Author: Alison Mould
A Company Voluntary Agreement (CVA) provides a company (Debtor) experiencing financial difficulties with a quick and flexible way of essentially restructuring its debts with unsecured creditors with a view to continuing its business. Such debts would include rent owed to a landlord and may even permit a compromise of obligations owed by third party guarantors to landlords. Landlords and Debtors have “locked horns” over the latter issue recently in the High Court, with landlords coming out on top. But is their success in the recent Sixty UK decision a knockout blow?
It all starts with a proposal for a CVA, which is put to a meeting of the company’s unsecured creditors. Each creditor present at the meeting is entitled to vote based on the value of their debt at the date of the meeting. If more than 75 per cent. (in value) of the creditors present approve the CVA, then it is binding on all creditors, including those who did not receive notice of the meeting.
In an effort to protect members of their corporate group, Debtors have cynically used the CVA procedure to undermine third party guarantees given in respect of a number of stores that were to be closed. If successful, such attempts would be catastrophic for the property industry.
The first attempt along such lines was in 2006 when creditors approved a CVA for the nationwide electrical retailer, PRG Powerhouse Ltd (Powerhouse). This purported to release Powerhouse’s parent from guarantees given to a number of its landlords. The CVA allowed full payment to unsecured creditors of stores that were to remain open, whereas the claims of the guaranteed landlords of closed stores were to be released without any value or compensation given for those guarantees.
Furthermore, the CVA would have left landlords in a much worse position than in a liquidation because in that scenario the landlords could have pursued the solvent parent in reliance on those guarantees. Consequently, the High Court had no hesitation in ruling that the CVA was “unfairly prejudicial” to the landlords, which under the empowering statute allows the court to set aside a CVA. Landlords were relieved but anxiety remained because the High Court controversially accepted that the release of guarantees could in principle be effected through a CVA. The justification being that a landlord’s claim against a guarantor would entitle that guarantor to be indemnified or reimbursed by the Debtor, which would undermine the Debtor’s survival prospects.
The issue came again before the High Court in 2009 when clothes retailer Sixty UK Ltd (Sixty) ran into financial difficulties operating its 14 stores in the UK. Sixty proposed closing a number of stores. This included two units in Liverpool where those leases, with rent totalling £200,000 per annum, had been guaranteed by Sixty’s Italian parent. In return for Sixty taking those leases and procuring the guarantees, the landlords had given incentives totalling £566,000 including long rent free periods and reverse premia.
The Sixty CVA proposed a release of those guarantees, which certainly troubled the landlords, given Sixty’s parent had a balance sheet surplus of €95 million in 2006. But whereas the CVA in Powerhouse placed no value on the landlord’s guarantees, the Sixty CVA attempted to do so. As with Powerhouse, the unsecured creditors of the stores to remain open were to be paid in full. Unsurprisingly, the votes of those creditors overwhelmed the affected landlords’ votes and the CVA was approved thereby binding the landlords.
The landlords applied to have the CVA set aside claiming it was “unfairly prejudicial”. The High Court swiftly accepted this, even commenting that the CVA “should never have seen the light of day”. Again, it was held that the landlords would have been much better off in a liquidation because they could have relied on the guarantees. Furthermore, the landlords were not treated fairly when compared with other creditors. For example, a separate landlord who had the benefit of a guarantee on separate premises was not forced to release the guarantee. And loans to Sixty from associated companies were not compromised or restructured.
Henderson J went on to say that if this conclusion was wrong, the value placed on the landlords’ guarantees was woefully inadequate, so the same result would have ensued. It is important to note Henderson J’s comment that it would be difficult, if not impossible, to determine what sum will fairly compensate the landlord for the loss of rights under a guarantee at a time of market uncertainty.
So is this the knockout blow landlords were looking for? Not quite. The release of a guarantee via a CVA is now unlikely but remains a possibility. Certainly these cases will discourage their use in this manner, particularly given the legal costs and uncertainty in defending a claim from landlords.
So what can landlords do to better protect themselves? Not a lot. They should ensure the guarantee contains standard provisions that prevent it from being released when the rent is compromised or varied. And they may want to attribute a lower value to a guarantee being offered when incentives are being negotiated with prospective tenants.