All the fun of what’s fair – why the Virgin & New Look cases matterMost people think they have a pretty good handle on what’s fair and what isn’t.
They think they’d look to the middle of any proposed scenario as a starting point and work from there but real life with all its caveats, complications and considerations means that solutions are rarely as simple and equitable as 50/50.
Two recent legal cases involving Virgin Active and New Look have illustrated what a difficult concept “fairness” is – especially if you’re a corporate landlord.
Virgin Active operated a chain of national health clubs which suffered a dramatic loss of income when they were closed as a result of the Covid-19 pandemic and subsequent year of lockdowns.
They decided that the only way the business had a viable future would be if it was able to restructure its debt commitments.
This was objected to by various landlords who own properties rented by Virgin Active and the company subsequently failed to secure the necessary 75% majority from its creditors so a court was asked to rule on the plans.
Under new legislation created in the Corporate Insolvency and Governance Act 2020, a court can agree to a company’s proposals if none of the dissenting creditors would be financially worse off than if the business entered administration or ultimately liquidation.
Another condition to be met is if the restructuring plan has been approved by a creditor who has a genuine economic interest in the relevant alternative.
What is a restructuring plan? A restructuring plan is an arrangement between a company and its creditors resulting in a reduction or restructure of any outstanding debts and liabilities. A court must agree to sanction it for it to become binding on all parties.
While similar to the already well-established “scheme of arrangement” process, a new power known as “cross class cram down” allows the court to override the objections of certain creditors and bind them all to the agreement if the court sees it as the most viable way forward for the business.
Previously, certain creditors could hold up or vote down a procedure if they were unhappy with their probable returns regardless of whether it meant the business had a chance of surviving or not.
In a relatively new precedent, a judge agreed to sanction Virgin Active’s restructuring plan which legally allows companies to reduce owed rent debts to landlords and other creditors instead of entering a CVA agreement which would entail all creditors potentially losing more.
The judge found that under the proposals, the return to all creditors was higher than they would receive under an alternative insolvency procedure so agreed to implement the “cross class cram down” mechanism, reducing their rental obligations.
What is a CVA? A Company Voluntary Arrangement or CVA is an agreement between a company and its creditors to pay a set, monthly fee for a period of times, usually five years, that will go to creditors in return for a proportion of existing debt being written off and the business being allowed to continue trading and not being threatened with winding up and liquidation.
The other pertinent case was brought against clothes retailer New Look by landlords challenging its Company Voluntary Arrangement (CVA).
New Look entered into a CVA in September 2020 as a result of severe trading difficulties caused by the coronavirus pandemic. This was the company’ second CVA in recent years, the first being launched in 2018, but the subsequent crisis necessitated a new agreement.
Various landlords who owned properties leased by New Look challenged the arrangement on the grounds that they would suffer unfair prejudice and that there were other material irregularities within the procedure.
They argued that the CVA would be unfair to them because some creditors would be treated preferentially and their votes were the ones used to pass the agreement in the first place.
They also argued that moving to a turnover based rent system after the CVA had concluded; the imposition of a three-year rent concession period and the release of “keep-open” covenants, allowing New Look to close certain unprofitable stores, all unfairly impacted them.
The court rejected these arguments saying that differential treatment of creditors does not make a CVA materially unfair but depended on the unique circumstances of each case.
The judge found that as creditors would likely receive a better financial outcome under the CVA than any alternative, it would pass a fairness test.
Chris Horner, Insolvency Director with Business Rescue Expert, said: “While the restructuring plans regime is being tested in court, we can already see how useful and flexible it can be.
“While both recent cases involved large businesses covering several locations, it proves that they can be part of a holistic solution for otherwise viable organisations looking to restructure their liabilities and find a path back to profitability, no matter what size they are.
“Some individual landlords might be annoyed at having to take a financial hit but a thriving tenant will be able to provide more reliable returns than counting on the proceeds of asset sales in a liquidation.
“CVAs, administrations and now restructuring plans give insolvency practitioners a range of viable and flexible tools to help businesses survive and rebuild on stronger foundations.
“The pertinent question creditors need to ask themselves is “what’s the alternative?”
“If more companies consider a restructuring plan as an alternative to a CVA, depending on their circumstance, it will generally mean that the costs of debt restructuring are shared across all creditors which, as well as being “fairer”, should mean more business recoveries.
“A restructuring plan increases the chances that a financially distressed firm will be able to restructure and bounce back within one procedure rather than looking to renegotiate or relaunch subsequent CVA’s.
“If the past 12 months have taught us anything, it’s that we should all look beyond our own circumstances and see if we can do more to help wider society.
“Fairer outcomes for creditors and recovering or restructuring companies would be a good start”.
While the country gets back to trading with less restrictions, it will be some time before we see if certain changes of behaviour enabled by the pandemic and response are here to stay or a temporary solution.
New laws and rule changes are part of this. They might prove universally popular and useful and enjoy widespread adoption, or collectively they might be seen to have outlived their usefulness and a better solution found to tomorrow’s problems.
Directors and business owners need to be more focussed on what happens to today, and this is where we can help.
There might be some ideas that you haven’t considered but the sooner you decide to take action, the more options you’ll generally have to act on.
Click the link above, pick a time that’s convenient for you and we’ll do our very best to help your business get back on its feet.
We can’t say fairer than that.