The possibility of “guarantee-stripping” in a company voluntary arrangement (CVA) first came to light in Prudential Assurance Co Ltd v PRG Powerhouse Ltd [2007] EWHC 1002 (Ch); [2007] 3 EGLR 131. Although, in that case, the landlords successfully challenged the CVA because they had been unfairly prejudiced, the decision established that it is permissible for a tenant to include provisions in a CVA requiring a landlord not to enforce a parent company guarantee where the incorporation of such provisions does not cause unfair prejudice to the landlord. That decision caused widespread concern.
However, landlords will be relieved by the ruling in Mourant & Co Trustees Ltd v Sixty UK Ltd [2010] EWHC 1890 (Ch); [2010] PLSCS 209, in which the High Court held that a CVA was fatally flawed and had to be set aside. The decision provides useful guidance as to when a CVA might unfairly prejudice landlords.
The solvency of the tenant’s parent company was not in issue. None the less, the effect of the CVA was to release the parent company from liability under rental guarantees in respect of two leases that had more than seven years left to run, in return for a payment of £300,000. That, the judge accepted, was considerably less than their worth.
He observed that a CVA that leaves a creditor in a less advantageous position will be prejudicial to that creditor. Consequently, the real issue is whether the prejudice suffered is “unfair”. There is no single test for judging unfairness. A number of techniques may be used to test the position, including what may be described as “vertical” and “horizontal” comparisons.
The former compares the position that a creditor would occupy in a liquidation with its position under the CVA. This comparison will generally identify the irreducible minimum below which the return in the CVA cannot go. The latter comparison involves a comparison as between the creditors. If a CVA differentiates between creditors, the court must decide whether the imbalance is disproportionate and whether differential treatment can be justified, for example by the need to secure business continuity by paying essential suppliers.
The judge decided that it was unfair to require the landlord to give up the guarantees. In a liquidation, the landlord would have retained the benefit of these and would have had the option, following a disclaimer by the liquidator, to require the parent company to take up new leases in its own name. These were commercially valuable rights, offered in return for the incentives provided to the tenant at the start of its leases.
With the exception of landlords, no other external creditors were asked to accept a reduction in or compromise of their debts. Consequently, in the absence of compelling justification, the landlord should not be required to accept a sum based on assumptions (for example, concerning the landlord’s ability to relet the premises) which, in the current economic climate, might prove ill-founded.
The decision provides welcome confirmation that the courts will reject CVAs that are designed to strip landlords of guarantees for a fraction of their value. Importantly, it also highlights the duty of administrators to retain their independence, to act in good faith, and to propose a CVA only if they are satisfied that it will not unfairly prejudice the interests of any creditor, member or contributory of the company.
Allyson Colby is a property law consultant
