In a year fast becoming dubbed the “year of the CVA” in the retail sector, there was a cautionary tale for insolvency practitioners following the recent High Court judgment in Re SHB Realisations Ltd (formerly BHS ltd (in liquidation).

The timeline of the case

Following several years of increasing losses, BHS proposed a CVA on 4 March 2016, which was approved by its creditors on 23 March 2016. BHS subsequently went into administration on 25 April 2016. The CVA did not automatically terminate on BHS’s administration and so, for a period, the CVA and the administration ran in parallel with the administrators trading from the stores paying the reduced rents in accordance with the terms of the CVA. On 2 December 2016, BHS moved into creditors’ voluntary liquidation which indirectly led to the termination of the CVA on 16 December 2016.


The CVA provided for some of BHS’s landlords to receive less than the full amount of the rent due under their respective leases. While the CVA was in force, these landlords were paid the reduced rents as provided in the CVA. However, on termination of the CVA, clause 25.9 took effect, which provided as follows:

"…the compromises and releases effected under the terms of the CVA shall be deemed never to have happened, such that all Landlords and other compromised CVA Creditors shall have the claims against [BHS] that they would have had if the CVA Proposal had never been approved (less any payments made during the course of the CVA)."

On the basis of this clause, Prudential (as one of the affected landlords) submitted that:

(a)  it was owed all outstanding rent payable under the relevant leases (giving credit for amounts received during the CVA); and

(b)  part of the outstanding balance was payable as an administration expense for the period during which the original administrators continued to trade from the premises.

The liquidators argued the following, which they sought to have resolved by application to the court:

(i)  the provisions of the CVA which required BHS to pay additional sums on breach of the CVA were unenforceable as a penalty;

(ii)  the provisions increased BHS’s liabilities to Prudential after the commencement of the liquidation, as a result they contravened the pari passu principle (precluding a company from agreeing to distribute property among its creditors other than on an equal footing); and

(iii)  the sums were not payable as an administration expense because they fell due after the period during which the original administrators were in occupation of the property for the purposes of the administration, and were payable under clause 25.9 (above) rather than the relevant leases.

The decision

The court found in favour of Prudential on all three issues, ruling that BHS could not challenge its own CVA as a contractual penalty, on the basis that:

(i)  The CVA was brought about by a statutory procedure and was binding on BHS and its members and creditors by reason of a statutory hypothesis under the Insolvency Act 1986. The law on penalties was not designed to apply to hypothetical contracts;

(ii)  The law of penalties was founded on the principle of oppression and it was impossible to see how a proposal put forward by or on behalf of BHS could subsequently be said to have oppressed BHS;

(iii)  At law, a variation of a lease granted by deed has to be by deed. The CVA was, or operated as, a contract. As a result, the terms of the contract were entitled to equal force and recognition. This meant BHS could not apply some aspects of the CVA and seek to disapply others.  

(iv)  Clause 25 of the CVA expressly provided for the parties to be restored to their original positions if the CVA was terminated. It did not increase Prudential’s claims in BHS’s administration or liquidation. Rather, its intention was to ensure they would not be disadvantaged if the CVA was terminated.

(v)  The rent accruing or the rent accrued in respect of any period had to include all sums payable for the premises for that period. Therefore, the “additional sums” falling due to Prudential upon the termination of the CVA (i.e. a contingent liability which crystallised after the administrators had ended  their occupation of the property) were payable as an administration expense for the period during which the original administrators were in possession of the premises for the purposes of the administration.

The effect of the decision

The case was largely determined on its facts, however it does show that landlords who agree to a reduction in rents as part of a CVA with tenants who continue to trade as a going concern, will be entitled to the full amount of the rent accrued upon failure of the CVA. Further and to the extent that a company subsequently enters administration and the premises are used by the administrators for the purposes of the administration, such rents will be paid in priority as administration expense. Subject to any appeal, greater consideration should be given as to whether the terms of a lease can be permanently varied (by way of a deed of variation) in conjunction with a CVA proposal. However, this will ultimately depend on the bargaining strengths of the parties.