Insolvency Lawyer Says Complex CVAs Are A Feature Of The English Compromise Landscape

Landlords have today lost their legal challenge against fashion retailer New Look’s use of a company voluntary arrangement (CVA) it put in place to help it restructure its business.

Lawyers at Irwin Mitchell say today’s ruling is significant avoided a profound impact on the future the of the retail sector.

The CVA was approved by creditors of the fashion chain last September but a number of landlords launched a legal challenge against it.

The business, which has almost 500 stores and employs over 12,000, asked landlords to agree to rents based on a percentage of sales for 402 of its stores, an arrangement relatively new to CVAs termed “turnover rent”. In return, it offered them enhanced rights to take back stores to re-let to other tenants.

The landlords argued several points of challenge, most importantly from a legal and commercial perspective that CVA jurisdiction does not extend to complex, differential arrangements.

The case was heard by Mr Justice Zacaroli, who stated in his judgment:

“I do not accept that “arrangement” in section 1(1) IA 1986 is to be construed…. so as to limit a CVA to an arrangement in which the rights of all creditors are such that they can consult together with a view to their common interest.”

Zacaroli J indicated in that unfair prejudice might be found where the requisite majority is reached by reason of the votes of a notional class that is treated more favourably (known as “vote swamping”), even where there is an objective justification for their payment in full. 

Expert Opinion

“Had the jurisdiction challenge been successful, or indeed some of the stronger arguments on unfair prejudice or material irregularity, it would have placed limits on the aggressive use of CVAs and shifted such compromises into the restructuring plan market. This decision retains the use of a CVA as a tool in complex, differential compromises and arrangements and is in line with increased emphasis on providing debtor protection to enable it to restructure its affairs with a view to financial recovery. The comments regarding vote swamping are important and will need to be factored in to CVA design and the scope for challenge.” Doug Robertson - Partner