A ‘New Look’ at fairness: Company Voluntary Arrangement Primer

Welcome to the 141st Pari Passu Newsletter, 

Today, we’re taking a look at a unique legal restructuring tool across the pond, the English Company Voluntary Arrangement (CVA). The CVA had become the go-to restructuring tool for distressed UK retailers in the late 2010s and early 2020s, not because it overhauled financial debt but because of its usefulness when cramming down landlords. Originally conceived as a fast, inexpensive compromise mechanism for Small and Medium-sized Enterprises (SMEs), the CVA has evolved into a powerful tool for shedding lease liabilities without the procedural guardrails of class voting or judicial confirmation.

Today, after the New Look case and the rise of new cross-class cram-down restructuring tools in England,  the CVA has faded in popularity. Nonetheless, the CVA is an interesting case study that provides a contrast to more formal restructuring processes like Chapter 11, and delving into CVAs will help bolster our understanding of fairness in restructuring. We will begin with a Primer on CVAs and the issues that landlords as a class face when leases are included in a CVA. Then, we will have a look at New Look and its 2021 CVA before finally drawing some comparisons between CVAs and Chapter 11s.

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Company Voluntary Arrangements Primer

Before we dive into CVAs, let’s make sure we have a strong understanding of what corporate rescue tools are.  A corporate rescue tool is a legal mechanism that reduces the level of consent needed from creditors to amend the company’s debt obligations. For example, Chapter 11 can be utilised as a corporate rescue tool as it can reduce the required consent from a class of creditors from 100%  to two-thirds in value of the debt and over half in number of creditors of the class. This is referred to as ‘cramming down’; the rest of the creditors in that class can be subject to new debt obligations that they did not agree to. Chapter 11 can also go further to impose new debt obligations on a class where all its creditors object to the amendments, where the ‘two-thirds in value and half in number' threshold is reached in another class (cross-class cram down). As a general rule, the more the consent threshold for altering the debt’s terms is reduced, the stronger the justification is needed for changing and imposing new obligations on the dissenting creditors. 

The Company Voluntary Arrangement (CVA) is one of England’s three principal corporate rescue tools. The other two tools are the Part 26 Scheme of Arrangement and the Part 26A Restructuring Plan, the latter of which has been at the centre of Thames Waters’ ongoing in-court restructuring. While these two tools are quite similar in many respects to how Chapter 11 functions as a corporate rescue tool, the CVA is very different. As a sort of overview description before we break down its characteristics, the CVA allows a company to enter into a binding agreement with its unsecured creditors to compromise debts without the need for court approval, all while making creditors vote in a single class. It is almost as seamless as an out-of-court transaction, but it requires additional disclosure to the Companies House (the UK’s SEC equivalent) and the appointment of an insolvency practitioner (similar to a bankruptcy trustee) to oversee the CVA process. It was conceived to be a fast and cost-effective option for SMEs, but as we will go over, it has been increasingly used by large retailers to compromise their lease agreements.

Who does it bind

Practically speaking, a CVA only binds unsecured creditors. Where a CVA is used to amend the rights of secured and preferential creditors (explained below), those creditors will have the power to block the CVA [20]. Thus, it is very rare that a CVA would be used to alter secured or preferential creditors’ claims against the company; the debtor would propose a Scheme of Arrangement or Restructuring Plan instead. This goes to demonstrate how the CVA was deliberately designed to restructure operational liabilities, such as leases, trade debts, and other unsecured claims. If secured claims could be altered very quickly and easily, then lenders would be far less willing to provide secured financing in the UK, which explains why more court supervision would be needed in their case. The core premise of the CVA was to create a quick, cost-effective solution for SMEs where corporate rescue tools that require heavy court supervision would be expensive. Furthermore, SMEs, having fewer assets to provide as collateral for lenders, are unlikely to have a lot of secured loans on their balance sheet anyway.

As to who preferential creditors are, they are creditors to whom England grants extra protection in a liquidation event for public policy reasons. This group includes employees (up to £800 in wages [24]), pension scheme contributions, and, most controversially, HMRC, the tax collection and enforcement government arm like the IRS in the US [21]. Thus, where a CVA is used to impair the government’s tax claims, HMRC will have the right to block the CVA. This highlights how CVAs are a corporate rescue tool focused on restructuring operational liabilities.

Voting Requirements

In order to satisfy the consent threshold for a CVA, it first requires that either a) 10% by value, (b) 10% by number of creditors, or (c) just 10 creditors need to be voting. Second, of these voting creditors, 75% by value most approve the CVA proposal, that being the company's proposed amendments to its debt documents [21]. Where this threshold is met, the CVA becomes binding on all creditors regardless of how they voted or if they participated in the vote, save for where the CVA proposes to alter a secured or preferential creditor’s rights and is therefore blocked. 

The key characteristic of the CVA is that all creditors, secured or unsecured, vote as a single class. This is unlike Chapter 11 or the UK Scheme / Restructuring Plan where creditors vote in separate classes. Equally important to note is that where secured lenders are participating, they are only entitled to vote in relation to the unsecured part of their debt. For example, a lender who provided a £100mm loan but only £60mm is collateralised, they are able to vote £40mm in value in favour of the amendments proposed under the CVA. 

The single-class voting and secured lenders’ participation in the vote are critical features of the CVA and explain why the corporate rescue tool, designed for SMEs, was so popular with large companies. Single-class voting enables the company to secure the approval of a small number of large supportive creditors who are not affected by the proposed CVA;. This is called ‘swamping’ the vote. The reason why secured lenders are likely to vote on a CVA despite not being directly affected is best explained through an example.

RetailCo is seeking approval for a CVA to restructure its leasehold liabilities. Four creditor groups are involved in the vote: the Bank Lender, Trade Creditors, Landlords A, and Landlords B. The proposed terms under the CVA are that Landlords A will have their rent payments cut by 50%, decreasing total landlord obligations from £30mm to £15mm, and Landlords B will have their leases rejected after two months, effectively cutting landlord obligations to zero. Both the Landlord groups are unhappy with this arrangement and will vote against the CVA proposal. 

The other two groups are not involved or affected by the CVA. RetailCo wants to maintain a good relationship with the Bank Lender, and it also decides that the Trader Creditors are too critical for its business and cannot afford to have them withhold future supply. The Bank Lender initially concluded that the CVA being approved or not was irrelevant to them and decided not to attend the vote. As it stands, the CVA will be rejected overwhelmingly.

However, consider the alternative set of facts. RetailCo launches another restructuring simultaneously and is willing to give the Bank Lender very generous terms so that it does not enforce its collateral and seize critical business assets. The Bank Lender, though, will only co-operate in this restructuring if RetailCo can reduce its cost base by £25mm. Both parties are keen on making this restructuring work, so the Bank Lender commits to voting in favour of a CVA that cuts total landlord obligations using the value of the unsecured portion of its debt.  After this, RetailCo goes to its Trade Creditors and convinces them to vote in favour of the CVA proposal, as cutting leasehold liabilities will allow RetailCo to continue to purchase from them.

Here, the CVA passes comfortably as the Bank Lender (£110mm unsecured value) and Trader Creditors (£50mm) combined for 80% of the value of the debt voting on the CVA proposal (£160mm / £200mm). The CVA is approved and implemented shortly after without needing to go to court to obtain permission (assuming the Landlords do not challenge). In the end, some of Landlords A decide to terminate their leases and try the market to see if they can obtain more favourable rent, and the rest of Landlords attempt to renegotiate leases as RetailCo looks to keep its cost base low.

This is a clear example of vote swamping because the vote’s outcome was determined by creditors who are not affected by the CVA. The creditors who were directly affected by the CVA voted unanimously against it, but they were outvoted by creditors who retain their full unsecured claims and/or benefit from deals outside the CVA. This is possible because the CVA uses single class voting, enabling creditors unaffected by the CVA, using the unsecured portions of their loans, to influence voting outcomes. Hence, where a company is able to get large creditors onside, they can swamp the vote and force a group of creditors to accept onerous terms without having to go through a potentially long and expensive court-supervised process.

Grounds for challenging a CVA

Even if the scope of creditors who can have their rights altered by a CVA is narrow, the vote swamping makes this corporate rescue tool extremely powerful. However, the creditors who believe that CVA has mistreated them can challenge it, at which point the permission for the CVA to go ahead will be heard in court [21]. There are two grounds on which the affected unsecured creditor can challenge:

• Material Irregularity 

• Unfair Prejudice 

The first ground is pretty straightforward. Material irregularity is concerned with the process around the CVA proposal and voting being fair. For example, improper notice being given to creditors to attend the CVA vote, failure to disclose material information, or even a miscount count of the vote [21]. All of these examples would be a procedural defect which could have changed the outcome of the vote or affected creditors' decision-making where it shouldn't have.

The second and more interesting ground is the unfair prejudice ground, which has to do with the substantive fairness of the terms proposed under the CVA. While there is no single universal test for judging fairness, and the judge is afforded a lot of discretion in doing so, it will be helpful to discuss the two-step framework by which fairness is generally assessed [21]:

1) Vertical comparison: The starting point to assess fairness is to compare the creditor's position under the CVA with what the creditor's position would have been in the relevant alternative. The relevant alternative is simply what is most likely to happen if the CVA is not passed. This is usually a liquidation scenario, but it can also be another restructuring process. For simplicity's sake, though, the court will generally be comparing what the challenging creditor is getting under the CVA against what they would be receiving in a liquidation. Where the challenging creditor is worse off in the CVA than in the liquidation, they will have a strong case for unfair prejudice. This is a test of absolute treatment: are and how much better off are they in comparison to the relevant alternative.

2) Horizontal comparison: The second way the court assesses fairness is through comparing the challenging creditor's treatment under the CVA against (a) other creditors and (b) other classes of creditors under the CVA. This is an assessment of the challenging creditor’s relative treatment to other creditors.

An important point is that just because a CVA treats creditors of the same class differently, that is not necessarily enough to establish unfair prejudice. Ultimately, the court would need to find that there is ‘no good commercial justification’ for treating the challenging creditors differently from other creditors [21]. Thus, as long as the company provides a sensible reason for why the challenging creditors are being treated the way they are under the CVA, then the court will be hesitant to question a genuine commercial decision. 

There are numerous sub-factors that the court takes into account when a CVA is being challenged for unfair prejudice, and there is a lot of literature on this topic. We will explore aspects of how the English courts use vertical and horizontal comparison in our New Look case study when we are thinking about the treatment of impaired Landlords in a CVA.

The Landlord CVA

As has been referenced throughout, landlords were often the victims of aggressive CVAs, more so than any other sort of unsecured creditor. The CVA was particularly effective for large retailers who needed to cut their rent payments and reduce leasehold liabilities in the run-up to and during the pandemic. There are three key reasons why CVAs had been so popular in cramming down landlords specifically: 

1) CVAs can reduce ‘future rent’ obligations: Alongside amending existing unsecured claims against the company, the CVA can be used to reduce rent obligations that are not presently due. Future rent is a unique kind of liability because it relates to an ongoing contract, not a debt that has already become due. For example, a company signing a 10-year lease does not mean they would be liable for 10 years’ worth of rent immediately; rather, they may have agreed to pay rent every month (or quarter) for the 10-year  lease. The rents become payable over time as the company continues to occupy the premises (think about executory contracts and unexpired leases we discussed in our Section 365 Primer). Thus, where the 10-year lease tenant has occupied the premises for 2 years, 8 years’ worth of rent hasn't fallen due yet. 

The CVA cases defined this as a 'Pecuniary Liability', which includes liabilities that are not yet due but are likely to arise in the future based on existing contracts or legal obligations [21]. These future rent obligations can be valued, even though these rent obligations may not actually exist in the future if the landlord decides to repossess the property or if the tenant leaves prematurely.  Future rent being classified as a pecuniary liability is important, as a CVA is capable of reducing and amending such pecuniary liabilities.

2) Calculation of claims for voting: As a CVA only passes when 75% by value of all voting creditors (without it being blocked by a secured or preferential creditor), how the landlord's claims are valued for voting is critical. Rent that is already due is valued at face value. However, future rents are treated differently. Where a debt is unprovable (which would include the pecuniary liabilities), then that debt is to be valued at a minimum of £1 (not 1:1, but nominally £1) [21]. In practice, the appointed nominee will apply a discounted rent formula on the face value of the future rents, and then a further 25% to 75% reduction [21][22].

The logic is that there is no guarantee that the tenant will stay on the premises for the full duration of the lease. Where a 10-year lease tenant has eight years of his lease left, and there is a chance that the lease will not be served in full, the landlord should not be able to vote for the full value of the remaining eight years. This is because the lease may be cut short, and the tenant may not owe the landlord eight years’ worth of rent. Therefore, a discount is applied to future rent to account for the risk of the lease not being served in full.

For clarity, this is different from the risk of financial debts not being paid in the future. A financial debt is a liability that is presently owed to the lender; there is no question as to whether this liability will or will not exist like with future rent. The risk of a financial debt not being paid in the future is about whether the company will default on debt that it actually owes, not whether that company will owe that debt.

The important takeaway here is that the landlord's voting power is significantly reduced relative to the amount that they could be owed. The effect of the discounts on future rents is that landlords are particularly susceptible to having their vote swamped by other creditors with existing liabilities, which are at face value for voting. 

3) Weak termination leverage: It is now standard practice for a CVA to give landlords the right to terminate the lease within a short window after the CVA is approved [21]. This provides leverage to the landlords to break the lease if they do not consent to the lease amendments proposed by the CVA. The idea is similar to how trade creditors would take steps to protect themselves if they are being compromised, such as refusing future supply. On the other hand, Landlords without a termination right would be forced to provide future rent on the CVA's terms.  

What is the incentive for the company to provide landlords with a termination right? It helps the company mitigate the risk of an unfair prejudice challenge. When a landlord decides not to exercise their termination right, they are effectively consenting to the CVA terms. It could not be said that the company is forcing or coercing the landlords to accept reduced rent payments where they have an option to try the market for better. 

While this termination right seems very powerful for landlords, as they can reject onerous CVA terms, in the context of COVID-19, this termination right provided landlords with little leverage. The demand for commercial real estate during the pandemic was basically non-existent; this left landlords with little choice but to accept aggressive amendments to their leases as they were unlikely to get anything better through re-letting. This made CVAs particularly popular during the pandemic to cut rent payments as landlords were willing to accept much more favourable terms for the company.

All in all, while the CVA is an effective tool for cramming down unsecured claims, it is particularly powerful against landlords. The vulnerability of their future rent payments, reduced voting power, and weak leverage against the CVA during COVID-19 made it difficult to resist aggressive CVAs. Now that we have a conceptual grasp, we can move onto our New Look case study to see how CVAs were used by distressed retailers to rid off their leasehold liabilities.  

The Context to New Look 

Company Overview

New Look is a British fast-fashion retailer founded in 1969 in Taunton, Somerset, known for delivering trend-driven apparel and accessories at accessible prices to primarily an audience of women  [2]. New Look presently has 364 stores across the United Kingdom and the Republic of Ireland. It has been a leader in the Womenswear market [5]. Ranking second overall for wear market share in the 18 to 44 range and first for women’s dresses and going out, New Look is a household name in the UK for women’s fast-fashion [3].

We won’t be delving deep into New Look’s financial troubles as we’re primarily focused on the company's 2020 CVA. In short, a lot of its troubles were very similar to many high-profile retailers. The move to online shopping and COVID-19 made their leases expensive and redundant (you can read more in our Express Chapter 11 Case Study to get an idea of the sorts of trouble New Look was facing). New Look underwent three restructuring transactions in 2018, 2019, and 2020 before the 2020 CVA that we will be examining [1]. We will only cover the 2020 financial restructuring as it was happening simultaneously with the 2020 CVA and was directly relevant in the 2021 challenge hearing. Below is New Look’s capital structure after its 2019 financial restructuring.

The 2020 Financial Restructuring

When the UK government ordered a pandemic lockdown in March 2020, it forced New Look to shut all its 496 stores. For a company pre-coronavirus that made only around 20% of its sales online, the effect of COVID was hard to overstate for New Look [18]. The company’s EBITDA had fallen to negative £16mm in Q1 2021 (April 2020 to June 2020) [25], annualised at negative £64mm. Compared to the £132mm EBITDA that New Look had in FY 2020, it is evident how devastating COVID-19 was for the fast-fashion retailer [27]. Hence, even after the two previous restructuring transactions in 2018 and 2019, EBITDA and FCF (£27mm in FY 2021) were far too low to sustain £444mm in Net Debt excluding lease liabilities going into FY 2021 (April 2020 to March 2021).

Therefore, New Look commenced both a Financial Restructuring and CVA in 2020 to grapple with its liabilities. It is important to note that these restructuring processes happened simultaneously. The CVA went on to be challenged in court in 2021, and its judgment is the subject of the newsletter. However, we should first break down the 2020 Financial Restructuring. 

The Financial Restructuring was executed via a court-sanctioned English corporate rescue tool called a ‘Scheme of Arrangement’ as there was no unanimous agreement for the restructuring. The outcome of the Scheme was as follows [19]:

• The Senior Secured PIK Toggle Notes (£424mm total) were fully exchanged for a £40mm non-interest-bearing Shareholder loan (SHL) and were given 20% of equity in New Look. 

• A new £42mm New Money Term Loan (NMTL) was injected into the business, structured as 16.5% PIK interest. The NMTL holders also received 80% of the equity in New Look. While most of the new money was provided by existing investors in New Look [19], this new money was really well compensated with 16.5% interest and 80% of the equity. The existing £424mm of debt, on the other hand, was treated comparatively poorly for its £384mm write down with no interest loan and only 20% of the equity

• The existing £100mm RCF was amended and converted into a £101mm term loan and extended to 2024. This term loan ranks ahead of the SHL and the NMTL

• Operating facilities were increased from £60mm to £70mm and extended to 2023. This Operating Facility also ranks ahead of the SHL and NMTL.

Together, these steps reduced New Look’s funded debt burden to £72mm of net debt (1.2x NTM EBITDA). However, despite this financial overhaul, the business remained weighed down by its store estate, paying rent on 496 closed stores. Net Debt including lease liabilities stood at £460mm, still 7.8x EBITDA. A CVA was ultimately required to restructure New Look’s lease obligations and reset the fixed cost base.

The 2020 CVA & High Court Judgement 

The CVA Approval

As the restructuring was ongoing, New Look proposed a CVA to restructure its store lease obligations and reduce fixed costs across its UK real estate. The proposal grouped the leases into three categories: A, B, and C [19]. These categories were made based on the stores' performance and not on the specific rights those landlords had against the company (like how a class composition would be made). Below is a table depicting the terms of the CVA from New Look's annual report.

The most important parts of the table above are the rent concessions the lease categories had to make. In short, these are:

• Category A: Leases stayed on existing terms with full rent arrears (overdue rent) paid in full. These landlords were entirely unaffected and retained all rights under their existing leases.

• Category B: Rent arrears were to be written off. As for the CVA Term, for the first 12 months, rent was to be reduced to a “turnover-based model” [19]. 

This turnover model makes rent payable by New Look based on the turnover / sales revenue generated at the Category B leased premises. For example, let's say turnover rent was set at 10% of turnover: then if a store generates £1mm in sales,  the respective landlord would be owed £100,000 in rent. Having rent payments tied to turnover helps New Look cut costs during pandemic restrictions.

For the remaining 24 months of the CVA, tenants would also be guaranteed a base rent that was equal to 85% of the previous year’s rent paid [19]. This ensures the landlord receives a minimum rent, even if turnover drops sharply. 

• Category C: Rent arrears were also cancelled. For the first two months of the CVA Term, these landlords were paid the rent that was guaranteed to them in their leases. After two months, rent payments would be reduced to zero. These were considered non-viable leases; hence, the landlords were given the most flexible termination rights. 

In September 2020, the CVA was approved by approximately 80% by value of the creditors voting, well clear of the 75% thresholds. As for the voting split between different classes of creditors, this is presented in the table below:

The biggest takeaway from the voting results is that the groups unimpaired by the CVA (the SSN Holders, Ordinary Unsecured Creditors and Employees, and the Group A Landlords) made up 72% of the vote in favour of the CVA proposal. (56% + 15% +1%). In contrast, only 27% of the in-favour vote came from the impaired landlords (Categories B and C). The SSNs (through the unsecured claims they held in New Look) really drove the voting results. Despite being unimpaired by the CVA, 100% of the SSNs voted in favour of the CVA, representing 56% of all the votes in favour of the CVA. This was not by coincidence, either. Part of the parallel Financial Restructuring required the SSNs to enter into a lock-up agreement, which bound them to support the CVA, which will now be discussed in the next subsection.

The Judgement

After the CVA was launched in September 2020, the dissenting landlords challenged the CVA in March 2021 on several different points in court in front of Judge Mr Justice Zacaroli. We will just examine and breakdown aspects of the unfair prejudice claim, building on what we learned in the CVA Primer. There are two elements to the challenge that are relevant for us: 

1. The amendments to the leases and the significant reduction in rent were unfair

2. The requisite majority was achieved by the votes of the SSNs who were not affected by the CVA

As to the first point, the landlords (those in category B in particular) argued that the change to turnover rent for their future rent payments “involved the fundamental reallocation of commercial risk and deprives such landlords of their bargain” [22]. In essence, the landlords are arguing that the CVA cannot operate to reduce future rent as it disrespects their bargain they reached when negotiating the leases, and that is unfair.  

However, Justice Zacaroli used the vertical comparison to dismiss this first point. He held that the reduction of future rent that is being imposed on the landlords is not really a product of the CVA but is actually a consequence of New Look going bankrupt. It was accepted that in the relevant alternative (what is most likely to occur if the CVA is not approved), there would be no return to unsecured creditors. In this sense, the landlords’ bargain actually entitles them to almost zero. 

Furthermore, as the landlords are provided with a termination right, they are faced with two choices: (a) terminate their lease for a financial return that would be better than New Look’s bankruptcy, or (b) continue the lease on the amended terms from the CVA. The termination right is crucial for the CVA to be fair in Justice Zacaroli’s eyes, as the reduction in rent only applies if the landlord does not opt to terminate the lease Like how we discussed in the CVA Primer, the landlord effectively consents to the CVA’s amended terms if they don’t use their termination right; it would not be completely accurate to suggest that they were being forced or coerced into accepting the CVA’s amended terms when they choice between the CVA and the market rate for letting their property. Therefore, to suggest that the CVA ‘reallocates commercial risk’ was not convincing to Justice Zaracoli; rather, its harsh terms were a reflection on the market conditions for commercial real estate, hence not evidence of New Look being unfair to its landlords. 

We now move to the second point, which addresses the controversial nature of vote ‘swamping’ by the creditors who were unimpaired by the CVA. We highlighted earlier how 73% of those approving the CVA were unaffected by the CVA terms. The particular group that the opposing landlords took the most issue with was the SSN holders. The landlords argued that it was unfair for the 75% threshold to be obtained mainly by the SSN Holders votes. Justice Zacaroli considered this contention in detail as it was the first time vote swamping was seriously challenged [22].   

He accepts that the SSN holders were incentivised to vote in favour of the CVA for reasons that they did not share with the impaired landlords. The SSN Holders were only willing to provide the NMTL in the parallel Financial Restructuring if the CVA was approved. The NMTL had been calculated by reference to the cash needs of New Look on the basis of a significantly reduced rent burden [22], hence, the SSN Holders entered into a lock-up agreement to vote in favour of the CVA.

Moreover, Justice Zacaroli highlighted that in virtually every CVA, the secured lender would vote in favour of amendments that aim to rescue operational viability at an unsecured creditor’s expense [22]. The fact that secured lenders do not share the same incentives as unsecured lenders cannot be unfair prejudice, as there would be no point in the CVA allowing secured creditors to vote for their unsecured debt in the first place. 

Still, J Zacaroli conducted horizontal comparisons to decide that there was no unfair prejudice against the landlords due to the SSN Holder’s treatment and voting:

• The SSN Holders are impaired: It was necessary to take into account the wider ongoing restructuring. Justice Zacaroli treated the secured portion (£151mm) of the SSN Holders’ debt as being swapped for non-interest bearing £40mm SHL and the  20% minor equity interest, the latter of which the value would be speculative at best [22]. This is undoubtedly an impairment when considering the wider restructuring. 

Regarding the treatment of the unsecured portion of the SSN Holder’s debt (£273mm), the CVA offered nothing in exchange for the SSN Holders releasing the unsecured part of their debt. Where the Category B landlords were getting turnover-based rent and a minimum base rent in the last 24 months of the CVA Term, and the SSN Holders were receiving nothing, it was difficult for Justice Zacaroli to see how the SSN Holders were not being impaired. 

• SSN Holders did not enforce their collateral: The SSN Holders held collateral over New Look’s assets and could have seized them if New Look defaulted. Instead, they agreed to release their collateral (give up the claims over those assets to accept new terms) because forcing a liquidation would have meant only recovering £151mm out of their loan of £424mm (36%). This allowed New Look to keep trading. As a result, landlords still had the option to keep leasing their premises to New Look, even at reduced rents under the CVA. If the SSN Holders had enforced their collateral, New Look would likely have collapsed, leaving landlords with almost nothing. Because their actions helped preserve value, the court found it hard to say the landlords were treated unfairly.

• Majority of Impaired Landlords voted in favour: While the 75% threshold could not have been met without the SSN Holders’ support, nonetheless, a majority (57%) of the impaired landlords voted in favour of the CVA. This was an indication that creditors in a similar position thought the deal reached was at least reasonable, making an unfair prejudice claim less convincing.

Hence, for this particular case, the landlord’s challenge was dismissed. However, Justice Zacaroli emphasised that it did not mean vote swamping could never be unfair prejudice. Assessing unfair prejudice required the court to consider all the circumstances and in New Look [21]. The challenge was dismissed because the wider context of the restructuring demonstrated that the SSN Holders were being impaired and they were enabling the landlords to receive better treatment than they would have in the relevant alternative. Equally, where the vote is swamped by creditors who were unaffected in all the circumstances and make out much better than the landlords or unsecured creditors, the fairness of the CVA will be questioned. This point was actually a significant reason why CVAs declined in popularity, despite the challenge being dismissed in New Look [26]. It was seen as a much safer route for large companies to utilise the new Restructuring Plan and its cross-class cram-down feature to reduce their leasehold obligations (for example, Virgin Active and Cineworld, the latter of which we’re going to cover soon!).

Assessing the CVA against Chapter 11

To end this newsletter, we’re going to apply Chapter 11 (purely as a corporate rescue tool) to the facts of New Look to highlight the differences between Chapter 11 and the CVA. If we think Chapter 11 is an effective restructuring tool, seeing how the CVA stacks up against it with similar facts should reveal what Chapter 11 prioritises for parties versus the CVA.

Section 365 Bankruptcy

In the CVA, New Look divided its store estate into three categories: Category A stores continued on full rent; Category B stores switched to a reduced turnover-based rent; and Category C stores were effectively slated for exit. The CVA does not require landlords to be placed into categories this way, nor does it specify the nature of the amendments to the leases in statute. To the extent the CVA does prescribe what the treatment of landlords should be, the company is guided by precedent/case law, e.g. including a termination right and respecting the vertical and horizontal comparison tests.

However, in our Chapter 11 hypothetical, New Look’s unexpired leases (an ongoing lease where there are future rents) are governed by Section 365 of the Bankruptcy Code. The debtor is provided the option to assume or reject leases [23].

• Assumption: New Look would most likely assume the same leases that it kept on, unaffected, in the actual CVA. These would be the Category A leases. §365 makes some substantive demands of the debtor when assuming leases, such as requiring New Look to pay rent arrears in full and assure future performance (e.g. cash flows) to the Category A leases. Given that New Look did pay rent arrears for its Category A leases, the assumption should be unproblematic.

Note §365 offers the option to ‘assign’ leases.. Assignment is where a debtor first assumes the lease, hence the lease is unamended, and transfers that lease to a third party. The assignment would be difficult as the lockdown restrictions would have meant there would have been no demand from a third party to take on New Look’s leases on the terms before the rent concessions were imposed.

• Rejection: Firstly, the Category C leases would be rejected in our hypothetical, as they were effectively cancelled in the CVA. As for the Category B leases, under §365, it would not be possible to amend these leases unilaterally. All §365’s options leave the leases on the same terms or reject the lease entirely. New Look would likely enter extensive negotiations with the Category B landlords individually to secure turnover-based leases. However, some of these leases would be rejected if an agreement could not be reached.  Firstly, the rejected landlord receives an unsecured damages claim for the full amount of rent that is overdue.

Second, the rejected landlord also receives a discounted unsecured damages claim for future rent. As per §502(b)(6), the landlord’s unsecured damages claim for future rent against New Look would be capped at (i) one year’s rent or (ii) 15% of the remaining lease term, capped at three years of rent. Therefore, Chapter 11 is prescriptive on how much future rents are discounted, whereas the CVA does not provide a statutory formula to discount rent. In New Look, the retailer applied a 25% discount on the voting value of the landlords, and, unlike Chapter 11, there is no claim for future rent against New Look. 

Class Voting

The CVA pools are creditors into a single class. In contrast, Chapter 11 separates creditors into their own class. So, in our hypothetical, the rejected Category B and Category C landlords would be in their own class. However, as the landlords would only have a claim for the rent arrears and unsecured damages, there are no ongoing leases for New Look to amend at this point. The company would most likely use Chapter 11 to write off at least a significant portion of the rejected landlords’ unsecured damages claims which are created when the lease is rejected. Implementation of the write-off would require the court’s permission, as the landlords are likely to oppose the write-off of their debt; hence, there would be a need for a cross-class cram-down. 

As we’ve discussed, the voting value in the CVA is very important, as all creditors vote in a single class, as there is a risk of vote swamping from other creditors with different treatment under the CVA. Here, the vote is on the treatment of ongoing leases. New Look’s CVA did require the court’s permission, but only because it was challenged. Ordinarily, there is no need for the court’s approval. Unlike Chapter 11, where obtaining the court’s permission is necessary, the CVA would have taken less time and money to implement the restructuring. 

Policy goals 

The walkthrough above highlights four key tensions between the CVA and Chapter 11, demonstrating a difference of policy goals underlying the different restructuring tools. 

1. Single Class vs. Multi-Class Voting: The CVA pools all unsecured creditors into a single class, where creditors can outvote landlords with entirely different interests. Chapter 11 separates creditors into classes, ensuring that if landlords disagree with the restructuring proposals, they cannot be vote swamped.

2. Protection by Majoritarianism vs Protection by Process: The CVA largely relies on creditors to police fairness themselves. Courts only intervene if creditors challenge the outcome after the fact. In Chapter 11, fairness is enforced by mandatory judicial oversight, requiring courts to confirm that the plan treats each class equitably from the outset.

3. Flexible Amendments vs Prescribed Treatment: The CVA allows commercial flexibility to amend ongoing leases and to allocate voting power to landlords, though this is contingent on the respect for the precedents set by CVA case law. Chapter 11 imposes strict legal rules: under §365, leases can effectively only be assumed or rejected entirely, and future rent claims are capped by statute under §502(b)(6). There’s no room for unilateral mid-way solutions like turnover rent without lengthy, individual negotiations with landlords

4. Pragmatism vs Principle: The CVA prioritises fast, lower-cost solutions, enabling businesses like New Look to restructure quickly and stay operational. Chapter 11 trades speed for procedural rigour, layering fairness checks at every step. This is the most important tension, where we can see Chapter 11 is not as willing as the CVA to give up on principles for speed and cost of the restructuring. 

In sum, we hoped to have provided an in-depth insight into a unique legal restructuring mechanism that functions very differently from what we have in the US. Whether or not the CVA would be a desirable tool to have in the US is a difficult question to answer. What compromises on principles underpinning Chapter 11 can we make to introduce single-class voting and minimal court oversight, if at all? But by showing you the pros and cons of the CVA and its application in New Look, we hope to have built your interest in foreign restructuring tools as they continue to grow in popularity!

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