Landlords lose High Court Regis CVA fees claim despite revocation decision

Out-Law Legal Update | 17 May 2021 | 10:47 am | 5 min. read

The High Court in London has ruled against landlords seeking the repayment of fees against the nominees of a company voluntary arrangement (CVA) for a salon and beauty business.

The court did rule to revoke the CVA for Regis on the basis that the arrangement’s treatment of one creditor was unfairly prejudicial to the landlords. However, since the CVA was previously terminated in late 2019 and the court rejected the landlords’ other arguments against the CVA, the revocation finding will have no practical effect.

  • For the same reasons as the decision in the case of New Look, the challenges to the CVA against the company failed on the majority of grounds advanced.
  • The landlords did obtain a ruling of unfair prejudice on one discrete ground, with an order revoking the CVA against the company.
  • No orders were made against the former nominee/supervisors in relation to the claim for repayment of fees despite a finding of breach of duty on one ground.
  • Carraway Guildford (Nominee A) Ltd and others v Regis UK Ltd (in administration), Williams and another [2021] EWHC [1294] (Ch)

The landlords’ challenge in the case of the Regis CVA was heard before the challenge to the New Look CVA, which was made by the same applicants. Both cases were heard by Mr Justice Zacaroli during March 2021.

Background

The applicants in the Regis CVA challenge were landlords of various properties where Regis UK Limited (in administration) operated its salon and beauty business under the Regis and Supercuts brands. Regis entered into a CVA in October 2018. The landlords raised a challenge against this in November 2018. The challenge raised was against both Regis and the nominees/supervisors of its CVA on the grounds that it caused unfair prejudice and material irregularity under section 6(1) of the 1986 Insolvency Act. A secondary claim was advanced against the nominees/supervisors for repayment of their fees.

The nominees/supervisors had consistently maintained that the claim against them had no utility in light of the termination of the CVA following the company’s administration and in light of the limited orders that were sought against them. The question of utility was raised in a strike out application at the time of the administration of the company and again at trial. 

Grounds of challenge

The landlords’ case against the CVA was based on two grounds of challenge: material irregularity and unfair prejudice. Other jurisdictional issues and grounds of challenge that were advanced in a recent case involving New look were excluded in this case after the landlords unsuccessfully applied to include them at an earlier stage. The landlords argued that if any of the grounds were successful then the nominees/supervisors had breached their duties in recommending the proposal to creditors, and so should be obliged to repay their fees because of the breach. 

Material irregularity grounds

The landlords claimed that there was material irregularity in the way in which the CVA was approved for the following reasons:

  • an unpopular discount on landlord votes, common to retail CVAs, of 75% was applied to their claims at the creditors' meeting to approve the arrangement;
  • the CVA proposal suggested that if the CVA was not approved the consequence would be a shut down of the business and compared outcomes for creditors on the CVA to those of a shut down. The applicants said that the comparison should have been made against a sale of the business either by way of a pre-pack or following a period of trading – the court heard evidence from two insolvency experts on this point;
  • there was not enough disclosure of the history of Regis and various transactions the business had entered into in the years prior to the launch of the CVA; and
  • certain creditors should not have been allowed to vote at the meeting as their debts were not valid and the statement of affairs and estimated outcome statements were inaccurate in this respect.
Unfair prejudice grounds

The landlords argued that the CVA was unfairly prejudicial to them on a wide range of grounds. In essence those arguments centred on claims that:

  • the modifications to a number of lease terms including the reduction of future rent, the period over which those reductions were made and other ancillary terms were unfairly prejudicial. The landlords disputed whether this was mitigated by a right of termination and a profit share fund; and
  • it treated two particular creditors as critical, with their debts unimpaired and the differential treatment was not justified.

The judgment

The Court acknowledged that there was very little utility in the application, that the only possible utility was to answer the question of whether the CVA should be revoked and to determine the theoretical question of whether the nominees should be ordered to repay fees. The lack of utility was said to be a highly relevant factor in considering the arguments. 

Adopting the same reasoning as in the case of New Look, every ground of challenge was rejected by the High Court, save for the argument raised around the treatment of one creditor as critical. 

The grounds for material irregularity were rejected either on the basis that there was no irregularity, or that any possible irregularity was not material. It was determined that the correct comparator to a CVA was a shut down administration – the evidence of the nominees’ expert was preferred in this respect. The court considered that it was not appropriate to determine the validity of debts identified in the statement of affairs and estimated outcome statement given that those creditors were not represented. 

The numerous grounds for unfair prejudice relating to modifications to leases were rejected on the basis that a termination right was offered which provided for a better outcome during the termination notice period than the CVA alternative. The court considered that this was an answer to the arguments of unfair prejudice, similar to in the New Look decision. 

Applying a long-established test of fairness, the court considered whether the treatment of two creditors as critical creditors whilst others were impaired was justified. In the first case, it considered that the treatment was justified and in the second that it was not, speculating that the parent company would be supported by its ultimate shareholder who stood to gain from the CVA. As such the CVA was deemed unfairly prejudicial to landlords by treating one creditor as critical. 

The court then considered whether the nominee had breached its duties by recommending the proposal to creditors when the treatment of one party as a critical creditor was unfairly prejudicial. It was decided that, in this one limited respect, the nominee had breached its duty, however the court went on to decide that it was not appropriate, in the absence of bad faith or fraud which were not suggested in this case, to make an order against the nominees to repay fees. In respect of the company, the CVA was revoked. 

Pinsent Masons, the law firm behind Out-Law, acted for Eddie Williams and Christine Laverty, the nominees/supervisors in this case.