Regis CVA revoked but Court rules against all but one of landlords’ grounds of challenge

Mr Justice Zacaroli has handed down his judgment in Carroway Guildford (Nominee A) Limited and 18 others and (1) Regis UK Limited, (2) Edward Williams (as Joint Supervisor of Regis UK Ltd) and (3) Christine Mary Laverty (as Joint Supervisor of Regis UK Ltd) [2021] EWHC 1294 (Ch) following his decision in the New Look challenge last week.

Summary

• The Court has granted an order revoking the CVA after finding that the preferential treatment shown to IBL, the Company’s sole shareholder, was not justified and was unfairly prejudicial to those creditors whose debts were impaired by the CVA.
• However, applying the same reasoning as that expounded in the New Look decision, all other grounds of challenge were rejected by the Court either on the basis that there was no irregularity/any possible irregularity was not material or the CVA represented a better outcome than the CVA alternative (a shutdown administration).
• The Court refused to grant the applicant landlords’ claim for fees from the nominees/supervisors of the CVA (the “Nominees”).
• The Court held the landlord blanket vote discounting of 75% was not justified in this case.

Background

Regis UK Limited (the “Company”) proposed on 8 October 2018 (the “Proposal”) a CVA between the Company, its creditors and its sole shareholder, International Beauty Limited (“IBL”), which was approved on 26 October 2018 (the “CVA”).

Certain landlords challenged the CVA on 27 November 2018 on grounds of material irregularity in respect of the creditors’ meeting and unfair prejudice to their interests on numerous grounds.

Despite the Company entering into administration on 23 October 2019 and the CVA automatically terminating on that date, some of the landlords continued to pursue the CVA challenge against the Company and Nominees on a reduced number of grounds.

Grounds of challenge

1. Material Irregularity or Unfair Prejudice

1. Issue 1: Inadequate disclosure as a material irregularity
2. HELD: REJECTED.
3. (a)There was inadequate disclosure as to the Antecedent Transactions

The Applicants argued that inadequate details had been provided of certain transactions entered into by the Company in 2017 and 2018 (the “Antecedent Transactions”), which would have been subject to possible challenge in the event of a liquidation or administration.

The Judge repeated his comments in the New Look decision that non-disclosure will constitute a material irregularity only if there is a substantial chance that the undisclosed material would have made a difference to the way in which the creditors voted at the meeting.

The Judge did not accept there was a material irregularity in respect of the non-disclosure of the Antecedent Transactions because, amongst other things, he did not believe that such disclosure would have given rise to the substantial chance that creditors would have assessed the CVA differently.

(b) There were inadequacies in the Statement of Affairs and Estimated Outcome Statement

The Court rejected the three grounds for challenge advanced and determined that it was reasonable in the circumstances at the time for the Company to have identified a shut-down administration as the likely alternative, as opposed to a sale of the business, either by way of pre-pack sale or following a period of trading in administration.

1. Issue 2: Regis Corp and IBL categorised as critical creditors

HELD: The preferential treatment shown to IBL was not justified and was unfairly prejudicial to those creditors whose debts were impaired:

• Creditors deemed to be critical to the ongoing trading of the Company were unaffected by the CVA.
• IBL was the Company’s sole member and was deemed to be a critical creditor as it held the benefit of all trademarks and branding pursuant to which the Company traded. The Company claimed that compromising IBL’s claim may have led to the termination of franchise and other agreements which would prevent the Company from operating under its existing trade names. The Court found there was no evidence of this.
• Treating IBL as a critical creditor had an immediate and significant impact on other CVA creditors.
• The IBL debt was nearly £600,000 and was to be paid in full from the Company’s assets in the CVA. In contrast, the amount funded from the Company’s assets to pay allowed CVA claims was only £330,000. In other words, the Proposal envisaged the Company paying a sum to its shareholder almost twice the amount that it would pay in order to fund the claims of all impaired creditors under the CVA.
• Repayment in full to IBL was made possible only because of the CVA under which impaired creditors would be paid a fraction of their claims (7%) and Compromised Landlords would be entitled only to reduced rent going forward.
• As to Regis, on balance, the Judge felt there was sufficient justification for the non-impairment of the Regis Corp debt.
• The Regis Corp debt and the IBL debt together were material in the sense that without them the requisite majority would not have been obtained at the creditors’ meeting. The Applicants had applied for consent to amend their claim to argue that there was a material irregularity and/or unfair prejudice in Regis Corp and IBL being permitted to vote where the CVA compromising landlords was only achieved as a result of the votes of these unimpaired creditors ,but was refused.

1. Issue 3: Whether 75% discount of Landlords’ claims in respect of future rent for voting purposes was justified

HELD: The blanket percentage discount cannot be justified in this case.

The Court noted two important distinctions between the Company CVA and the New Look CVA:

• In the Company’s CVA, the claims of all landlords (across all categories) were calculated according to the same formula. In the New Look case, the Judge concluded that the discount of 25%, where the claim of each landlord had been estimated by reference to the circumstances of the particular lease, was justified on the basis that it was a reasonable method of estimating a minimum value.
• The discount in Regis was much larger and there had to be some adequate justification offered for such a large discount. No justification was offered here other than the argument that the discount applied was the same discount which had been applied in most retail CVAs since 2011.

1. Issue 4: Modifications to the terms of the leases

• The Judge did not have to consider whether the specific modifications to the leases were unfairly prejudicial given his finding that the treatment of IBL as a critical creditor was unfairly prejudicial.
• However, the arguments addressed by the Court were as follows:
  • Termination rights granted under the CVA were insufficient mitigation because they had to be exercised within 90 days of the Effective Date of the CVA:
  • HELD: Rejected. In the circumstances, this does not amount to unfair prejudice.
  • Any landlord of multiple leases in Categories 2 to 5 could only exercise a right of termination in respect of one lease if it exercised it in respect of all.
  • HELD: Rejected. This was modified by way of a modification letter, although the Court noted that a provision requiring a landlord to terminate all leases, rather than one by one, would be unfairly prejudicial.
  • The Company had a right under the CVA to terminate Category 5 leases
  • HELD: Rejected. This is an academic point as the CVA cannot affect proprietary rights of landlords.
  • The supposed benefit from the profit share fund was illusory
  • HELD: The Court accepted that the benefit was illusory but commented that the absence of a real profit-share arrangement is not necessarily unfairly prejudicial albeit it is something to weigh in the balance when considering the differential treatment of creditors within a CVA. Given his earlier finding of unfair prejudice, the Judge did not need to consider whether the absence of an effective profit-share arrangement was in this case itself unfairly prejudicial.

1. Breach of duty by Nominees and repayment of their fees

• A finding of unfair prejudice or material irregularity does not mean there is automatically a finding that the relevant nominees failed in their duties.
• Relief against the Nominees would be granted only if the Nominees had fallen below the required standard in recommending that the Proposal be put to a meeting of creditors in circumstances where the inclusion of IBL as a critical creditor was unfairly prejudicial to the Applicants.
• The Court found that in this one respect, the conduct of one of the Nominees (as no submissions were made on the position of the second Nominee), had fallen below the required standard and that a reasonable nominee ought to have questioned the position with IBL before accepting without question that the shareholder is properly to be treated as a critical creditor.
• Whilst the Court did not rule out the possibility that in cases of particularly egregious conduct a nominee may be required to repay fees, it would not be appropriate in the absence of fraud or bad faith to deprive a nominee of fees in a case where, had they been sued in professional negligence, a claim to deprive them of their fees would have failed.
• The Judge concluded that this is not an appropriate case in which to deprive the Nominees of their fees.

Conclusion

The recent decisions in the New Look CVA challenge, Virgin restructuring plan challenge and now this decision demonstrate that the Court is largely supportive of corporate restructuring. However, this judgment does show the importance of landlords scrutinising the treatment of creditors and members and does at least make clear that companies do not have carte blanche to prioritise members’ interests at the expense of unsecured creditors.