UK: England & Wales High Court Rules On Landlords' CVA Challenge

Last Updated: 27 September 2019
Article by Jessica Walker, Devi Shah, Alexandra Wood, Michael Fiddy and Amy Jacks

The High Court gave its ruling yesterday in the case of Discover (Northampton) Limited and others v Debenhams Retail Limited and others [2019] EWHC 2441 (Ch), rejecting four of the five grounds on which the Applicants disputed the validity of the company's Creditors Voluntary Arrangement ("CVA"), which was approved by creditors in May 2019. 

The main effect of the CVA was that the company's leases were split into categories in order to vary predominantly rent and forfeiture obligations by various degrees. The Applicants (who were landlords who did not vote in favour of the CVA) challenged the CVA on five grounds, four of which were unsuccessful, with the remaining ground being addressed by the deletion of a technical provision in the CVA. The CVA therefore continues to be effective.

Ground 1- rejected: landlords are not creditors with regard to claims for future rent

The court rejected this argument and decided that, while future rent was not a provable debt in a liquidation, it was well established that there was no need for a "creditor" under a CVA to have a provable debt. Future rent is a liability to which a company could be subject under an existing lease notwithstanding the landlord's right to forfeiture, so it was a "debt" and the landlord was a "creditor" for the purposes of a CVA.

Ground 2 - rejected: reducing rent due under the leases that the CVA failed the basic fairness test under section 6(1)(a) Insolvency Act 1986

The court disagreed with this assertion. First, reducing rent under a CVA is not inherently contrary to the basic fairness test where the reduction is "limited to what is necessary to achieve the purpose of the CVA" and where landlords can still bring an end to the lease, though the court noted that just because a CVA treats creditors more favourably than alternative processes (the so-called "vertical comparator") it does not mean it is inherently fair and that a CVA would have to be assessed as a whole. As the CVA does not create new obligations but it varies existing arrangements, the basic fairness test had not been failed.

Ground 3 – accepted: the right of forfeiture is a proprietary right that cannot be altered by a CVA

  The only ground on which the Applicants were successful, the High Court considered the authorities and accepted that a landlord's right of re-entry was property belonging to the landlord, not linked to any indebtedness between the landlord and tenant or merely a security. Accordingly, a CVA can restructure debt obligations that may result in forfeiture, but it cannot change the right to re-enter itself.

Ground 4 – rejected: the Applicants are treated less favourably than other unsecured creditors without any proper justification

It was common ground that differential treatment between creditors would not inherently make a CVA unfair; where a CVA intended for there to be business continuity, landlords and suppliers could be treated differently as varying obligations to suppliers could have had short term cash flow impacts that would impede the ability of a company to continue trading. The court considered that a CVA may be unfair where landlords were expected to accept reductions in rent below market value, but this was not alleged by the Applicants, so this ground was rejected.

Ground 5 – rejected: the CVA fails to comply with the content requirements of rule 2.3(1) Insolvency (England and Wales) Rules 2016

The Applicants claimed that an administrator or liquidator of the company may have claims under sections 239 and 245 of the Insolvency Act 1986, which were material and should have been included in the CVA, as required by rule 2.3(1) Insolvency (England and Wales) Rules 2016. Failure to do so amounted to a material irregularity and therefore a breach of section 6(1)(b) Insolvency Act 1986. The court disagreed that the potential claims under sections 239 and 245 were material as they would have had no effect on the outcome of the approval of the CVA so the fifth ground failed.

The effect of the ruling on the validity of the CVA

The court declared that the CVA was valid and enforceable but, as ground 3 had succeeded, the relevant provisions in the CVA in respect of forfeiture were to be deleted.

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