UK: Treatment of landlords´ unliquidated claims in a CVA

A recent case in the High Court has shown that where claims in a company voluntary arrangement (CVA) are both unliquidated and/or unascertained, and there is insufficient evidence to lead the chairman of the meeting at which the proposed CVA is considered to place a higher value on the claim, the chairman is within his rights to value the claims at £1 in accordance with Rule 1.17(3) of the Insolvency Rules 1986.

A recent case in the High Court has shown that where claims in a company voluntary arrangement (CVA) are both unliquidated and/or unascertained, and there is insufficient evidence to lead the chairman of the meeting at which the proposed CVA is considered to place a higher value on the claim, the chairman is within his rights to value the claims at £1 in accordance with Rule 1.17(3) of the Insolvency Rules 1986. For more information please see below.

Under a CVA procedure, a corporate debtor is generally permitted to make a proposal to its creditors which, if accepted by a 75% majority in value of those creditors present and voting, will usually bind all of the unsecured creditors. Creditors whose claims are uncertain in amount (and in particular landlords), have however shown an aversion to being bound into this process.

The facts of the case were as follows:

A company which operated a school was placed into administration, and the administrators proposed that a CVA be entered into.

The school's landlord was excluded from the CVA proposal on the basis that its future claims would be paid in full if the school was rescued. However, the landlord argued that it should still be entitled to vote on the proposal, and that its vote should be valued at the amount of the likely unpaid rent that would accrue if the lease was forfeited and a new tenant had to be found, and the sum of an alleged dilapidations claim.

The chairman took the view that Rule 1.1.7(3) Insolvency Rules 1986 should apply, given that the landlord's claim was both "unliquidated" and "unascertained", and accordingly valued the claim at £1 for voting purposes. The landlord appealed that decision, and argued that the claim should be dealt with under Rule 1.17A(4), as the claim was "disputed" rather than "unliquidated" and/or "unascertained". It submitted that although the claim should be marked as "objected to", the landlord should have been allowed to vote for the full amount of its claim.

The court gave judgment in favour of the chairman. He found that the likelihood of the rent being unpaid was impossible for the chairman to quantify, and that the schedule of dilapidations did not give sufficient evidence for the chairman to establish a minimum level of the landlord’s claim. Accordingly he held that the chairman was obliged to value the landlord’s claim at £1, and the landlord was effectively prevented from overturning the CVA.

This is the first time that the application of Rule 1.17(3) has been tested in the courts and the decision provides clarity when dealing with unliquidated or unascertained claims. The case confirms that for voting purposes, whilst a CVA chairman has an obligation to consider all material in relation to the valuation of a claim, he is not obliged to speculate, or investigate the claim. In the absence of clear evidence of the minimum value of the claim the chairman is not obliged to put any value higher than £1 on the claim.

Further reading: Chittenden and others v Pepper and others; Re Newlands (Seaford) Educational Trust [2006] All ER (D) 299 (Jun) [2006] EWHC 1511 (Ch) Chancery Division Sir Andrew Morritt C 26 June 2006

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 07/07/2006.