Landlord challenge to Debenhams CVA partially successful but does not topple CVA (High Court)
The High Court (Norris J) has upheld the validity and effect of Debenhams’ company voluntary arrangement (CVA), subject to certain modifications that it deemed made to protect the landlord creditors’ right of forfeiture.
The landlords had challenged the CVA on grounds that the CVA exceeded its jurisdiction because:
- The landlords were not “creditors”: their claim for future rent was not a “debt” but was instead an unearned future payment.
- The CVA provisions reducing rent payable under relevant leases purported to change the terms of the leases.
- The CVA purported to restrict the landlords’ proprietary rights of forfeiture. (This argument succeeded.)
The landlords also claimed that:
- The CVA unfairly prejudiced the landlords as it treated them less favourably than other unsecured creditors without proper justification.
- There had been a material irregularity in the CVA process because there were potential clawback claims available to Debenhams if it went into administration which had not been disclosed in the CVA.
The landlords, who were funded to challenge the CVA by an aggrieved shareholder and creditor of Debenhams (Sports Direct) failed on all but the point in relation to forfeiture. However, even that success is arguably academic: the court was clear that while a CVA could not directly restrict a right of forfeiture, there was no difficulty with a CVA that reduced the obligations of the tenant so that the right of forfeiture would be less likely to be triggered in practice. Accordingly, it simply ordered the offending provisions on forfeiture to be deemed deleted.
The finding that the CVA was not unfairly prejudicial to the landlords nor subject to a material irregularity was inevitably fact-based. However, of particular note is the importance of the fact that the CVA did not propose reductions in the rent payable to the landlords to a level below market value. The right of the landlords to exercise break clauses was also a strong factor.
The court’s analysis that the landlords did constitute “creditors” in respect of their claim for future rent is perhaps the most interesting part of this decision. Although the argument that future rent is not a debt capable of being subject to a CVA was perhaps formulated as a long shot, it took up a great deal of the court’s analysis. (Discovery (Northampton) Limited and others v Debenhams Retail Limited and others  EWHC 2441 (Ch) (Norris J).)
Source: Practical Law