CVAs – Retail's Flexible Friendship Continues

On 19 September 2019, Norris J handed down judgment in the challenge brought by six landlords against the Debenhams Retail Limited (Debenhams) company voluntary arrangement (CVA) which was approved by 94.71% of Debenham's unsecured creditors on 9 May 2019. The challenge been watched with significant interest, particularly by the landlord community, which has for some time expressed increasing concerns regarding the use of CVAs as a mechanism to commute leasehold liabilities while other unsecured creditors' rights remain unaffected. While CVAs have been the subject of legal challenges previously, the Debenhams challenge is the first time certain key elements of CVAs in play in the market have been tested before the court. Norris J's decision provide welcome clarification on a number of key issues concerning the treatment of leases in retail CVAs.

The grounds for challenge and the decision

CVAs were introduced in the Insolvency Act 1986 (the Act) as a more flexible restructuring option than administration, receivership or liquidation. Under a CVA, the directors of a company can make a proposal to its creditors for a composition in satisfaction of its debts or a scheme of arrangement of its affairs. Creditors have 28 days after the CVA has been approved at the creditors' meeting to challenge the CVA on the grounds of unfair prejudice or material irregularity.

The applicant landlords (the applicants) claimed unfair prejudice and material irregularity under Section 6(1) of the Act and, in addition, claimed that the CVA went beyond the jurisdiction conferred by Part 1 of the Act. They requested that the court make a declaration that the decision of the creditors' meeting was void for want of jurisdiction and/or an order revoking the decision of the creditors' meeting under section 6(4)(a) of the Act.

Claims for future rents The applicants argued that future rents could not be compromised under a CVA. The Act provides that the directors of a company can “make a proposal.. to the company and its creditors for a composition in satisfaction of its debts or a scheme of arrangement of its affairs”. “Creditors” and “debts” are not defined. The applicants contended that future rent was not a 'debt', since rent is only payable as it falls due and may never become payable at all (Re Park Air Services plc [2000] 2 AC 172 at 181). If future rent was not a debt, the applicants could not becreditors. Accordingly, the jurisdiction had been exceeded and the...