New ruling on CVAs

The recent case of Mourant & Co Trustees Ltd and others v Sixty UK Ltd and others [2010] EWHC 1890 (Ch) gives landlords hope of being fairly treated where tenants instigate CVAs (company voluntary arrangements). In the Mourant case, Sixty UK Ltd, the fashion retailer, had gone into administration and a CVA was approved by creditors. Under the terms of the CVA, Mourant, the landlord of two retail units which were to be closed, was to release (and therefore lose the benefit of) parent company guarantees in relation to the two units in return for £300,000 (considerably less than the guarantor’s liability under the guarantees).

The landlord applied to court to have the CVA set aside for unfair prejudice. As there is no single test for unfairness, the judge considered the tests of “vertical” and “horizontal” unfairness. The vertical unfairness test looks at whether the creditor would be worse off under the terms of the CVA compared with its potential position if the debtor company went into liquidation.

In the present circumstances, if Sixty UK Ltd had gone into liquidation, Mourant would have had the benefit of the parent company guarantees which would require the parent company to take new leases of the two units. Clearly, this would put Mourant in a better position than under the CVA, particularly given that the offer of compensation for the loss of the parent company guarantees was based on what the debtor company was willing to pay (calculated on the basis of the debtor’s assumptions on future retail property performance) and not on the true commercial value of the guarantees.

Horizontal unfairness depends on whether the treatment of the relevant creditor is disproportionate to the treatment of other creditors or other classes of creditors, and whether such treatment can be justified under the circumstances. In the present case, the remaining creditors (save for one, another landlord) would be paid in full under the CVA.

The court revoked the approval of the CVA, deciding that the CVA was unfairly prejudicial to Mourant because it had not been adequately compensated for the loss of the guarantees. Whilst leaving the door ajar for CVAs to require the release of guarantees, the court indicated that this would only be where compensation to the landlord is seen to be fair. In addition, the court strongly criticised the conduct of the administrators for being too easily swayed by the parent company, whilst neglecting the interests of creditors.

The implications of this decision are potentially far reaching. Landlords can feel confident that guarantees will not be stripped without adequate compensation, whilst administrators are reminded by the court of the need to act independently, in good faith and only to propose CVAs which they are satisfied are not unfairly prejudicial to the interests of any creditor.

 

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Jury O'Shea