Lawbite: Regis Salons CVA gets the chop!

 

Carraway Guildford (Nominee A) Ltd & others v. Regis UK Ltd - [2021] EWHC 1294 (Ch)

This challenge brought by landlords to the Regis CVA (on grounds of unfair prejudice and/or material irregularities) follows on from the recent eagerly awaited Judgment on the challenge to the New Look CVA which was brought on very similar grounds but was ultimately unsuccessful. Further details are set out in our LawBite which can be found here.

Conversely, in the Regis case, the landlords were successful in their challenge, albeit only on one of numerous grounds. The Judge held that the CVA was unfairly prejudicial and made an Order revoking the CVA. However, the Judgment has limited (if any) impact on those effected by the Regis CVA given that Regis is now in Administration which resulted in the automatic termination of the CVA in October 2019.

A number of the grounds of challenge failed for the same reasons as in the New Look CVA Challenge. However, the Judgment does provide a tangible example of circumstances in which the Court considers there to have been unfair prejudice warranting the revocation of a CVA. Specifically, where a particular creditor is given preferential treatment without justification.

Practical Utility of the Proceedings

• Regis entered into Administration on 23 October 2019, causing the automatic termination of the CVA (whereby all compromises and releases effected under the terms of the CVA were deemed never to have happened)

• The Judgment therefore considers in detail whether there was any practical utility to the challenge to the Regis CVA (especially in circumstances where landlords were entitled to submit claims in the Administration based on the contractual sums due, as opposed to the reduced amounts payable under the terms of the CVA)

Successful Grounds of Challenge

• IBL purchased its shareholding in Regis in 2017, from Haircare Limited (the parent company being Regis Corp, based in the US). IBL was party to a separate franchise agreement with Regis Corp which enabled Regis to trade under and with the benefit of various Regis Corp brands, even though it was IBL who was the franchisee (not Regis)

• there was an informal arrangement in place whereby Regis reimbursed IBL in respect of the payments IBL owed to Regis Corp under the terms of the franchise agreement

• in principle, it is acceptable for a CVA to provide for payment in full to certain creditors (“the Critical Creditors”), if it is necessary to do so because (i) the creditor’s ongoing support for the company is critical to the success of the CVA and (ii) that support will not be provided without payment of the sums owing

• for the purpose of the Regis CVA, IBL was categorised as a Critical Creditor on the basis that the sums paid to it would be paid on to Regis Corp (in return for Regis having the benefit of the brand names, critical to its business operations)

• the Judge held that the CVA failed to give any consideration to the following: (i) the entity that was legally obligated to pay Regis Corp was IBL (not Regis); (ii) although IBL was a non-trading holding company, it was wholly owned by Regent, a global private equity firm, likely to have sufficient assets to assist in meeting the payment obligations to Regis Corp; and (iii) to the extent that the Regis’ debt burden, in particular to landlords, was reduced, Regent as equity holder stood to benefit

• the Judge concluded that the categorisation of IBL as a Critical Creditor was therefore not justified and that the preferential treatment IBL received under the CVA was unfairly prejudicial to those creditors whose debts were impaired, including the Applicants

• to put this in context, the sums owing to IBL (which under the terms of the CVA, would be payable in full) amounted to c£600,000. Conversely, the total amount ringfenced to be distributed amongst all the remaining impaired creditors was only £330,000

• although revocation of a CVA does not automatically follow from a finding of unfair prejudice, in light of the above the Judge made an Order revoking the CVA 

Unsuccessful Grounds of Challenge

The remaining unsuccessful grounds of challenge, can be split into broader categories as detailed below:

Unfair Prejudice

• Future Rent – the argument that the reduced future rents were unfairly prejudicial was rejected on the basis that (1) landlords had the option to terminate their lease or to accept the modifications to their leases under the CVA (consistent with the New Look decision) and (2) that these options provided a more favourable outcome than the relevant comparator (being a shut-down administration in which there would be no material recovery).

• Nature and extent of lease modifications - consistent with the New Look decision, it was held that the absence of a workable profit share fund does not necessarily mean that a CVA is unfairly prejudicial. Further, Regis’ right to terminate leases under the CVA which involved a full release of liabilities was not unfairly prejudice; as the potential recovery for any liabilities in the event of a disclaimer on liquidation, would be less than the sums made available under the CVA.

Material Irregularity

• Non-disclosure of antecedent transactions within the CVA Proposal - Consistent the New Look decision, non-disclosure will constitute a material irregularity only if there is a substantial chance that the non-disclosed material (in this case, information relating to the 2017 sale purchase and a 2018 settlement agreement) would have made a difference to the way in which creditors voted at the meeting. The Judge determined that (i) there were no potential causes of action arising out of the transactions which would be lost upon approval of the CVA or (ii) that the grounds of such causes of action were not sufficiently high; to give rise to the substantial chance that creditors would have assessed the CVA differently, had further information been provided.  

• Claim discounting - A blanket percentage discount of claims for voting purposes was justified in the New Look CVA, but the Judge found, on the facts, that it was not justified in the Regis case, as there was a real risk of landlord’s losses being overestimated in circumstances where the quality of the premises differed so significantly between the landlord categories. That said, the irregularity was not material as it was held to have had no impact on voting.

• Voting by Regis Corp/IBL. Given the lack of practical utility, the Judge refused to determine whether there was a material irregularity in permitting the ‘Critical Creditors’, Regis Corp and IBL to vote at the creditors meeting. 

Unfair Prejudice and/or Material Irregularity

• Statement of Affairs/Estimated Outcome Statement. Arguments were raised with regards to (1) the way in which debts were presented but the Judge considered it to sufficiently reflect the underlying factual position, (2) missing values of the Antecedent Transactions but the Judge did not consider this material information and (3) whether the suitable alternative to consider in the context of the proposal ought to have been pre-pack sale or trading administration, but the Judge accepted that the actual comparator used (a shut-down administration) was reasonable to have identified as the likely alternative. 

Nominees Duties

• The Judge reaffirmed that a finding of unfair prejudice, did not automatically mean that the CVA Nominees had failed in their duties. However, the Judge did find that the Nominees’ conduct had fallen below the standard required of a nominee.

• The Judge accepted that where negligence renders a service valueless then the renumeration should be returned. However, the Judge held in this case that the service provided by the Nominees was not valueless and therefore it was not an appropriate case in which to require repayment of their fees.

Key points

• on the face of it, this case is a win for landlords in so far as it is a successful challenge to a CVA on grounds of unfair prejudice, but it is of little practical utility to those impacted by the Regis CVA

• however, it is a positive reminder that CVA proposals ought to be considered in detail by effected landlords to consider whether there are any grounds for challenge. Specifically any provisions concerning ‘Critical Creditors’ will no doubt be subject to detailed scrutiny going forward