A CVA was introduced as one of the rescue arrangements under the Insolvency Act 1986. It allows a company to settle unsecured debts by paying only a proportion of the amount owed, or to vary the terms on which it pays its unsecured creditors. Whilst a CVA only requires approval of a 75% majority of the creditors by value, it binds every unsecured creditor of the company, including any that voted against it or did not vote at all. The CVA can be challenged in one of two ways: a) on the ground that it unfairly prejudices the creditor’s interest and b) on the ground that there was a material irregularity in the conduct of the meetings called to consider the CVA proposal.
In a case of Mourant & Co Trustees Limited and another v Sixty UK Limited (in administration) and others  EWHC 1890 (Ch), Mourant (the landlord) applied to the court for the revocation of a CVA, proposed to rescue Sixty UK Ltd (Sixty), on the ground of unfair prejudice. Although, unfair prejudice is a principle that has already had much judicial consideration and indeed, the issue of guarantee stripping in this very context was considered in the well known Powerhouse litigation in 2007, the case of Mourant has provided further reassurance to creditor landlords. Mourant not only reinforced the decision in Powerhouse but went further still in prescribing the circumstances in which a CVA can ‘fairly’ release guarantors.
Sixty’s obligations under the two Mourant leases were guaranteed by its ultimate Italian parent company, Sixty SPA (SPA). Sixty got into financial difficulties and a CVA was proposed. The effect of the CVA was to release SPA from all liability under guarantees upon payment of a sum of £300,000 to Mourant as landlords of the units. In return, Mourant were to be deprived of any recourse against SPA as guarantor during the remainder of the 10 year terms of the leases. The CVA also provided for two other stores occupied by Sixty to close, and for their landlords to receive 21% of Sixty’s estimated liability to them under the relevant leases, which unlike the Mourant leases did not have the benefit of any guarantees. All other creditors under the CVA would continue to be paid in full, subject to normal terms and conditions 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.
Mourant challenged the CVA on the following grounds:
- The CVA left Mourant in a substantially worse position than on a liquidation of Sixty;
- It was unfair in principle for the CVA to abrogate their contractual right against SPA under guarantees;
- The estimate of Sixty’s liability to the landlords adopted in the CVA was based on the unreasonable and unrealistic assumptions;
- It was unfair to fix the amount of compensation payable to the closed store landlords in a predetermined sum;
- The CVA treated the applicants differently from at least two other creditors or classes of creditors, without any proper justification; and
- The CVA created no enforceable obligation upon SPA to pay any compensation in return for guarantee release.
The court agreed with Mourant’s grounds for challenge and revoked the CVA, ruling that it was unfairly prejudicial to the landlord. The judge said that:
‘In times of commercial and financial turmoil, the ability to enforce the terms of the existing leases against the guarantor……was a most valuable right, and there was no sufficient justification for requiring any of the guaranteed landlords (let alone just one of them) to accept a sum of money in lieu……To adopt such a procedure, in circumstances where the solvency of the guarantor is not in issue, is to undermine the basic commercial function of the guarantee, and to force the landlord to accept a commercially inferior substitute for it.’
The Judge went as far as to say that the CVA in question ‘should not have seen the light of day’. He added that although it was not impossible to propose a fair CVA, greatest care was needed to ensure fairness, both in the substance and in the procedure that is adopted.
All in all this is good news for landlords and should provide encouragement to challenge the legality of CVAs which would otherwise unfairly limit landlords’ ability to pursue solvent guarantors in circumstances for which the guarantees were given in the first place.