Corporate Rescue is alive and well – Why the New Look and Virgin Active cases matter

What happened in the New Look case?

The proposed CVA was challenged by landlords who considered that the provisions were unfairly prejudicial both in how it separated landlords into different classes (with each class being treated differently) and how it imposed a turnover based rent on many landlords.

The court decided that:

1. It is permissible for a CVA to treat different sub-groups of creditors in a different way and this will not necessarily be unfairly prejudicial to some of the creditors, and
2. It is not necessarily unfairly prejudicial to a sub-group of creditors that the required majority of creditors supporting the CVA is comprised by creditors who were either treated more favourably or not affected by the proposals. However, the court did note that where a CVA had passed only because of the vote of creditors who were unaffected by the proposals – it might give grounds for a challenge in future CVAs.
3. The Court did not find the imposition of turnover rents into leases unfair.  The Judge took note of the fact that
   • landlords were offered a right of termination in the CVA; and
   • in the court’s view, the outcome was no worse than if New Look were placed into administration or liquidation.

What happened in the Virgin Active case?

This was not a case about CVAs but about a request by companies in the Virgin Active Group for the court to sanction a restructuring plan, pursuant to s901F of the Companies Act 2006 and new processes introduced by the Corporate Governance and Insolvency Act 2020.

In this case, several creditor classes of landlords failed to approve the plan put forward by the Virgin companies, which meant the plan could not pass in the usual way.

In these circumstances the court has a discretion, if certain tests are met, to sanction the plan, notwithstanding that it faces opposition, perhaps significant opposition, from the creditors it will impact.

Here, the court decided that the two tests necessary to impose the restructuring plan were met, namely:

1. That the court was satisfied that the creditors would be no worse off if the plan were approved than under an alternative outcome (in this case an administration);
2. That 75% of creditors (by value) who had an economic interest in the outcome had voted to approve the measure.

This is called, in what is likely to be the new legal buzzword of the summer, a “cross class cram down”.

This matters because – even though insufficient numbers of landlords in particular classes approved the restructuring plan – it was imposed on those landlords in any event.

Why is this important?

The big picture here is that the corporate rescue culture is alive and well.

There has, for years, been a tension between property rights and the processes and demands of the corporate rescue culture and processes.

We can be sure that more restructuring programs are on the way – possibly many more as a result of the COVID-19 Pandemic.

Corporate entities will be comforted that the flavour and approach of recent CVAs and insolvency processes have received qualified blessing from the court.

Landlords will likely be disappointed and concerned.

We can also be sure that further challenges will occur in the future as the tension between property rights and rescue culture will be with us for the foreseeable future.