Landlords fail to expand basis of CVA challenge

Out-Law Legal Update | 18 Dec 2019 | 11:47 am | 6 min. read

Landlords have challenged a retail company voluntary arrangement (CVA) on a new series of grounds that could change how CVAs are used.

Though they were refused permission to make the new challenges in an existing case concerning Regis UK, they will form part of a further challenge in a new case. The landlords were given leave by the court for claims against supervisors of the CVA to be continued. The administrators had not granted leave, but had not objected to it being granted.

  • New grounds of challenge refused but will form part of new case
  • Could introduce uncertainty to CVA process
  • Carraway Guildford (Nominee A) Ltd and others v Regis UK Ltd (in administration) Williams and another 2019 (Unreported)

This was a case management conference (CMC) in the ongoing litigation following the CVA and subsequent administration of Regis, which traded as a chain of hair salons under the brands Regis and Supercuts. In November 2018, 19 landlords issued a challenge to the CVA of the company on grounds of material irregularity and unfair prejudice under section 6 of the Insolvency Act 1986.

Regis entered into administration in October 2019 following the appointment of administrators by a floating charge holder. This was subsequently converted by the court to a pre existing administration instigated by the landlords.

Following the appointment of administrators, under paragraph 43 of schedule B1 Insolvency Act 1986 a statutory moratorium on legal process comes into effect, meaning that litigation cannot be started or continued against the company without the consent of its administrators or the court. Typically the court is not required to decide such issues as the administrators will do so.  

Following Regis' administration the landlords sought to continue the proceedings against the supervisors of the CVA. The supervisors applied to strike out the proceedings on the basis that the CVA had terminated meaning that revocation of it was not possible or appropriate, amongst other grounds. The judge was not willing to grant the strike out application on a summary basis and left the issue to be determined at trial, but did suggest that leave under the moratorium would be required for the proceedings to continue on the basis the whole claim would be required to be pursued against Regis in order to revoke the CVA. Whilst it was acknowledged that this point was not clear cut, it was accepted by the parties that the question of leave had to be determined.

The trial had been listed for early December, and at the strike out judgment on 11 November the court required the landlords to apply for leave under the moratorium quickly, to preserve the trial date. In the end the administrators required further time to determine whether leave would be granted. The trial was adjourned and a CMC listed in its place to consider leave and any other case management issues. A sale of the business by the administrators completed shortly before the CMC. 

Having obtained the benefit of an adjournment, the landlords applied to substantially amend their statement of case to include a number of additional grounds, some in untested areas of the law, to be considered at the CMC.

Though the landlords were not allowed to plead the new grounds in this case they will form part of a new challenge. If they are successful they would have a significant detrimental impact on existing CVAs, supervisors and even landlords benefitting from such CVAs or looking to vote on future CVAs.

Moratorium

The judge considered that it was clear that the court must balance the detriment to Regis with the interests of the applicants in line with Re Atlantic Computers Systems Plc. [1992] Ch. 505, having regard to the purpose of the administration. In circumstances where the administrators as guardians of Regis's interest did not object or identify any prejudice to Regis in lifting the moratorium, the judge took their position to be a highly relevant factor in lifting the moratorium. He considered it relevant that the moratorium will come to end at some point in the future and thought it expedient for good case management to lift the moratorium. The supervisors were keen to bring matters to a conclusion and it was sensible for the court to move the case forwards.

The decision is a bold one for the court and will be helpful to other creditors when applying for the moratorium to be lifted. The administrators did not determine themselves that the balance in Re Atlantic Computers Systems Plc. [1992] Ch. 505 was satisfied. In the case, there was no financial benefit to the landlords of lifting the stay; rather they had been clear that their primary motivation was to obtain a judicial precedent.

Application to amend statement of case

The landlords claimed that their amendments were not new arguments. The CVA supervisors said that they were.

The judge placed the amendments in categories:

Jurisdictional issues

The landlords argued that the retail CVA was not a single "arrangement" within the meaning of Part 1 of the Insolvency Act 1986, but multiple “arrangements”. The consequential order would be that the CVA was invalid or non-binding.

While it may be difficult to see such an argument succeeding, it was considered to be legally arguable. The effect of such an order, if made, could be to render all other existing retail CVAs void, to the detriment of both the landlords who have approved and benefitted from such arrangements and to the wider creditors of such CVAs, who could be faced with an unplanned administration.

In the case of supervisors of such arrangements, the impact would be to leave them with an uncertainty as to the validity of acts taken in the CVA and their position on remuneration and any indemnities relied upon. They would be unable to benefit from the ability to apply for further orders under s6(6) of the Insolvency Act 1986, this  challenge seeking a declaration that the CVA was invalid, thereby preventing a Court from making any orders under s6 of the Insolvency Act 1986.

Property issues

The landlords had not pleaded that restrictions placed on forfeiture rights in the CVA caused unfair prejudice in their original claim. In a landmark case involving Debenhams the only successful ground of challenge to a CVA was the restriction on such rights. In Debenhams, the judge directed that such provisions be removed from the CVA rather than overturning the CVA. A further case, Re Instant Cash Loans Limited [2019] EWHC 2795 (Ch), relating to schemes of arrangement, had considered the introduction of new tenant termination rights.

The landlords argued that modification of proprietary rights by placing restrictions on forfeiture rights and the introduction of new termination rights, to reflect the decisions in Debenhams and Instant Cash, invalidated the CVA or rendered it non-binding. They went further than either Debenhams or Instant Cash by proposing an order that the landlords were not bound by the CVA, or that it was not a CVA at all, which would carry similar consequences.

Conflicts issues

The landlords sought to add an additional argument of unfair prejudice, suggesting that the conduct of the creditors’ meeting was materially irregular in that creditors whose claims were not substantially reduced by the CVA, or unimpaired creditors, were permitted to vote. It was suggested that the supervisor ought to have treated the arrangement as separate arrangements by category of creditor, and therefore refused to let unimpaired creditors vote when the effect of doing so was to force an outcome on impaired creditors, such as some of the landlords. Unimpaired creditors would have included category one landlords, whose rent was only compromised by payments moving to monthly payments.

Indemnity issues

The landlords originally sought repayment of £45,000 of fees from the supervisors. They then sought repayment of all fees paid to the Supervisors by Regis under an indemnity contained within the CVA.

Outcome

The landlords were refused leave to amend their statement of case on all four grounds. There had been conduct concerns in respect of the landlords' legal advisors and no explanation had been provided for the application being made so late in the day.

The jurisdictional issues could have been known to the landlords when they made their application and the landlords had appeared on the Debenhams application, so had been aware of the possible arguments since as early as July. Conversely there was potentially a need for further evidence and disclosure on the conflicts ground, creating delay and the supervisors being 'mucked around', and the supervisors faced prejudice in that they would be required to answer a substantially different case whilst also urgently preparing for an imminent trial.

Conversely, the landlords were no longer in a position where they were likely to suffer a detriment as unsecured creditors and may even suffer more of a detriment if their arguments were allowed. Further, it seemed likely that the particular points of law would be addressed in a new challenge recently issued or in future cases in the short or medium term.