Company voluntary arrangement (CVA) – CVA affecting claimants as landlords of first defendant company – CVA purporting to release guarantees given by company’s parent company in favour of claimants regarding lease obligations – Whether guarantees unenforceable by reason of CVA – Whether CVA unfairly prejudicial to claimants
The first defendant electrical retailer (the company) operated from stores held on leases from the claimant landlords. Its obligations under the leases were supported by various guarantees given by its parent company (PRG). The company got into financial difficulties and proposed to close a number of underperforming stores. It also proposed to enter into a company voluntary arrangement (CVA), under which all creditors in respect of the closed stores would be provided with a scheme fund of £1.5m to provide a dividend of approximately 28p in the pound on their respective claims, including the claimants’ claims for future rent. Clause 3.12 of the CVA provided that such payment was to be in satisfaction of all debts, liabilities or obligations “including… obligations and liabilities of the Company… that have been guaranteed or indemnified by PRG”. Clause 3.14 reiterated that any guarantee given by PRG should be treated as having been released. The CVA was approved at a meeting of all the company’s creditors.
In each of the two sets of proceedings, the claimants sought a declaration against the company and the CVA supervisors that the CVA was invalid and that the creditors’ approval of it be revoked, under section 6 of the Insolvency Act 1986, on the ground that it was unfairly prejudicial to the claimants. Preliminary issues were tried as to whether: (i) the effect of the CVA, properly construed and in the light of section 5(2) of the Act, was to release the guarantees and indemnities given by PRG to the claimants; (ii) the claimants were otherwise precluded from enforcing the guarantees by reason of the CVA; and (iii) the CVA unfairly prejudiced the interests of the claimants as creditors within the meaning of section 6(1)(a).
Held: The preliminary issues were determined.
(1) The Act did not enable clause 3.12 to operate directly to release the liability of PRG under the guarantees. A CVA gave rise to a hypothetical bilateral agreement between the company and each of its creditors. Only the company and not any third party had the benefit of the rights and obligations conferred by the CVA: Johnsonv Davies [1998] 3 EGLR 72; [1998] 49 EG 153. In turn, the creditors were parties to the arrangement only by virtue of their capacity as creditors of the company, and the hypothetical agreement did not extend to rights and obligations between them in another capacity. PRG’s obligations under the guarantees were those of a debtor arising out of a contract made by it on its own behalf. Nothing in the Act made the CVA binding and enforceable as between PRG and the claimants in respect of such obligations: Shaw v Royce Ltd [1911] 1 Ch 138 distinguished.
(2) However, clause 3.14 of the CVA was enforceable by the company as an obligation of the claimants not to claim against PRG under the guarantees. It was legally possible for a CVA to provide that a creditor could not take steps to enforce an obligation of a third party to the creditor that would give rise to a right of recourse by the third party against the debtor company: Burford Midland Properties Ltd v Marley Extrusions Ltd [1995] 2 EGLR 15; [1995] 30 EG 89 applied. There was no difference in substance between such a provision and one that stipulated that the creditor should deal with the third party as though the creditor’s contract with it did not exist. The obligation in clause 3.14, to treat the guarantees as having been released, carried with it the necessary and obvious implication that the claimants would not sue PRG on the guarantees.
(3) None the less, in all the circumstances the CVA was unfairly prejudicial to the claimants within the meaning of section 6. It left them in a less advantageous position than they were in prior to the CVA by depriving them of the benefit of guarantees that were of value and would have been enforceable. Under the scheme, the claimants were no better off than the creditors that did not have the benefit of guarantees, and would be worse off than those creditors that were not covered by the fund; they would be paid in full. By contrast, on a winding-up, the claimants would have benefited from the guarantees while all the unsecured creditors would have received nothing. The claimants would suffer the least on an insolvent liquidation of the company, while they were most prejudiced by the CVA. Such a result was illogical and unfair: Re a debtor (no 101 of 1999) (No 1) [2001] 1 BCLC 54 applied.
Gabriel Moss QC and Daniel Bayfield (instructed by Lovells LLP) appeared for the claimants in the first action; Richard Sheldon QC and Blair Leahy (instructed by Addleshaw Goddard LLP) appeared for the claimants in the second action; Paul Morgan QC and Marcia Shekerdemian (instructed by Charles Russell LLP) appeared for the respondents.
Sally Dobson, barrister
