Hotel – Insolvency – Defendant company running hotel under lease – Defendant selling lease under company voluntary arrangement (CVA) – Defendant failing to obtain consent of claimant supervisor to agreement for lease – Whether claimant having power to give retrospective consent – Whether claimant having power to impose conditions – Claim dismissed
The defendant company operated a hotel under a 125-year lease from the local council. The lease was charged to the bank. The rent payable under the lease was £35,000 pa and the council were entitled to use the hotel’s conference facilities free of charge.
In 2001, the defendant got into financial difficulties and proposed a company voluntary arrangement (CVA), which was accepted by its creditors, with modifications in January 2002. Under the CVA, the existing debts were to be frozen and the defendant was to make periodic payments towards their repayment. The CVA stated that the defendant’s directors were considering the possibility of creating and selling a 25-year lease. In the event that a suitable purchaser was found, any premium would be paid into the CVA for the benefit of creditors and any rental income would help to serve the CVA. No such lease was to be created without the prior knowledge and consent of the claimant, as the CVA supervisor.
Such consent or sanction by the claimant could be given either unconditionally or on such terms and subject to such conditions as the claimant might in his absolute discretion determine and it could be given retrospectively. Modification 14, made by the creditors, provided that if the defendant defaulted on obligations under the arrangement and/or failed to remedy them, either by meeting all outstanding obligations or agreeing a variation of its terms, the claimant should petition for a winding-up order.
The defendant continued to make trading losses and the lease was placed with agents for sale. In 2005, T Ltd agreed to enter into an agreement for the lease conditional upon the conversion of the conference facilities to provide 10 extra bedrooms. The council relinquished their right to use those facilities in return for £75,000.
Although the claimant’s consent had not been obtained prior to the agreement for the lease in breach of the CVA, he was prepared to support a variation of the scheme if the defendant paid £55,000 into the CVA together with costs. The claimant applied to the court to determine whether he could give retrospective consent and, if so, whether he was entitled to impose conditions.
Held: The claim was dismissed.
In all the circumstances, it was open to the claimant to give retrospective consent to the agreement for the lease.
The primary duty of a CVA supervisor was to implement the CVA in accordance with the Insolvency Act 1986, the Insolvency Rules 1986 (SI 1986/1925) and the terms of the proposal as modified. Any power or discretion given to him under those proposals was to be exercised reasonably for that purpose only, and not for any collateral purpose. In deciding whether to give consent, the supervisor must not use his power to obtain an advantage for creditors over and above that to which they were entitled under the agreed CVA. It was not a legitimate use of the power to impose conditions that were designed to give the creditors a better deal than that to which they had agreed.
The requirement to obtain the claimant’s retrospective consent was capable of being an outstanding obligation for the purposes of modification 14, which did not outlaw all such consents. In interpreting a CVA, the contract had to be given the meaning that a reasonable reader, with the background knowledge that the parties had, would give it. It might be possible to say, in the light of background knowledge, that something had gone wrong with the language.
The parties would have had the expectation that, as an officer of the court, the claimant would exercise his discretionary power to give retrospective consent responsibly and reasonably. To remove that power would leave the defendant with no option but to agree a variation with the creditors, which would put it at their mercy. Modification 14 did not have the clarity to remove that significant protection.
The claimant had not demonstrated any reasonable grounds for imposing conditions on the grant of retrospective consent other than those collateral to the purposes for which the power to impose conditions was conferred upon him. He could not say that the company had failed to meet its outstanding obligations to obtain consent and no reasonable and legitimate ground for refusing consent had been demonstrated.
Lance Ashworth (instructed by HBJ Gateley Wareing, of Birmingham) appeared for the claimant; Jonathan Lopian (instructed by MC Law Solicitors, of Hampshire) appeared for the defendant
Eileen O’Grady, barrister
