The Powerhouse CVA, which sought to strip away guarantees provided by the parent company to landlords of Powerhouse, has been struck down as unfairly prejudicial by the High Court. However, certain aspects of the judgement remain unclear and could be subject to future appeal…
BACKGROUND TO THE POWERHOUSE CVA
Powerhouse (an electrical retailer) proposed a CVA on 1 February 2006 with the intention of closing 35 of its stores (the Closed Premises).
The effect of the CVA was to bind all creditors to the terms of the CVA the key components of which included: (i) the offer to surrender certain leases on terms which landlords were effectively forced to accept; (ii) an offer to pay each affected landlord compensation in the sum of 28p in the pound; and (iii) a release of certain guarantees given by Powerhouse's parent company. Creditors of stores which remained open were to be paid in full going forward.
In short, Powerhouse's liabilities to the landlords of Closed Premises were compromised and its parent company guarantor released in circumstances where the affected landlords did not agree to any such compromise or release.
Two groups of landlords commenced proceedings to overturn or modify the terms of the CVA. The judgement in those proceedings was handed down on Monday.
THE HIGH COURT DECISION
In short, the guarantees given by the parent company to landlords could not be 'stripped away' by the CVA. The CVA should be regarded as an agreement between Powerhouse and its creditors alone. Given that the guarantees which had been provided to landlords arose out of separate contracts entered into by the parent company on its own behalf, the CVA could not affect the binding nature and enforceability of those guarantees as between the landlords and the parent company.
However, in principle it was acceptable for the CVA to require that the landlords treat the guarantees as if they had been released since enforcement action by the landlords against the parent company would lead to a right of recourse for the parent company against Powerhouse. Such a CVA provision was in principle enforceable by Powerhouse so long as the CVA remained in force - effectively suspending the ability to enforce the guarantees for at least as long as the CVA continued (similar to the moratorium that exists when a company enters administration).
Nonetheless, in this case the court struck the CVA down as unfairly prejudicial to the interests of the guaranteed landlords. On a liquidation the guaranteed landlords would have retained the benefit of their guarantees and other creditors would have received nothing. The CVA effectively reversed this position and this factor, combined with the failure of the CVA to place any value on the guarantees of landlords for the purpose of paying a dividend under the CVA, led to the court finding that the CVA was unfairly prejudicial.
Subject to any future appeal, the Powerhouse judgement has confirmed that CVAs cannot be used to strip away guarantees provided by third parties. However, it may be possible for CVAs to at least suspend the effect of guarantees in circumstances where the interests of creditors are not unfairly prejudiced.
It is therefore important that landlords take steps to protect their position going forward - this could include requiring parent companies rather than subsidiaries to enter into leases and taking rent deposits (possibly with some form of regular 'top up' mechanism) as an alternative to parent company guarantees.