The High Court has struck down a company voluntary arrangement on the ground that it unfairly prejudiced a landlord who was to lose the benefit of a guarantee given by the tenant’s parent company. The judge said it was “unreasonable and unfair in principle” to require the landlord to give up the guarantee and there was “no sufficient justification” for requiring the landlord to accept a sum of money in lieu.
Three years ago we reported on the Powerhouse case, in which the electrical retailer’s CVA was held to be unfairly prejudicial to landlords who would not be adequately compensated for the release of parent company guarantees. Although the landlords won on that occasion, the risk remained that a CVA might be used to release a parent company guarantee as long as the landlord was sufficiently compensated for its loss.
The Powerhouse case led to fears that the widespread use of CVAs to release guarantees would make guarantees less acceptable to landlords and thus adversely affect the market for tenanted property. Drafting solutions were proposed which aimed to remove the justification for the release by providing that the guarantor would have no right of recourse against the tenant. But these suggestions were untested and uncertainty remained.
There have been a number of high profile CVAs since Powerhouse but the question of guarantee release did not come before the courts again until July, when the arrangement proposed by fashion retailer Miss Sixty was challenged by the landlord of a Liverpool store. As in the Powerhouse case, the CVA provided for the release of the parent company guarantee but, unlike Powerhouse, the landlord who had the benefit of that guarantee was to be compensated with an additional payment. The amount of the payment was originally intended to be the estimated amount payable to surrender the lease. However, the figure actually included in the arrangement was a much lower sum based on what the parent company was prepared to pay, rather than a true estimate of the value of the landlord’s rights.
The court upheld the landlord’s challenge to the CVA which was described as “fatally flawed”. It held that the landlord was unfairly prejudiced both on a “vertical comparison”—that is, by reference to what its position would be on a liquidation, where the guarantee would remain enforceable, and on a “horizontal comparison” —that is, by reference to how other creditors were treated under the CVA.
The court found that the amount offered to the landlord was inadequate and could not be adequate unless it was a genuine estimate of the commercial value of the benefit of the guarantee. The judge went further, saying: “At a time of market uncertainty it will be difficult, if not impossible, to determine what sum will fairly compensate the landlord for the loss of such rights”. That would seem to spell the end of so-called CVA “guarantee-stripping”, at least during the current period of “market uncertainty”.
Source: Prudential Assurance Company Ltd v PRG Powerhouse Ltd  EWHC 1002; Mourant & Co Trustees Ltd v Sixty UK Ltd (in administration)  EWHC 1890.