Insolvency – Company voluntary arrangement (CVA) – Validity – Claimant landlords challenging defendant retailer’s CVA – Whether CVA beyond jurisdiction in section 1 of Insolvency Act 1986 – Whether CVA unfairly prejudicial to claimants under section 6(1)(a) of 1986 Act – Whether removing right of claimants to forfeiture abrogating claimants’ proprietary rights outside CVA jurisdiction – Whether claimants treated less favourably than other unsecured creditors without proper justification – Whether CVA failing to comply with contents requirements of Insolvency Rules 2016 – Claim allowed in part
The claimants were landlords of commercial premises leased to the first defendant company, one of the largest retailers in the UK. They sought to challenge, under section 6(1) of the Insolvency Act 1986, the company voluntary arrangement (CVA) entered into by the first defendant. The second and third defendants were the joint nominees and joint supervisors of the CVA. The fourth defendant was a security trustee acting on behalf of financial creditors of the first defendant, who had also been its beneficial owners since 9 April 2019.
The claimants participated in a “sale-and-leaseback” transaction in 2010 as part of which they granted shop leases to the first defendant. Those leases all had thirty-year terms with automatically escalating rents for the first ten years and thereafter rent reviews on an upwards-only basis at five-yearly intervals.
The claimants argued that: (i) the CVA went beyond the jurisdiction of the 1986 Act by binding landlords who were not “creditors” within section 1 of the Act; (ii) in reducing the rent payable under the leases, the CVA was unfairly prejudicial to the claimants under section 6(1)(a) of the Act or, alternatively, took the CVA beyond the jurisdiction conferred by section 1 by changing the terms of the leases; (iii) in removing any right of the landlords to forfeiture, the CVA abrogated the landlords’ proprietary rights, beyond the jurisdiction conferred on the CVA; (iv) the claimants were treated less favourably than other unsecured creditors without proper justification; and (v) the CVA failed to comply with the contents requirements in rule 2.3(1) of the Insolvency Rules 2016 by failing to disclose potential claims under sections 239 and/or 245 of the Act if the first defendant went into administration which was a material irregularity under section 6(1)(b) of the Act.
Held: The claim was allowed in part.
(1) On the face of section 1 of the 1986 Act, a “creditor” included someone towards whom the company had a present pecuniary liability which would in the future or might on a contingency become payable as a debt. A CVA required a proposal to be put to creditors. The term “creditor” had to be given a wide meaning, but a creditor had to have a “debt”. The term “debt” extended to pecuniary liabilities (obligations that might turn into debts) that might spring out of an existing legal relationship. A landlord was a creditor for the purposes of proposing a CVA. Future rent was a pecuniary liability (although not a presently provable debt) to which the company might become subject by reason of the covenant to pay rent in the existing lease: whilst the term endured the company was liable for the rent, and the fact that in the future the landlord might bring the term to an end by forfeiture did not mean that there was no present liability. As a matter of jurisdiction, future rent could be included in a CVA.
(2) The effect of the CVA was to reduce the rent payable under the leases for the rent concession period. The valuation advice received was that all stores were over-rented. Common justice and basic fairness required that the landlord should receive at least the market value of the property he was providing. He should not subsidise other creditors but nor should they be compelled to overcompensate him. A contractual rent should be interfered with to the minimum extent necessary in the circumstances, limited to what was necessary to achieve the purpose of the CVA. If those principles were observed, the fact that under the exit arrangements in the CVA a varied rent was payable during the notice period did not make the arrangement unfair.
Furthermore, the CVA did not impose new obligations. It proposed variations of existing obligations which were arrangements of the company’s affairs which it was the very object of Part I of the 1986 Act to enable. The fact that future rent was reduced under the CVA did not transgress the requirements of common justice and basic fairness.
(3) The right of forfeiture was a proprietary right that could not be altered by a CVA. The CVA itself contained a stipulation that any provisions of the leases that provided a right of early termination, forfeiture or “irritancy” as a result of the terms or effects of the CVA were waived by the landlords. It was clear from section 1(2)(e) of the Law of Property Act 1925 that a right of re-entry (which was used inter-changeably with the right of forfeiture) was now a legal interest in land. It enjoyed the usual attributes of a property right and was annexed to the reversion, not to the term of years.
The claimants and the first defendant were plainly creditor and debtor and the right of re-entry was an incident of that relationship. The existence and exercise of the right of re-entry was not dependent on the existence of pecuniary obligations and their due performance. Commercially a right of re-entry was security for the due performance of covenants and should be treated as such. A CVA could modify covenants that required the payment or expenditure of money and the right to forfeit would then relate to the covenant as modified: but a CVA could not directly modify the right to forfeit itself. The distinction was fundamental and not technical.
(4) On the evidence, the differential treatment of landlords (providing long-term accommodation at above market rates) from suppliers (providing goods and services on an order-by-order basis which, given competitive pressures, were likely to be at market rates) was justified by the need for business continuity.
(5) The claimants had not satisfied the court that failure to disclose potential claims under the 1986 Act was a material irregularity. It was the self-evident policy of the Insolvency Rules 2016 to focus on the conveying of content and not on the completion of forms. An irregularity under section 6(1)(b) of the 1986 Act would be considered material only if, objectively assessed, there was a substantial chance that if the irregularity had not occurred it would have made a material difference to the way in which the creditors would have considered and assessed the terms of the CVA.
(6) The forfeiture restraint provisions in the CVA were in excess of the jurisdiction conferred by Part I of the Insolvency Act 1986 and the court would direct that those provisions be deleted from the CVA. As so modified, the CVA was valid and remained enforceable.
Daniel Bayfield QC and Ryan Perkins (instructed by Shoosmiths LLP) appeared for the claimants; Tom Smith QC, Richard Fisher and Madeleine Jones (instructed by Freshfields Bruckhaus Deringer LLP ) appeared for the first defendant; Jeremy Goldring QC and Andrew Shaw (instructed by Travers Smith LLP) appeared for the second and third defendants; Martin Pascoe QC and Matthew Abraham (instructed by Baker & McKenzie) appeared for the fourth defendant.
Eileen O’Grady, barrister
