Tuesday, 27 July 2010

When does a CVA unfairly prejudice the interests of a creditor?


Mourant & Co Trustees Ltd and Mourant Property Trustees Ltd v Sky UK Ltd & Others [2010] EWHC 1890 (Ch): Mr Justice Henderson

Mr Peter Hollis and Mr Nicholas O'Reilly, licensed insolvency practitioners and partners of Vantis Plc, were appointed the administrators of the tenant, Sixty UK Ltd ("Sixty"), of two retail units at the Met Quarter shopping centre in Liverpool at an initial creditors' meeting held on 8 December 2008. The administrators proposed a CVA on 17 March 2009 that was approved at another meeting on 2 April. The effect of the CVA was to release Sixty SpA (Italian parent company of Sixty) from all liability under the guarantees upon payment of a sum of £300,000 to the applicants as landlords of the units. The figure of £300,000 was said in the proposal to represent 100 per cent of Sixty's estimated liability to the landlords on a surrender of the leases. The applicants were ostensibly to receive full compensation on the basis of a notional surrender of the leases, but they were to be deprived of any recourse against Sixty SpA as guarantor during the remainder of the 10 year terms of the leases, which had been granted in 2006 and still had approximately seven and a half years to run. All other creditors under the CVA were to be paid in full, subject to normal terms and conditions. They also had the benefit of an apparent agreement by Sixty SpA to defer repayment of a sum of just under £15 million due to it from Sixty. It was intended that Sixty would continue to operate as a going concern, and with the exception of the landlords of the closed stores no other external creditors were asked to accept any reduction in, or compromise of, their debts. As such, the necessary majority of 75 per cent in value of creditors present and voting in person or by proxy at the meeting voted in favour of the arrangement; the only creditors present at the meeting who voted against the proposal were the applicants.

The applicant’s challenge was made under section 6(1) of the Insolvency Act 1986, which is to the effect that an application may be made by any creditor entitled to vote at the meeting if a voluntary arrangement which has effect under section 4A unfairly prejudices the interests of the creditor and/or there has been some material irregularity at or in relation to either of the meetings. The gist of the applicants' argument was that they were unfairly treated in comparison with the generality of the external unsecured creditors, all of whom were to be paid in full. Moreover, they could not find any justification for requiring them to give up the valuable benefit of the guarantees in precisely the situation they were designed to meet, namely the inability of the tenant to honour its obligations under the leases. The CVA therefore left them in a substantially worse position than on a liquidation of Sixty, when regardless of the amount that they might have expected to receive as a dividend in the liquidation, their contractual rights against Sixty SpA would have been unaffected.


Mr Justice Henderson noted that the critical point was that in a liquidation the applicants would still have had the benefit of the guarantees for the remainder of the term of the leases. They would also have had the option, following a disclaimer of the leases by a liquidator of Sixty, to require Sixty SpA to step into Sixty's shoes and to take equivalent leases in its own name. These contractual rights were of obvious commercial value to the landlords, and formed an important part of the consideration for the package of incentives negotiated with the Sixty group in 2006. Hence, neither Sixty nor Sixty SpA could unilaterally alter any of those contractual provisions, and but for the CVA it would have been open to the landlords to continue to enforce the guarantees against Sixty SpA regardless of the plight of Sixty, and regardless of whether it went into liquidation or the leases were disclaimed. As such the CVA was fatally flawed, and ought to be set aside.
Mr Justice Henderson then advised that it is the duty of administrators or other office holders to maintain an independent stance, to act in good faith, and only to propose a CVA if they are satisfied that it will not unfairly prejudice the interests of any creditor, member or contributory of the company. The need for a responsible and professional attitude is even more pronounced where the CVA is structured in such a way that it is bound to be passed by the votes of creditors whose position is either unaffected or improved, and where another much smaller class of creditors is to be deprived of valuable contractual rights in reliance on the Powerhouse principle. Thus, the greatest care was needed to ensure fairness to the latter class, both in the substance of what was proposed and in the procedure that was adopted.


Picture credit: http://www.vantisplc.com/

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