In September 2003, PRG Powerhouse Limited bought the Powerhouse business and its leases. As a condition of the sale, the landlords of various stores accepted a guarantee from Powerhouse’s parent company in respect of Powerhouse’s obligations under the leases.
Financial difficulties developed and this meant that store closures were inevitable. The directors of Powerhouse proposed a company voluntary arrangement (CVA), the terms of which included the closure of 35 stores that were performing poorly and a provision that the landlords would not be able to pursue PRG under the parent company guarantees. This would have left 53 stores open and it was hoped that they could trade profitably after implementation of the CVA.
The CVA was put to the creditors, most of which were suppliers and who had been offered 100p in the £1 for debts owed to them, as opposed to the landlords who were offered 28p in the £1. The gist of the plan was that Powerhouse’s liabilities to the landlords of the premises to be closed were compromised and the parent company guarantor would be released from obligations. A large enough percentage of the creditors were happy with this and outvoted the landlords to pass it.
If such a strategy was successful, it could mean that CVAs could be used to escape obligations under leases at a fraction of the cost, which would otherwise be payable.
A group of the landlords got together to challenge the validity of the CVA. There were two grounds to their challenge. Firstly, they claimed that the CVA could not have the effect of releasing PRG from the parent company guarantees as PRG was not a party to the CVA. In the alternative, the landlords argued that if the CVA did release PRG it was unfairly prejudicial to the landlords’ interests.
The Court held that the CVA was effective in releasing PRG from the parent company guarantees but it also held that the CVA was unfairly prejudicial to the landlords’ interests.
It therefore seems that in circumstances where interests of landlords are unfairly prejudiced, and a Court will have to look at the facts of each case to ascertain whether there has been such prejudice, a Court will not allow a CVA to be used as a mechanism to strip away guarantees. Care does need to be given, however, as the outcome would have been very different had the Court found that the interests of the landlords had not been unfairly prejudiced. To offer some protection, consideration should perhaps be given to taking rent deposits, with regular top ups, as an alternative to guarantees.