Lazari Properties 2 Ltd v New Look Retailers Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Zacaroli |
| Judgment Date | 10 May 2021 |
| Neutral Citation | [2021] EWHC 1209 (Ch) |
| Date | 10 May 2021 |
| Docket Number | Case No: CR-2020-003558 |
| Court | Chancery Division |
[2021] EWHC 1209 (Ch)
Mr Justice Zacaroli
Case No: CR-2020-003558
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
7 Rolls Building
Fetter Lane
London EC4A 1NL
Peter Arden QC and Ben Shaw (instructed by Hogan Lovells International LLP) for the Applicants
Tom Smith QC and Adam Al-Attar (instructed by Latham & Watkins (London) LLP) for the Respondents
Hearing dates: 17, 18, 19, 22, 23 & 24 March 2021
APPROVED JUDGMENT
A: Introduction
This case concerns a company voluntary arrangement (“CVA”) under Part 1 of the Insolvency Act 1986 (“ IA 1986”) which, among other things, seeks to impose rent reductions on landlords of a company operating in the retail sector.
There have been a number of CVAs in recent years of companies operating in the retail sector seeking to do the same, but only one in which a challenge by landlords to the CVA has reached a conclusion in court: Discovery (Northampton Limited) v Debenhams Retail Limited [2019] EWHC 2441 (Ch) (“Debenhams”).
The trial in this case took place a week after a trial in respect of the challenge by landlords to a CVA for another retail company, Regis UK Limited (“Regis”). The same solicitors and counsel appeared for the landlords in the Regis case as in this one. Counsel for the respondents in each case were permitted to attend and observe the trial in the other matter. Although all parties were content for a single judgment to be produced covering both cases, in the event I have decided not to delay judgment in this case (where the CVA is continuing) while completing my consideration of the Regis case (where the CVA has long ago terminated). A judgment in the Regis case will follow shortly.
B: Background
New Look Retailers Limited (“New Look”) is the principal operating company in the New Look group (the “Group”), which operates a retail, clothing, footwear and accessories business. As at August 2020 New Look operated from over 400 stores in the UK and employed over 10,000 people.
Like many businesses in the retail sector, New Look has suffered enormously as a result of the COVID-19 pandemic. During March 2020, the Group experienced a decline in like for like sales compared to the prior year of 32%. On 23 March 2020, the start of the first national lockdown, the Group's revenue from its stores fell to nil. The Group continued to trade through its e-commerce channels, and began a phased re-opening of stores on 1 June 2020. Stores were closed again as a result of the second and third national lockdowns.
At the start of the pandemic it ceased to pay rent and service charge to its many landlords. Upon the re-opening of its stores it paid a contribution to the rent payments due on a turnover basis.
By August 2020 it was clear that the Group could not continue to trade without a major restructuring of its liabilities. New Look's principal liabilities were as follows:
(1) It was borrower under a £100 million revolving credit facility (“RCF”) which was fully drawn;
(2) It was borrower under a £65 million trade finance facility agreement (“TFFA”), under which £54 million was outstanding;
(3) It was guarantor of two series of senior secured notes due 3 May 2024 (the “SSN”) issued by another group company, New Look Financing Plc (“NLF”), under which £441 million was owing;
(4) The liabilities under the RCF, TFFA and SSN were secured by a debenture over the assets and business of New Look. Under an intercreditor deed, the RCF and TFFA had priority over the SSN;
(5) Apart from its liabilities to suppliers, employees and ongoing trade creditors, New Look's other significant liabilities were its obligations to pay rent, service charge and other amounts under numerous long-term leases of its stores.
The directors believed that the effect of the pandemic on the retail sector would be long lasting. They concluded that New Look could not survive without a restructuring which addressed both its financial obligations and reduced its long-term rent obligations.
New Look's immediate problem was that it was projected to run out of cash by October 2020. It is common ground that in the absence of a restructuring it would be forced into administration, the most likely scenario being a short period of marketing the business with a “pre-pack” sale upon the appointment of administrators. In that event, there would have been no assets available for distribution to the unsecured creditors other than the prescribed part under section 176A IA 1986, which is set at a maximum sum of £600,000. This would have resulted in a dividend to unsecured creditors of 0.1p/£.
The restructuring involved the following elements:
(1) An extension of the term of the RCF and TFFA from 25 June 2021 to 30 June 2024, and certain amendments to the terms of the RCF, by agreement with the relevant creditors;
(2) A scheme of arrangement (the “Scheme”) between NLF and the holders of the SSN (the “SSN Holders”), under which:
(a) the SSN Holders released all claims against NLF and against New Look (as guarantor) in return for participation rights in (i) 20% of the equity of New Look Retail Holdings Limited (the “Parent”) and (ii) a subordinated shareholder £40 million loan to an intermediate holding company (“Midco”) on a cashless basis; and
(b) SSN Holders were entitled to participate pro rata in a new £40 million term loan to Midco (the “New Money Loan”) in return for a pro rata share in 80% of the equity in the Parent.
(3) a CVA of New Look (the details of which are set out below) principally in order to amend the terms of leases with those landlords who did not opt to terminate their lease(s) with New Look, so as to provide for reduced rental payments going forward and other amendments to the leases.
The proposal for the CVA was dated 26 August 2020 (the “Proposal”). It was sent to all creditors of New Look. The meeting of creditors took place on 15 September 2020, at which the CVA was approved by a majority of 81.6% by value of those attending and voting.
On 13 August 2020 New Look, NLF and various other companies in the Group entered into a lock up agreement (the “LUA”) with the majority of the Group's secured lenders (including the creditors under the RCF, TFFA and many of the SSN Holders). By the time of the CVA meeting in excess of 93% of the SSN Holders had acceded to the LUA. This obliged them to support the wider restructuring, including the CVA.
The Scheme procedure was commenced by the sending of a letter to Scheme creditors pursuant to the Practice Statement issued by the Chancellor of the High Court dated 26 June 2020. On 23 September 2020 Miles J ordered that a single meeting of SSN Holders be convened to consider the Scheme. That meeting took place on 16 October 2020. It was attended (in person or by proxy) by SSN Holders holding 98.27% by value of the SSN, who all voted in favour of the Scheme. I sanctioned the Scheme at a hearing on 23 October 2020.
Although the CVA (which came first) and the Scheme were separate processes, they were closely linked. It was a condition to the extension of the RCF and TFFA and a condition to the provision of the New Money Loan that the CVA was approved and had not been challenged within the time required by the Insolvency Rules 2016 (“IR 2016”) (although that condition was subsequently waived). More importantly, it is quite clear that had the CVA not been approved the Scheme would not have gone ahead. The amount of the New Money Loan had been calculated by reference to the cash needs of New Look on the basis of the reduced rent burden which the CVA was designed to achieve. Without that reduction, there would have been no reason for the RCF and TFFA lenders to agree to an extension of the facilities, or for the New Money Loan to be advanced. Conversely, reflecting the fact that if the facilities were not extended, or the New Money Loan not provided, clause 45.1(a) of the Proposal provided that if there was a challenge to the CVA that had not been dismissed, or if the wider restructuring was not completed by 31 January 2021, the Supervisors of the CVA had the power to terminate the CVA.
C: The terms of the CVA
The Proposal divides New Look's creditors into numerous different categories, as follows.
Category A (Landlords)
Category A comprises two landlords of New Look's distribution centre at Newcastle under Lyme. The directors considered the leases of the distribution centre to be critical to the Group's continued operations.
The Category A landlords' rights are unimpaired by the CVA except that: (1) the timing of payments of rent is changed from quarterly to monthly; and (2) the Category A landlords waived and release any claims resulting either from New Look's failure to pay amounts due before the “Effective Date” (meaning the date on which the CVA was approved) or from a “CVA Related Event” (in essence, the promotion and coming into effect of the CVA and any cross-default arising in consequence).
Category B (Landlords)
Category B comprises landlords of stores described (at paragraphs 6.4 to 6.12 of section 2 of the Proposal) as stores where the property costs were above market or were moving to a rent based on a percentage of turnover was necessary to assist cash-flow and make these stores viable...
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