Debenhams CVA challenge dismissed (Discovery (Northampton) Ltd and others v Debenhams Retail Ltd and others)

Debenhams CVA challenge dismissed (Discovery (Northampton) Ltd and others v Debenhams Retail Ltd and others)

We look at this case on the landlords’ challenge of the Debenhams Retail Ltd (Debenhams) company voluntary arrangement (CVA) where Norris J rejected four of the five grounds for challenge and approved the modified CVA.

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

What are the practical implications of this case?

In this case, the Debenhams restructuring is back on track and the CVA will continue despite vigorous challenges from the landlords. It provides welcome clarifications in relation to CVAs:

  • future rent can be compromised under a CVA
  • the fact that future rent is reduced under the CVA does not inevitably render a CVA unfair, the court will consider the CVA in the round
  •  a CVA cannot vary a right of re-entry

 What was the background?

The applicants were six landlords seeking to challenge the CVA of Debenhams under section 6(1) of the Insolvency Act 1986 (IA 1986). The applicants had leases with 30 year terms with automatically escalating rents for the first ten years of the term, with rent then being reviewed on an upwards only basis at five yearly intervals. The Debenhams’ directors proposed the CVA to address unsustainable property costs by compromising future liabilities for rent and business rates.

Sports Direct International Plc were originally co-applicants but were removed for lack of standing as they were paid in full under the CVA. However, they agreed to fund the applicants’ costs of maintaining the challenge and indemnified them against any adverse costs order arising.

The CVA principally affects the landlords and local authorities and as is commonplace, the CVA grouped leases into six categories according to the extent to which the company sought to alter its obligations under the relevant leases. The categories were grouped by reference to the financial performance and sustainability of rent for the individual properties, ranging from category 1—those performing relatively strongly with rent considered to be market rate (or at a sustainable premium) to category 5—those the company considered not to be financially viable.

The proposed CVA terms and proposed effect on the leases was to:

  • reduce rent payable under the leases for a rent con

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.