Six landlords of Debenhams stores are asking the High Court to rule that the retailer’s company voluntary arrangement, approved in May by a vote of its creditors, is void or should be revoked, in a legal action being funded by Mike Ashley’s Sports Direct.
The highly publicised case could have major repercussions not only for Debenhams, if its restructuring plans are forced back to the drawing board, but also for the future of controversial retail CVAs, which typically see landlords forced to accept rent reductions in order to keep stores open.
The action is said to raise a number of fundamental questions about the scope and effect of CVAs promoted by retailers under Part 1 of the Insolvency Act 1986, which have dramatically increased in number as a result of the so-called high street crisis.
In the case, being heard by Mr Justice Norris, the six claimant landlords – who say they have suffered “financial turmoil” as a result of the CVA – claim that it “unfairly prejudices” certain landlords and local authorities, for the benefit of other unsecured creditors who therefore voted in its favour.
However, Debenhams Retail Ltd brands the action as an “abuse of process” with no merit, being funded by Mike Ashley’s Sports Direct as an attempt to “eliminate a competitor”.
The landlords are asking Mr Justice Norris to make a declaration that the decision of the creditors’ meeting is void for want of jurisdiction, and/or an order revoking that decision under section 6(4)(a) of the 1986 Act. He is expected to reserve judgment and deliver a decision in writing at a later date.
Retail CVAs
The landlords claim that the crucial tactic for any retailer promoting such a CVA is to promise to continue to pay in full all unsecured creditors, apart from landlords and local authorities. All other unsecured creditors then, acting in their own self-interest, vote in favour of the CVA at the creditors’ meeting and thereby “cram down” the landlords and local authorities. They say that local authorities, which can face significant business rates reductions under CVAs, tend not to attend the creditors’ meeting or pursue any challenge, probably due to a lack of funding.
Theirs is the first challenge to have gone to trial in relation to the recent raft of retail CVAs, which they say is because the dissenting landlords have usually been paid off by the company promoting the CVA in order to avoid the risk of a successful challenge. They say that there is one pending challenge to another retail CVA promoted by the Regis hair salon chain, and there may be others. As a result, the landlords say that the proceedings will be of significant interest to the legal and business community.
The Debenhams CVA
The CVA was approved at a meeting of Debenhams’ creditors on 9 May 2019, with more than 94% of voting creditors by value (with claims worth £989,515,756 out of total unsecured claims of £1,526,500,000) voting in favour. Debenhams Retail Ltd says the CVA was also approved by 82.1% of landlords by value of claims.
It provides for:
- Rent reduction on certain stores. The CVA divides leases into six categories. Category 1 leases are substantially unaffected, but the other categories are subject to substantial modifications, including future rent reductions and/or new break clauses. The landlords in this case, in categories 3, 4 and 5, face a rent reduction of between 35% and 50%.
- Reduction in business rates payable to certain local authorities by a similar amount.
- Potential store closures. Under the CVA, certain leases can be terminated many years before the agreed contractual termination date.
- Payment in full to many other unsecured creditors.
The landlords’ arguments
The landlords claim that:
- The CVA goes beyond the jurisdiction of the Insolvency Act 1986. They argue that landlords are not “creditors” under section 1 of the Act, because there can be no debt of future rent. As a result, a CVA is not capable of compromising the rent that will become payable under a lease in the future, and the creditors’ meeting had no jurisdiction to approve the CVA.
- Alternatively, the CVA “unfairly prejudices” the interests of the applicants. They say that the CVA is designed to create a situation in which Debenhams’ general body of unsecured creditors is paid in full, at the expense of certain landlords and local authorities. As a result, they say that “basic fairness” requires that they should be paid rent under the CVA at the full contractual rate.
- The CVA was approved by creditors who were not affected by it, and who expect to be paid in full at the expense of certain landlords. The CVA failed to achieve the support of 75% of the most impaired categories of landlords.
- Their proprietary rights cannot be abrogated by the CVA. The CVA purports to compel them to waive any rights of forfeiture arising out of the CVA, but they say it cannot lawfully prevent them from exercising a proprietary right to re-enter their own land. They say that it is highly likely that the promotion and approval of the CVA triggered an event of forfeiture under most or all of Debenhams’ leases.
- In addition, they say that, as challenging a CVA is an expensive and uncertain process, particularly for a charity, Sports Direct – which was originally a party to the proceedings – has agreed to continue to fund the action after withdrawing from it. They deny that this constitutes an abuse of process.
The retailer’s arguments
Debenhams Retail Ltd says that:
- The action is an abuse of process. It says that the landlords’ case is being funded by Sports Direct, which, as owner of House of Fraser, is one of Debenhams’ direct competitors on the high street and a former shareholder in Debenhams plc. It alleges that the motivation for the application is a desire on the part of Sports Direct, and its founder Mike Ashley, to force Debenhams into administration in order to acquire some or all of its assets, or to eliminate a competitor. It says that the role of Sports Direct is “highly unusual and a matter of significant concern”.
- The landlords’ points in respect of jurisdiction are contrary to well-established authority, with extensive case law in which the courts have upheld the ability of CVAs to restructure leases.
- CVAs are an essential part of the restructuring framework providing a flexible means for a company to avoid administration or liquidation, and this jurisdiction should not be narrowed or restricted by the court.
- As a result, the challenge is without merit.
Who are the landlords?
Five of the landlords hold their properties on trust for various charities, which were established to support education, the advancement of the Jewish religion and the relief of poverty. The other landlord holds its property on trust for an individual who is connected with those charities. They say the properties were purchased with the expectation that they would be secure, long-term investments for the charities. They acquired the properties with funding from Santander and expected to refinance the loans in spring 2019. As a result of the CVA, they claim it has not been possible to refinance the loans and they have now been served with demands for payment by Santander.
The six landlords are:
Discovery (Northampton) Ltd
- Premises: 33, 35, 37 and 39 The Drapery, Northampton
- Annual rent: £642,887
- CVA category: 3
Discovery (Nuneaton) Ltd
- Premises: 1, 5, 6, 7 and 10 Bridge Street; 37, 51, 53A, 55, 57 and 59 Newdegate Street (and other land), Nuneaton
- Annual rent: £411,695
- CVA category: 3
Southampton Estates Ltd
- Premises: Queen’s Building, Queensway, Southampton
- Annual rent: £1,964,097
- CVA category: 4
Discovery (Torquay) Ltd
- Premises: 10, 10A, 12, 13 and 14 The Strand, Torquay
- Annual rent: £263,336.00
- CVA category: 4
Discovery (Harrogate) Ltd
- Premises: 22/30 Parliament Street; 36/42 Oxford Street; and 1/7 Union Street, Harrogate
- Annual rent: £430,239
- CVA category: 4
Discovery (Folkestone) Ltd
- Premises: 48-66 Sandgate Road (even numbers); 6, 8 and 12 Bouverie Place; and 1 to 6 Bouverie Court, Folkestone
- Annual rent: £681,212
- CVA category: 5
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