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Opposition to New Look's Petition before the High Court

A recent case before Mr Justice McDonald in which William Fry were involved highlights the need for companies to meaningfully engage with their landlords before seeking the court's protection. In this earlier article on the case, we look at the statutory test for insolvency and the discretionary nature of the jurisdiction to appoint an examiner. This note explores in more detail, the discretionary factors at play before the High Court (Court).

William Fry acted on behalf of two of the three opposing landlords in response to an application by New Look Retailers (Ireland) Limited (New Look) for the appointment of an Examiner under Section 509 of the Companies Act 2014 (2014 Act).

In August 2020, New Look secured the appointment of an Interim Examiner before the Court as a result of financial difficulties caused by the COVID-19 restrictions. New Look relied on an Independent Examiner's Report which stated that without the court's protection, New Look would be cash-flow insolvent by October 2020.

The substantive application was opposed by three landlords (Landlords) across New Look's estate of 27 stores. The Landlords argued that New Look had not sufficiently explored alternatives to Examinership before applying to the Court. The Landlords argued that New Look was using the Examinership process (similar to a Company Voluntary Arrangement proposed by New Look's parent company in the UK) to force the Landlords to alter fundamental terms in the leases rather than engage in meaningful negotiation with them.

There was conflicting evidence on the cashflow status of New Look. Where it transpired that New Look had sufficient funds to survive, likely until Spring 2021, the Court was satisfied that it was likely that New Look would be unable to pay its debts in the first half of 2021. However, the Court exercised its discretion and refused the application on the basis that New Look had not engaged with its creditors before applying for the appointment of an Examiner.

Cash flow solvency

In response to New Look's claim that it would be cash-flow insolvent by October 2020, the Landlords argued that New Look would still have a cash flow surplus up to the end of March 2021 as it:

  • had cash of circa €12m on 27 June 2020, rising to €15m on the date of the Petition
  • had failed to account for the Employment Wage Subsidy Scheme which had been announced by the Irish Government a month before the application
  • had not factored in any possible rent deferral or concessions across its estate should it engage meaningfully with its Landlords
  • assumed a reduction of an €8.8m inter-company debt owed by its parent company to New Look by nearly 99% and the management fees owed by New Look to the parent was increased to 5%.

New Look countered that high rents and decreased footfall, months after the government restrictions, would result in it being unable to pay its debts.

McDonald J held that New Look had satisfied the test under Section 509 of the 2014 Act that "a Company is, or is likely to be, unable to pay its debts" as they fall due (test). He relied on a report of the Interim Examiner that New Look had been trading at a loss since the onset of the Covid-19 pandemic and all indications were that it would continue to do so for the foreseeable future. The Court recognised the unpredictable and uncertain nature of the current pandemic. McDonald J did warn that companies could not look too far into the future and their prediction must be reasonable and backed-up.

This judgment confirms that a company will be considered likely to be unable to pay its debts, if it will probably be unable to do so at some point in the future, see here for more detail.

Conduct and Discretion

The Court noted that satisfying the test did not give New Look an automatic entitlement to the Court's protection. Exercising its discretion, the Court focused on the conduct of New Look before and leading up to the Petition.

New Look had argued that it needed to reduce its rent obligations. It asserted that in negotiations outside examinership, landlords have “the stronger hand because of course [tenants] can’t break those leases …”. However, if an examiner was appointed, it would be possible to repudiate leases, subject to the consent of the Court and that would rebalance the power in any negotiations to reduce rents.

The Court noted New Look's failure to effectively engage with its Landlords during the pandemic and all correspondence had come from the parent company rather than New Look. There was little engagement from New Look, it made no attempt to initiate negotiations, and any requests for information or discussion by the Landlords were unsuccessful.

Describing the failure by New Look to act to resolve its differences with its landlords as "inexplicable", McDonald J ultimately declined to appoint an examiner where New Look was not currently insolvent, and where "less drastic options" to examinership should be explored first.

Conclusion

The current Level 5 restrictions and consequential impact on Christmas trade will affect the retail sector. In such challenging times, it is in the best interests of all parties to openly and effectively engage with each other to try to reach an agreement. The judgment shows that the Court will consider the factual matrix in the time leading up to any examinership application and a failure to engage can carry a significant legal risk.