Spring 2021 has seen the input of independent expert evidence become increasingly critical to successful restructuring. May 2021 saw several significant court decisions from concerning CVAs and restructuring plans. Two cases – New Look and Regis – concerned CVAs and Virgin Active concerned a restructuring plan. All three judgments highlighted the need for early independent expert input in formulating the CVA or restructuring plans.
CVAs – New Look and Regis
Regis was of limited wider significance beyond the remuneration of the nominee as the CVA had failed and the company ended up in administration. New Look, on the other hand, was just embarking on the CVA. In both cases, the CVA proposed modifying leases including reducing the rent due to the landlords. The CVAs did allow landlords an exit from the leases as an alternative to accepting the reduced terms. The landlords challenged the CVAs.
In each case, it was argued by the landlords that the CVA should be revoked as it was unfairly prejudicial to the landlords and had only been passed with the votes of creditors whose interests were not impaired by the CVA. The court made clear that assessing unfair prejudice required vertical and horizontal comparators. A vertical comparison was with what the landlords would receive in the most likely alternative insolvency or restructuring process. A horizontal comparison was between the entitlements of various creditors in the CVA.
In both cases, the comparison required extensive independent input from insolvency specialists on what would be the most likely alternative process to the CVA and the likely financial outcome for the landlords in the alternative process. In New Look, the alternative process was determined to be an administration. However, the court accepted that the company would be unable to pay the rent due in terms of the leases if it went into administration – its insolvency rendered it incapable of paying the rents due unless it was with the modifications proposed by the CVA. In Regis, the company had said the comparator was a shut down administration. The landlords contested that and led evidence that the comparator should be either a pre-pack administration or a sale of the assets where the company continued to trade for a period in administration. In Regis, the court preferred the evidence of Regis’ expert and determined that the comparator should be a shut down administration. In both cases, the vertical comparison meant that the landlords would receive a better return under the CVA than the comparator. That was not the end of the matter of unfair prejudice but left the landlords facing an uphill struggle in attempting to persuade the court that the CVA should be revoked.
Restructuring plans under s.26A of the Companies Act 2006 were only introduced in the last year. Virgin Active is one of the first to be sanctioned by the courts. Restructuring plans differ from CVAs in requiring greater input from the court but also have scope for cross class cram down on creditors which is not available in a CVA. The Virgin Active decision again highlights the importance of independent expert evidence in proposing or challenging a restructuring plan. Similar to CVAs, the court needs to be satisfied that any members of classes that have dissented from the restructuring plan will not be worse off under the plan than they would under the most likely alternative. Again, the court heard from insolvency specialists on what the most likely alternative should be and what the outcome would be under that alternative. The court favoured Virgin Active’s expert and determined that the alternative would most likely be a trading administration involving an accelerated sale of the business. The landlords would be worse off under this scenario than under the restructuring plan.
What other expert input may be required?
The courts did not just hear from insolvency specialists in the New Look, Regis and Virgin cases. Expert input from surveyors was also required to assist in considering the fairness of new termination provisions included in the leases. In the Virgin Active case, the company also traded overseas and the court required expert legal input on whether the restructuring plan would be recognised in other jurisdictions.
Independent evaluation of restructuring proposals is becoming critical to their approval in a number of areas. With limitations on creditor diligence and debt recovery actions coming to an end, debtor companies will be under increasing time constraints and pressure when exploring their restructuring options. Getting good advice at an early stage remains crucial to enable all appropriate and necessary independent input to be sought, and ultimately to identify and then implement a successful restructuring strategy.
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