1(1) of the Insolvency Act 1986. The word arrangement in that provision is not governed by the class-composition analysis applicable to schemes under the Companies Act 2006.
3. Differential treatment is not inherently unfair. The court must consider all the circumstances. Relevant matters include the vertical comparator, the fair allocation of assets available within the CVA, the nature and justification of the differential treatment, its effect on the voting outcome, and the extent to which creditors in the same position supported the proposal.
4. The votes of unimpaired or differently treated creditors may be counted. Their material contribution to the statutory majority is an important consideration, but it does not automatically establish unfair prejudice. Here, the secured noteholders’ treatment was justified by the release of their security and the wider restructuring, while payment of critical creditors in full was justified by business continuity.
5. The CVA could compromise future rent while New Look remained in occupation. Discovery (Northampton Limited) v Debenhams Retail Limited [2019] EWHC 2441 (Ch) was not plainly wrong, but it did not establish a rigid minimum-market-rent or minimum-interference test. The issue remained one of overall fairness. The landlords’ termination rights and the returns available against the administration comparator meant that the rent modifications were not unfairly prejudicial.
6. The termination provisions did not surrender the leases or otherwise interfere with proprietary rights. A lease does not require payment of rent as an essential element, and the leases remained on foot unless the landlords agreed to surrender them.
7. The voting methodology, including the 25% discount applied to landlords’ claims, did not involve a material irregularity. The chair retained discretion, the methodology was supported by valuation evidence, and the alleged errors would not have affected the result.
8. The disclosure failures were not material irregularities. Although the value of the equity issued to the secured noteholders and directors’ incentive arrangements were relevant matters, there was no substantial chance that fuller disclosure would have altered creditors’ assessment or vote.

First-instance decision. No earlier decision in the same proceedings is stated.