Collapse of BHS puts CVAs under the spotlight (Re SHB Realisations Ltd; Wright and another v Prudential Assurance Company Ltd)

Under what grounds can a company challenge its own company voluntary arrangement (CVA)? Mathew Ditchburn, partner, and Ben Willis, associate, both at Hogan Lovells, who acted for the successful landlord, consider the decision in Re SHB Realisations Ltd (formerly BHS Ltd) (in liquidation); Wright and another (as joint liquidators of SHB Realisations Ltd (formerly BHS Ltd) (in liquidation)) v Prudential Assurance Company Ltd and find it contains some helpful guidance on the operation of CVAs.

Re SHB Realisations Ltd (formerly BHS Ltd) (in liquidation); Wright and another (as joint liquidators of SHB Realisations Ltd (formerly BHS Ltd) (in liquidation)) v Prudential Assurance Company Ltd [2018] EWHC 402 (Ch), [2018] All ER (D) 58 (Mar)

What are the practical implications of this case?

This case serves as a reminder that there are limited grounds to challenge a CVA and a strict timescale within which to do so. While this provides certainty for the company and its creditors, it also means that landlords and others need to be pro-active and act quickly if they wish to challenge the validity of a CVA.

It also clarifies that administrators are liable to landlords for contingent liabilities that are attributable to their period of use of premises. This might include, for example, balancing service charge payments and back-dated rent review uplifts, which administrators are often keen to avoid.

What was the background?

BHS proposed a CVA in a bid to turn around its fortunes. The main creditors affected by the CVA were its landlords who saw rents cut by up to 75%.

Clause 25.9 of the CVA provided that, if terminated, Clause 25.9 ‘compromises and releases effected under the terms of the CVA shall be deemed never to have happened, such that all Landlords…shall have the claims against BHS Limited that they would have had if the CVA Proposal had never been approved’.

The CVA did not terminate automatically in the event of BHS’s administration, but the landlords were entitled to terminate for non-payment of sums due under the CVA.

A month after the CVA was approved, BHS went into administration. The administrators traded from the stores for a period of months, paying reduced rents under the CVA, before eventually folding the business and vacating. BHS then stopped paying rent and one of the landlords terminated the CVA. Liquidation then followed.

The defendant was another landlord. It claimed that, as a result of clause 25.9:

  • it was entitled to the difference between the full rent due under the lease and the discounted rent it has received under the CVA
  • such rent was an expense of the administration (payable in priority to other debts) for the period during which the administrators traded from the premises

The liquidators applied to court for a direction, arguing that:

  • clause 25.9 was an unenforceable penalty clause
  • further, it contravened the pari passu rule (ie that all unsecured creditors are entitled to share equally in any available assets of an insolvent company, in proportion to the debts due to each of them)
  • the rent was not an expense of the administration as it fell due after the administrators had stopped using the premises

What did the court decide?

The liquidators argued that clause 25.9 imposed a secondary obligation to pay the full rent in the event of a breach of the primary obligation to pay the discounted rent. This, they said, was exorbitant and/or unconscionable and, therefore, an unenforceable penalty.

The court disagreed, deciding that usual contractual principles, including the rule against penalties, do not apply to CVAs. A CVA is a ‘hypothetical’ contract that binds anyone entitled to vote on it because of statute. The only way to challenge a CVA is on one of the limited grounds set out in the Insolvency Act 1986 within 21 days of approval.

Referring to the public policy grounds behind the penalty doctrine, the court also said it was ‘impossible to see how a proposal put forward by or on behalf of the company…can somehow be said subsequently to have oppressed the company in some respect’.

The liquidators’ argument also presupposed that the CVA varied the leases at law, which the court held it did not, both as a matter of construction and because it was not executed by deed.

The court found that there was no breach of the pari passu principle. This was because clause 25.9 did not increase the landlords’ claims against BHS on insolvency. The true position was that the temporary rent concession in the CVA was ‘brought to an end and the original rent…continued to have effect.’

Finally, the court made clear that, for any period during which administrators used leasehold premises, they were liable to pay as an expense ‘all sums payable for the premises in respect of that period, even if they are only contingent or yet to be ascertained at that time’. It did not matter that the liability to pay the full rent for the period was not triggered until after they had vacated.

Further reading

If you are a LexisPSL subscriber, click the links below for further information on order of payments in administration:

 CVAs—landlord issues and remedies (Subscriber access only)

Retail sector insolvency—use of CVAs (Subscriber access only)

Not a subscriber? Find out more about how LexisPSL can help you and click here for a free trial of LexisPSL Restructuring and Insolvency.

First published on LexisPSL Restructuring and Insolvency

Interviewed by Jenny Rayner.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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