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Household name Debenhams recently had its plans for a Company Voluntary Arrangement (CVA) largely upheld by the High Court. The retailer went into administration earlier this year and its owners (principally banks and hedge funds) opted to enter into a CVA to arrange for the closure of some of its fledgling stores.

As the name implies, a CVA is a voluntary scheme that can be implemented to try and rescue a struggling business. It involves composing a plan that can be put to the company’s unsecured creditors with the aim of agreeing future repayments and timescales. Provided the required majority of these creditors vote in favour of the proposals, the CVA will take effect and bind the respective creditors.

With 166 stores across the UK, Debenhams has a significant high street presence. The CVA proposed closing around 20 of these stores and then requesting lower rent on many others. It also suggested providing landlords and Debenhams with break rights and that some stores would have reduced business rates. Notably, the new amounts to be paid in rent would not be below market value. Whilst the majority of Debenhams’ landlords were satisfied by these proposals, they were objected to by around 18%.  

A legal challenge to the CVA was mounted by one such landlord who received the backing of Sports Direct owner Mike Ashley. The sports store owner’s interest in the legal action stemmed from a loss of investment in Debenhams of around £150 million as a result of the decision to put the group into administration.

A number of submissions were made in respect of challenging the CVA. These included:

• that the landlords were not creditors in the ordinary sense under the CVA as they were not owed money;
• that the reduction of rent sought to create new terms in the leases and that a CVA could not do this;
• that the CVA would restrict the landlord’s right to forfeit the leases;
• that it unfairly prejudiced some creditors and not others; and
• that there had been a material irregularity in the CVA.

The challenge that the CVA was unfairly prejudicial to some of the creditors and not others is rarely successful as, although it may prejudice some of the creditors, there will only be unfair prejudice if the net effect of the CVA is to make it unfair. It is therefore a question of fact for the court to determine. That it should be set aside for material irregularity is also a question of fact and may occur where the debt stated to be owed to the creditor is incorrect.   

Finding in Debenhams’ favour, the High Court rejected all but one of the above submissions. The one submission that was accepted concerned the effect the CVA may have on a landlord’s rights to forfeit a lease. As these rights are proprietary in nature, they must not be affected.

The decision itself is significant as it expressly provides that future rent falls within the definition of a debt. This is because a tenant will be required to pay rent in the future as a result of the letting arrangement they are in and so this can be classed as a financial liability.

It also made clear that proposals to reduce the rent under the leases were actually only variations of the lease through a CVA and not attempts to impose new terms upon the parties. As a result, these changes were valid.

Although the case sheds further light on some of the practicalities surrounding CVAs, especially where these arrangements involve landlords as creditors, the decision is expected to be appealed. Consequently, we would suggest you watch this space!

Please get in touch on 01603 610911 if your organisation is at risk of insolvency or you are owed money by a business that has become insolvent. Our team at Leathes Prior have extensive experience in these areas and would be pleased to be of assistance.

Please note: The content of this article is for general information only and does not constitute legal advice. Specific legal advice should be taken in any specific circumstance.