CVAs can compromise landlords’ claims for future rent (Discovery (Northampton) Ltd and others v Debenhams Retail Ltd and others)

CVAs can compromise landlords’ claims for future rent (Discovery (Northampton) Ltd and others v Debenhams Retail Ltd and others)

Kate Stephenson, partner at Kirkland & Ellis International LLP, predicts that Debenhams’ High Court victory will become the leading case on company voluntary arrangements (CVAs).

Discovery (Northampton) Ltd and others v Debenhams Retail Ltd and others [2019] EWHC 2441 (Ch)

What are the practical implications of this decision?

In a resounding victory, and what will no doubt become the leading case on CVAs, this seminal judgment confirms that a CVA can compromise landlords’ claims for future rent, upholding the CVA as valid and enforceable—subject to the removal of provisions waiving landlords’ right to forfeiture. It offers welcome recognition that companies have legitimate reasons for the differential treatment of landlords and other unsecured creditors, such as suppliers. 
 
The first test case in the current wave of CVAs, this judgment provides major comfort to companies in financial distress with burdensome leasehold estates that a CVA remains a potential route to restructure and compromise their rent obligations.
 

The market will adjust to reflect the court’s ruling that a CVA cannot vary a right of forfeiture (because it is a proprietary right). There may, however, be grounds to say that landlords have waived their right to forfeit, including where they voted in favour of the CVA or treat the lease as continuing post-CVA (including by accepting rent). 

What was the background?

Debenhams, one of the largest UK retailers, was acquired by a creditor-owned SPV via pre-pack administration in April 2019. Shortly thereafter, it proposed a CVA, which was approved by creditors in May 2019, by approximately 95% by value of creditors voting. Debenhams’ CVA compromises rent payable to landlords—across six different categories—and business rates. The CVA was challenged by a group of six related landlords—the challenge was funded by Sports Direct, a former major shareholder of Debenhams. The challenge was brought on five grounds.
 
For those less familiar—a CVA may be challenged on the grounds that it unfairly prejudices the interests of a creditor (among others) or that there has been

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About the author:

Zahra started working as a paralegal at Lexis Nexis in Banking and Insolvency teams in April 2019. Zahra graduated with a 2.1 honours in a BA French and Spanish, completed the GDL at BPP University and is seeking some experience before commencing the LPC. She has undertaken voluntary work for law firms in London, Argentina and Colombia.