Landlords Prove Unsuccessful In Challenging Debenhams' CVA Despite Its Somewhat Draconian Provisions

Discovery (Northampton) Ltd & others v Debenhams Retail Ltd & others [2019] EWHC 2441(Ch)

Company Voluntary Arrangements ("CVAs") are seen as most unfair by landlords who are often forced to continue to make a supply of premises at an imposed reduced rent.

A group of landlords known as the Combined Property Control Group ("CPC") unsuccessfully challenged the CVA proposed by Debenhams Retail Limited ("Debenhams"). CPC argued that, pursuant to section 6 (1) (b) the Insolvency Act 1986 (the "Act"), the CVA was unfairly prejudicial because it treated landlords less favourably than other unsecured creditors.

Background

A CVA is a legally binding arrangement entered into by a financially distressed company and its creditors. A CVA serves to allow a company to continue trading whilst its liabilities and debts are restructured. CVAs have become increasingly popular as a method of reducing the rental costs that commercial tenants (often retailers) perceive to be onerous. Debenhams' prepack administration was announced 9 April 2019. The company proposed a CVA soon after with the aim of restructuring the company's balance sheet and store portfolio. The CVA was approved at a meeting of creditors on 9 May 2019. On 10 June 2019 CPC launched its legal challenge against the CVA.

Grounds of Challenge & Decision

The challenge was brought on five grounds (detailed below) all of which failed, with the exception of Ground 3.

Ground 1 - under the Act landlords do not constitute 'creditors' in respect of future rent; therefore, they cannot be compromised under a CVA.

This challenge failed. It was held that the Act did provide jurisdiction for landlords to be deemed creditors in respect of future rent. Mr Justice Norris stated that '"future rent is a pecuniary liability (although not a presently provable debt)... whilst the term endures the company is "liable" for the rent, and the fact that in the future the landlord may bring the term to an end by forfeiture does not mean that there is no present "liability"'.

Ground 2 - in reducing the rent payable under a lease the CVA was 'unfairly prejudicial' to landlords.

CPC argued this on two grounds:

as a matter of law and basic fairness; and it is beyond the scope of a CVA to do so These challenges also failed. It was held that the CVA was fair because it retained the landlords' freedom to bring an end to the lease if they so wished to. The Court was also of the opinion that because the CVA did not impose any new...