The Ontario Superior Court of Justice (Canadian Court) recently recognized, for the first time, an English company voluntary arrangement (CVA) proceeding commenced pursuant to the UK Insolvency Act 1986 (Insolvency Act).
The CVA was recognized in accordance with Part IV of the Companies’ Creditors Arrangement Act (Canada) (CCAA), which incorporates the UNCITRAL Model Law on cross-border insolvencies. The CVA proceeding in question (English CVA Proceeding) was in respect of All Saints USA Ltd. (AS USA), a UK-incorporated retailer with stores in Canada and the United States. Although all matters were not finally concluded until November 2020, the CVA proceeding was commenced prior to the wide-ranging insolvency reforms that were introduced in the UK on June 26, 2020 through the Corporate Insolvency and Governance Act (2020).
The English CVA procedure has much in common with its closest Canadian counterpart, the Bankruptcy and Insolvency Act (Canada) (BIA) proposal proceeding; however, it is distinguishable in certain key ways. Unlike a BIA proposal, not only does the CVA procedure allow for different sub-categories of unsecured creditors to receive distributions or recoveries on different terms, it is also used to amend go-forward contractual arrangements between a distressed company and its contracting parties. In that regard, as described in greater detail below, the CVA filed in the UK by AS USA and recognized by the Canadian court provided for a temporary transition from a fixed-base rent-based model to a turnover (sales percentage) rent based model. This allowed AS USA to restructure its obligations to meet the challenges raised by the COVID-19 pandemic and continue as a viable multi-jurisdictional enterprise.
AS USA and All Saints Retail Ltd. form part of the All Saints Group. The All Saints Group is a contemporary fashion brand that operates 129 standalone stores and in-store concessions in 27 countries across North America, Europe and Asia. AS USA was incorporated in 2001 pursuant to the UK Companies Act 1985 to facilitate the expansion of the All Saints Group into the United States in 2009 and into Canada in 2012.
The ongoing COVID-19 pandemic caused a rapid and unprecedented impact on the global retail industry and had a significant adverse impact on the All Saints Group’s immediate liquidity position. In complying with the global COVID-19 restrictions, the All Saints Group closed most of their international locations by the middle of March 2020, including all six of their Canadian stores.
ENGLISH CVA PROCEEDINGS
To address ongoing financial challenges and effect a restructuring of their lease liabilities, the All Saints Group commenced the English CVA Proceedings in the United Kingdom under the Insolvency Act.
A CVA proceeding is a process that allows a company to come to an arrangement with its unsecured creditors in respect of its liabilities and go-forward contractual obligations to such creditors. In order for a CVA to become effective, 75 per cent or more (in value) of all creditors entitled to vote thereon must vote in favour of it, and no more than 50 per cent (in value) of all arms-length third-party creditors entitled to vote thereon can vote against it. If a CVA is approved by the requisite majorities of creditors, it binds all of the company’s creditors who were entitled to vote.
Once approved, however, any person entitled to vote on the CVA may apply to the High Court of Justice of England and Wales, within prescribed timelines, to oppose the CVA on certain enumerated grounds (Challenge Procedure).
In this case, the overall objective of the AS USA CVA was to restore AS USA’s financial viability by: (i) compromising all outstanding rent arrears owing by AS USA, (ii) amending go-forward payment terms under substantially all of AS USA’s leases in Canada and the United States, by temporarily moving to a sales percentage-based rent model, followed by a rebasing to market rent, and (iii) compromising certain other liabilities of AS USA in respect of abandoned, dilapidated or empty stores in the United States. The temporary transition to a sales percentage-based rent was designed to assist AS USA with cash flow and make stores viable during the COVID-19 pandemic and its aftermath.
Under the AS USA CVA, all landlords were provided with certain “break rights” that allowed them to terminate their respective restructured lease following the effective date of the CVA in the event that such landlord was not ultimately agreeable with the restructured terms of its lease. Notably, a landlord’s recovery under the CVA was reduced by the exercise of its break rights.
RECOGNITION OF THE CVA
Part IV of the CCAA provides that a foreign representative may apply to a Canadian court for recognition of a “foreign proceeding” in respect of which he or she is a foreign representative. If the Canadian court is satisfied that the proceeding in question is a “foreign proceeding”, the court is to specify whether the foreign proceeding is a foreign-main proceeding or a foreign non-main proceeding. A foreign-main proceeding means a foreign proceeding in a jurisdiction where the debtor company has the centre of its main interests (COMI).
Recognizing and giving effect to the CVA in Canada was a two-stage process. At the first stage, the foreign representative appointed in respect of the CVA (Foreign Representative) sought recognition of the English CVA Proceedings as a foreign-main proceeding (as AS USA has its COMI in the UK).
The Foreign Representative of AS USA was the “nominee” with respect to the CVA in the UK. A nominee is the licensed insolvency professional named in a CVA who is intended to ultimately supervise the implementation of the CVA if it is agreed to by the requisite majorities of the company’s creditors. As part of its application for initial recognition, the Foreign Representative provided the Canadian court with sworn expert evidence regarding the practices and procedures involved in a CVA, evidencing, among other things, that CVAs are routinely used in the UK to modify go-forward terms of leases. On June 17, 2020, recognition and the resulting mandatory relief provided for under Part IV of the CCAA, including a stay of proceedings, was granted.
Following recognition of the English CVA Proceedings, the Foreign Representative, assisted by the information officer appointed in the recognition proceedings communicated extensively with landlords to respond to questions and concerns regarding the CVA.
AS USA’s CVA was approved by AS USA’s creditors on July 3, 2020. All Canadian landlords voted in favour. Once the AS USA CVA received the requisite creditor votes, the only remaining key conditions precedent to effectiveness of the CVA were recognition of the CVA itself in both Canada and the United States.
To satisfy the test for recognition, the Foreign Representative had to, among other things, satisfy the Canadian court that the CVA was not inconsistent with Canadian public policy. That is, it was not necessary to demonstrate that the identical relief is provided for under domestic Canadian insolvency law; rather, the Foreign Representative had to demonstrate to the Canadian court that the relief sought was not inconsistent with the policy that animates such law.
In furtherance of that end, it was emphasized that the English CVA Proceedings were conducted in accordance with a well-established procedure, comparable and consistent with procedures under the BIA for approval of a proposal.
Like a Canadian BIA proposal proceeding, a CVA is commenced by filing of an instrument, involves the appointment of a licensed insolvency practitioner to oversee the proceedings, requires significant notice to creditors, and must be approved by a majority of creditors, with the voting thresholds under the CVA being comparable to those under proposal proceedings.
Additionally, the Foreign Representative submitted that recognition of the AS USA CVA was not contrary to public policy because AS USA is a UK company, subject to a UK proceeding, wherein the restructuring of a company’s contractual obligations on a go-forward basis is not only permissible, but commonplace. Of critical importance was that the landlords maintained break rights, allowing them to terminate the lease, at certain prescribed time intervals, should the revised lease not be acceptable. Accordingly, the landlords remained in ultimate control of their economic and commercial destiny. Given this, it was submitted that the CVA was in the best interests of Canadian creditors and provided the best possible outcome when compared to the result for Canadian creditors that would occur in a liquidation. Evidence was also put before the Canadian court that liquidation was the likely result, if the CVA was not implemented.
On July 6, 2020, the Canadian court recognized and gave full effect to the CVA in Canada. Recognition was also granted under Chapter 15 in the United States on July 6, 2020, satisfying the final key condition precedent to effectiveness of AS USA’s CVA. AS USA’s CVA took effect on July 6, 2020.
Following the effective date of the CVA, certain challenge applications were brought in the United States and the UK in accordance with the Challenge Procedure. The challenge applications were ultimately resolved consensually in November 2020 and did not impact the effectiveness of AS USA’s CVA.
The recognition of the AS USA CVA in Canada illustrates the utility of the CCAA as a tool for facilitating complex, cross-border reorganizations. The Canadian court has reaffirmed that while the particular relief available under a foreign proceeding may technically differ from the relief available under the Canadian insolvency regime, a foreign proceeding may still be recognized where the substantive legal effect is not inconsistent with Canadian public policy.
Blakes acted for All Saints USA Limited and its Foreign Representative in the Canadian recognition proceedings.