Hot on the heels of his judgment in Lazari Properties 2 Ltd v New Look Retailers Ltd comes Zacaroli J’s decision in Carraway Guildford (Nominee A) Ltd & Ors v Regis UK Ltd & Ors  EWHC 1294 (Ch), another challenge by dissenting landlords to a CVA. The judge said in the New Look case that he had contemplated covering both cases in a single judgment but had decided not to delay giving judgment in New Look because the CVA was live, whilst the Regis CVA had terminated. The challenge to the Regis CVA ended in revocation of the CVA but on a very limited basis and represents something of a pyrrhic victory for the challengers.
The directors of Regis had made a proposal to creditors of the company and its sole member in October 2018. Meetings of the company and creditors voted to accept the proposal. A number of landlords of commercial premises applied to challenge the CVA under s. 6(1) IA 1986, relying on unfair prejudice on various grounds and material irregularity in relation to the creditors’ meeting. The company wrote to all creditors purporting to modify the CVA in response to some of the objections raised. The validity and effect of that was a further matter of dispute between the parties. The relief sought included an order under s. 6(4)(a) of the Act revoking or suspending the CVA, an order under s. 6(4)(c) convening a further meeting of creditors, an order that the office-holders repay fees and remuneration received by them (whether as nominees or supervisors) and a declaration that the contentious modifications required creditor approval under a provision of the CVA.
As a result of the appointment of administrators, the CVA automatically terminated on 23 October 2019.
The challenge largely failed.
The objectives of the CVA were “to rationalise the Company’s leasehold obligations, restore the viability of the Company's business, improve the balance sheet of the Company and assist in a return to profitability.” To that end the business of the company was to continue, and it would trade from most of its leased premises but, in many cases, at a reduced rent. Creditors (other than those regarded as critical to the ongoing business) would receive a modest dividend from a trust fund funded by nine quarterly payments from the company. 111 “critical creditors” (“critical” in that they were essential to future trading) were largely unaffected by the CVA in that they would continue to be paid in full in accordance with existing contractual or other terms. The only effect on them would be if the fact of the CVA constituted a breach, in which case the breach was to be waived.
The focus of the judge’s inquiry was whether the treatment of two creditors as “critical creditors” whilst others were impaired was justified. In the first case, he considered that the treatment was justified in all the circumstances, but in the second he held that it was not, such that the CVA was unfairly prejudicial to the complaining landlords by treating one as critical. The judge said,
“The prejudice to the creditors whose claims were impaired by the CVA is clear. It was common ground between the Applicants and the Nominees that such prejudice was unfair unless it could be objectively justified: Mourant & Co Trustees Ltd v Sixty UK Ltd  EWHC 1890 (Ch) at . As I have noted in the New Look Judgment, a common justification for paying a creditor in full is that it is necessary to do so because that creditor’s ongoing support for the company is critical to the success of the CVA and it will not provide that support unless its existing debt is paid: Prudential Assurance Co Ltd v PRG Powerhouse Ltd  EWHC 1002 (Ch) per Etherton J at .”
It was the application of that justification test to the facts that led to the judge’s different conclusions in relation to the differing justifications for the treatment of the two critical landlords and the rejection of justification in relation to one:
“Accordingly, I conclude that the categorisation of IBL as a Critical Creditor was not justified and that the preferential treatment that it received under the CVA was unfairly prejudicial to those creditors whose debts were impaired, including the Applicants.”
The judge reminded himself that revocation was a discretionary remedy and did not flow automatically from the conclusion that a CVA was unfairly prejudicial. The present CVA had already terminated, but he nonetheless considered that revocation was the proper course. The allegations of material irregularity failed, and, there being no suggestion of bad faith or fraud, the judge rejected the application for an order that the nominees should repay their fees.