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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  EWHC 2441 (Ch)
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:
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:
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:
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):
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