By way of explanation, a CVA provides a company in financial difficulties with an alternative to liquidation or administration, by entering into an arrangement with its creditors for the discharge of its liabilities. If approved by 75% in value of the company’s creditors, the CVA is binding on all creditors, regardless of whether they have agreed to it, although a creditor can subsequently challenge the CVA, if its interest has been unfairly prejudiced. In February 2006, Powerhouse announced the closure of 35 of its 88 electrical stores in the UK and proposed entering into a CVA. The proposal included provision for the landlords of the closed stores to receive payment from a fund, but amounting to only 28 pence in every £1. The proposal was on the basis of, not only the tenant company being released from futher liability, but also the parent company, which had guaranteed the payment of rent and performance of covenants under each of the leases. Most of the creditors of the company were unaffected by this proposal and the CVA was approved with the necessary majority.

Unsurprisingly, the landlords objected and applied to the High Court to challenge the validity of the CVA and the Court has now given judgment (Prudential Assurance v PRG Powerhouse Limited). The principal issue raised was the effect of the CVA and although the Court accepted that the CVA did not directly release the parent company guarantees, as the CVA was binding between the tenant company and the landlords, the tenant company could enforce an obligation by the landlords not to pursue the guarantors, so the net effect was that the guarantor was released.

The controversial Company Voluntary Arrangement (CVA) in the Powerhouse case has been the subject of a successful challenge in the High Court brought by landlords who stood to lose the benefit of parent company guarantees as a result of the CVA. The case raised questions as to whether the tenant’s CVA could be effective to release the tenant’s guarantor from liability and, otherwise, whether the landlords had grounds for objecting to the CVA.

However, the Court still had to consider whether the landlords had suffered unfair prejudice such that the CVA should be revoked. The Court compared the position of the landlords, who were to receive a fraction of the debt, with that of the other creditors, who were entitled to be paid in full and concluded that the landlords had indeed suffered unfair prejudice.

Comment

The prospectof a tenant obtaining a release from parent company guarantees by entering into a CVA has been of considerable concern to landlords and therefore, the High Court decision will come as a relief. However, the case does highlight that a CVA entered into by a tenant can potentially release the guarantor from liability and, therefore, any tenant’s proposal for a CVA should be considered with great care. Also, although the Court concluded that, on the facts of this particular case, there had been unfair prejudice, it does not rule out the possibility of there being a CVA, which is effective to release a guarantee without necessarily resulting in unfair prejudice.