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 concession period; thereafter being adjusted to the greater of the reduced rent under the CVA or market rent at that time
  • prevent the landlord from exercising any forfeiture rights triggered by the CVA (see further below)
  • release the company from any dilapidations claims
  • grant the landlord an initial one off right to terminate the lease
  • (for category 3 & 4 leases) to grant the landlord and the company a mutual right to terminate on certain dates after giving 90 days’ prior written notice
  • (for category 5 leases) shorten the term of the lease to 24 January 2020

The CVA was approved at the previous creditors’ meeting by 94.71% of creditors; of the landlords voting on the CVA, 82.1% by value approved the CVA.

The applicant landlords challenged the CVA on these grounds:

  • that the CVA went beyond the jurisdiction of IA 1986, s 1 as the CVA cannot compromise a claim for future rent because future rent is not a debt, but an unearned future payment, ie the landlords are not creditors within the meaning of IA 1986, s 1
  • in reducing the rent payable under the leases, the CVA is unfairly prejudicial and has the effect of changing the terms of the lease
  • by removing the landlords’ rights to forfeiture, the CVA abrogates the landlords’ proprietary rights
  • the applicants are treated less favourably than other unsecured creditors without any proper justification
  • the CVA fails to comply with the requirements of rule 2.3(1) of the Insolvency (England and Wales) Rules 2016, SI 2016/1024 by failing to disclose potential claims under IA 1986, s 239 and/or IA 1986, s 245 (granting security over the previously unsecured RCF and notes on 29 March 2019) which would be available on administration, such failure being a material irregularity under IA 1986, s 6(1)(b)

What did the court decide?

Following an expedited hearing, Norris J rejected four out of five of the applicants’ arguments and approved a modified version of the CVA (removing the forfeiture restraint provisions):

  • ground 1 fails—future rent can be included in a CVA; a CVA requires a proposal to be put to creditors. The term creditor must be given a wide meaning, but a creditor must have a debt. The term debt has a meaning that extends well beyond a debt strictly so called and includes pecuniary liabilities that might spring out of an existing legal relationship. Future rent may not be a provable debt but may be characterised as a contingent claim. As such, it is a debt and the landlord is a creditor in relation to it [paras 57–59]
  • ground 2 fails—the fact that future rent is reduced under the CVA does not inevitably transgress the requirements of common justice and basic fairness, and it does not do so here. The CVA varies existing obligation: it does not create new ones [para 82]. Satisfaction of the vertical comparator does not of itself mean the CVA must be fair; the court will consider the fairness of the CVA in the round [para 75]. A CVA that reduced rent under an existing lease is not automatically unfair [para 76]
  • ground 3 succeeds—a CVA cannot vary a right of re-entry, being a proprietary right belonging to the landlord (rather than a security right). A CVA can modify any pecuniary obligation upon breach of which the right of re-entry may be exercised, but cannot modify the right of re-entry itself. However, Norris J approved a modified form of the CVA removing the forfeiture restraint provisions
  • ground 4 fails—the differential treatment of landlords from suppliers is justified by the need for business continuity and itself embodies a principle of fairness. However there would have been unfairness if landlords were expected to take reductions in rent below the market value of the premises [para 110]
  • ground 6 fails—creditors were assisted to assess the CVA in the correct way (ie on the assumption that the IA 1986, s 245 claim was a good one); at best, the applicants argued that category 5 landlords would have voted differently; but that would have meant only £5.4m by value of vote would have shifted (a wholly immaterial amount) [paras 127, 130]
 

Case details

  • Court: High Court, Chancery Division
  • Judge: Norris J
  • Date of judgment: 19 September 2019

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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.