Lessons to be learnt in the conduct of English CVAs with non-UK creditors

Lessons to be learnt in the conduct of English CVAs with non-UK creditors

This article looks at a recent Irish case on international elements of Company Voluntary Arrangements advanced by the English company Monsoon ahead of Brexit changes. Written by Mark Cullingford of Thrings LLP.

Apperley Investments Ltd (and others) v Monsoon Accessorize Ltd [2020] IEHC 523

As any person following the restructuring of UK retail operations and EU retail operations will know, the management of long-term leases and of rights and obligations of landlords and tenants and a compromise of debt, claims for dilapidations and future rent have been a key feature of successive Company Voluntary Arrangements (CVA) proposals and Scheme of Arrangements for many years.

It is common for English Companies to have many non-UK creditors and for many UK businesses to operate satellite operations in establishments in other EU countries. It is equally common for there to be UK establishments and creditors of EU-based companies.

That trend may increase as Brexit leads to changes of structural strategy for multinational businesses.

Regulation (EU) 2015/848 on insolvency proceedings will provide (until 1 January 2021) for the automatic recognition in one Member State of insolvency procedures initiated in the EU Member State where a company has its Centre of Main Interests. That means that those ‘Main Proceedingswill apply the laws of that country to all creditors. The positions of different creditors in different states is not harmonised (so local preferential creditor status may differ, for example). That is fairly well known, but the exceptions to that are less well known or understood.

A key exception is the need to respect rights in rem created in property in a particular Member State so that, for example, mortgages over land are respected, such that the local law applicable to the location of the land or other immovable will be applied.

The position for leases of land or ‘a contract conferring the right to acquire or make use of immovable property’ is plainly material to all business operating in multiple state locations.

The impact of CVAs on non-UK leases has come under close scrutiny in the High Court of Ireland that shines a light on the need to consider the rights of non-UK creditors and landlords of non-UK property very carefully and to plan any insolvency proceedings, in particular an English CVA, very carefully before being launched.

It may also impact on how a UK landlord or counterparty to a contract to acquire land approaches any non-UK insolvency procedures.

In October 2020 the High Court of Ireland in Apperley Investments Ltd (and others) v Monsoon Accessorize Ltd [2020] IEHC 523 considered whether to recognise the CVA approved by the creditors of the English retail company Monsoon in July 2019, as purportedly affecting leases granted to Monsoon of premises in Cork and Dublin.

The CVA purported to vary the terms of those leases and, in particular, to make significant reductions in rent. The total future rent under the Ireland leases would have been €11.5m and were part of a total of €62.4m liabilities under all leases affected by the CVA as a whole.

As has become fairly typical of trading retailer/hospitality business CVAs, the CVA categorised the premises leased with tailored proposals for categories of leases. Some of the 250-odd leases would continue unchanged, in over 135 premises rent reductions were sought and incentives were offered as part of the CVA to landlords. The Ireland leases were in one category (with many others) where:

  • The rent would become payable monthly and not quarterly.
  • The rent would be reduced by 65%, or if notice to terminate was given within six months, zero.
  • The landlords and tenants would each have a new right to terminate the lease on 60 days’ notice.
  • Dilapidations would be compromised at 50% of the sums claimed.
  • Business rates liabilities be compromised at 20% of the current year.
  • The CVA would not amount to an insolvency default/breach permitting termination/forfeiture of the lease by the landlord

An English CVA process involves no court process. The creditors who participate in the ‘decision-making process’ can vote and bind all creditors in what, in practice, is akin to a statutory contract to vary the obligations of Monsoon to its creditors.

The Cork and Dublin landlords objected before approval of the CVA that the CVA was contrary to Article 11 of Regulation (EU) 2015/848[BB(1]  (contracts related to immovable property) – which requires local (Ireland) law to apply to the leases in Ireland and claimed that the CVA would not be recognised in Ireland in varying the Ireland leases. Ireland law permits no ‘out of court process’ to terminate a lease but allows for a tenant to repudiate/disclaim a lease subject to use of a court proceedings and subject to conditions – that power was claimed to prohibit the variation of obligations of tenants.

Before approval by the Monsoon creditors on 3 July 2019, the Dublin landlords also contended that any vote by creditors to approve the CVA first required an application under Article 11 of Regulation (EU) 2015/848[BB(2]  to the English Courts. Neither Irish landlord participated in the CVA decision-making process.

As the CVA process includes no court process there is no opportunity for creditors to raise objections to a court before the event. Modifications to the proposals can in principle be suggested but practicalities make that functionally problematic except where a creditor has significant voting power (by value as a proportion of all creditors). A creditor that objects to the effect of a CVA approved by creditors may seek relief under section 6 of the Insolvency Act 1986 (IA 1986) by an application to the English Court if the CVA is ‘unfairly prejudicial’ to that creditor, or where there was some ‘material irregularity’ in the process.

After the CVA was approved, the two Irish landlords did not make a IA 1986, s 6 application. They applied independently to the High Court in Ireland for declaratory relief under Irish law and these were heard together. The landlords sought declarations that the leases continued unaffected by the CVA (as Article 11 of Regulation (EU) 2015/848 applied and the CVA process was claimed not to affect the leases), or that the CVA should not be recognised under the EU Insolvency Regulations in Ireland on the grounds that to do so would be manifestly contrary to the public policy of Ireland (Article 33 of Regulation (EU) 2015/848). Specific performance of the leases in an unmodified form and that surety obligations and guarantees continued unaffected also.

For Monsoon it was claimed the Ireland court was required to recognise the CVA under Articles 19, 20 and 32 of Regulation (EU) 2015/848 and the landlords should have, but failed, to raise objections to the CVA within the procedures under the English insolvency legislation (ie to apply under IA 1986, s 6) and that the Ireland proceedings were subject to res judicata/issue estoppel and the decision of the CVA was final and binding and could not be revisited.

The EU Regulations

Article 7 of Regulation (EU) 2015/848 provides that the law of the main insolvency proceedings (so English law in this case) will determine the effect of the process on creditors and in particular by composition of debts.

Recital 68 states that the proceedings will not affect rights in rem in other Member States. That is a clear exception to article 7 – but it does not expressly refer to rights under leases. Nevertheless Article 11 of Regulation (EU) 2015/848 provides an exception to Article 7. As noted in the judgment, this reflected the normal rules for the lex situs (local law) to apply to land/property and rights in property.

The Irish court decided Article 11 of Regulation (EU) 2015/848 would trump Article 7 where, and to the extent that, they conflicted.

The parties disputed whether Article 7 or Article 11 of Regulation (EU) 2015/848 affected all adjustments under the CVA to the rights of the landlords under the lease as Article 11 of Regulation (EU) 2015/848 addresses issues of ‘the right to acquire or make use of immovable property’.

It should be noted that English cases on English CVAs have, themselves, drawn a distinction between the compromise by a CVA of the obligations of a tenant to their landlords as debtor for past and future rent and other financial liabilities by the collective decision making of creditors and the limits to which other rights and obligations (eg occupation of premises and landlords right to forfeit or terminate the lease) can be affected by a CVA.

It seems to have been argued for Monsoon that the exception to Article 7 of Regulation (EU) 2015/848 provided by Article 11 was limited to rights to ‘make use’ of premises only (and not therefore debtor obligations under the lease as a contract) but the Irish court decided the phrase reflected the category of contracts that were governed by Article 11 of Regulation (EU) 2015/848 and not only those specific rights addressed in that contract/lease.

The role of the ‘court’ under Article 11(2).

Article 11(2) of Regulation (EU) 2015/848 contemplates that the ‘court’ which opened the insolvency proceedings will have jurisdiction to approve termination or modification of a contract relating to immovable property where ‘(a) the law of the Member State applicable to those contracts requires that such a contract may only be terminated or modified with the approval of the court opening insolvency proceedings; and (b) no insolvency proceedings have been opening in that Member State’.  

In doing so, the law of the Member State where the property is located would apply. The landlords argued that the English CVA process would have had to have applied Irish law to affect the Irish leases. Reference was made to express restrictions in any Irish law compromise or scheme of arrangement to modifications to leases (section 541 of the Companies Act 2014 - Ireland); Monsoon claimed English law could be applied.

The court accepted the landlord’s arguments based on the ‘clear’ language of Article 11 of Regulation (EU) 2015/848 such that, in considering any alteration to the Irish leases, Irish law would apply.

Irish law had not been applied in addressing the Irish leases in the CVA.

Article 32 of Regulation (EU) 2015/848 – recognition

Nevertheless, Monsoon claimed (and the Irish High Court accepted) that under the defined terms of the Regulation, the decision made at the meeting of creditors and members to approve the CVA was a ‘judgment’ of the ‘court’ that opened the insolvency proceedings as those terms are defined in the Regulations. Monsoon argued that the Irish High Court could not decline to recognise that ‘judgment’ under the Regulation and the landlord should have raised their objections in England under IA 1986, s 6.

The landlords argued that Article 32 of Regulation (EU) 2015/848 was applicable to a judgment opening insolvency proceedings only and not that court’s subsequent decisions. That was rejected by the court.

The landlords also argued that there was no decision (‘judgment’) of the creditors/members (‘court’) as to whether to exercise jurisdiction under Article 11(2) of Regulation (EU) 2015/848 in accordance with Irish law and as such the Irish court was not obliged to recognise that decision.

It will be noted that the Irish High Court considered the Irish Examinership procedure as the most like the English CVA procedure – the local Member State laws may have different procedures in different processes and where there is no harmonisation of procedures across different EU states some comparison of potentially applicable processes remedies and laws was necessary.

It was argued for the landlords that in the approval of the CVA, the CVA meetings were required to apply Irish law to any decision related to the Irish leases and it did not do so and insofar as the CVA purported to apply to the Irish leases they could be excised as impermissible amendments to leases and be struck out enabling the CVA to otherwise apply (the English law case of Discover (Northampton) Ltd v Debenhams Retails Ltd [2020] EWHC 260 re impermissible scope of clauses on the property rights rather than debtor obligations was relied on).

The court considered whether to refer this issue to the Court of Justice of the European Union – whether a ‘judgment’ (the decision to approve the CVA proposal) which on its face may have exceeded jurisdiction could therefore not be recognised under Article 32 of Regulation (EU) 2015/848. For the following reasons, that did not prove necessary.

Article 33 of Regulation (EU) 2015/848 – refusal to recognise a judgment that would be clearly contrary to the public policy of that state

The Irish High Court was plainly mindful of the need for automatic recognition of decisions in Main Proceedings, but Article 33 of Regulation (EU) 2015/848 potentially permits the court of a Member State not to recognise a judgment of another Member State in insolvency proceedings that are Main Proceedings but this must be employed only in exceptional circumstances.

The landlords argued that the decision to approve the CVA without applying Irish law constituted a ‘wilful and blatant disregard of Irish law’ such that the exception should be invoked.

It was also argued that the CVA decision to vary the leases was: (i) contrary to Irish constitutional rights and liberties under Article 40.3 of the Irish Constitution, and (ii) inherently unfair as the decision making was a mere ‘yes’ or ‘no’ and did not consider individual’s rights of Irish landlords that should have been respected under Article 11 of Regulation (EU) 2015/848 or provide an effective forum to do so.

The court considered that it was a fundamental principle of Irish constitutional law that prior to interference with property rights the landlords had a ‘right to be heard’. Reference was made to the Eurofood decision on recognition of other proceedings when there had been a failure to give Irish provisional liquidators documents necessary for it to participate in insolvency proceedings in Italy when the context of a ‘right to be heard’ was considered: what was crucial was they be given a sufficient opportunity to make representations – not necessarily a right to appear before a judge.

The way in which an English CVA decision is undertaken (normally by proxies at a meeting who have already decided on a ‘yes’ or ‘no’ basis) was compared to an Irish Scheme of Arrangements procedure that include a final step of court approval at which creditors have a right to be heard.

The Irish High Court decided that to respect Irish constitutional law rights of the Irish landlords under Irish law that applied to the leases, the CVA process should have been adapted so that this enabled the constitutional law issue to be brought to the attention of all creditors before the decisions were made by them. It was noted that as a web portal had been available for variations to the proposals, the creditors could have been informed in advance of any proposals to allow for representations to be made by the Irish landlords and for those to be considered by all creditors beforecasting their votes.

IA 1986, s6 review by the court – did it cure the defect?

Before the Irish High court there was conflicting evidence of English Law as to the availability of relief under IA 1986, s6 (or otherwise) to set aside a CVA where the CVA process had failed to apply Irish law to the Irish leases as had in fact been required and fail to provide an opportunity to be heard/make representations before creditors cats their votes. The court concluded that a right to make an application under s.6 after approvals did not displace the requirement that the Irish landlords be entitled to make representations before the decision was made.

Conclusion

The consequence of failing to apply the limits of Irish Law to the Irish leases and the failure to provide an opportunity to be heard by making representations to creditors before votes were cast were such that the court decided to apply the public policy exception and refused to recognise the CVA as affecting the Irish leases as it was ‘manifestly contrary to the public policy of the [Irish] State’. The consequences for the CVA will be material. It is not yet clear whether an appeal will follow.

The court emphasised that this could have been avoided by adopting a different procedure in the CVA approval process.

The court did not therefore have to consider whether to make a reference to the Court of Justice of the European Union for guidance on whether an Irish court could, as an exception to Article 32 of Regulation (EU) 2015/848, refuse to recognise a judgment’ of a court’ where there had been an obvious failure to apply the requirement of the Regulations – in this case to apply Irish law in the court’ exercising jurisdiction under Article 11(2) of Regulation (EU) 2015/848 to determine questions of the Irish leases in accordance with Irish law.

Lessons to be learned

This decision and other recent English decisions on the scope to which a CVA can impact on rights under leases impacts on the way a CVA should be planned, documented and implemented.

Tenants, landlords and nominees of CVAs need to consider this carefully. Similar issues will arise with other procedures. For example an English liquidators power to ‘disclaim’ onerous leases may not automatically recognised in all EU Member States.

As the UK leaves the EU on 1 January 2020, this landscape will change again.

Careful planning and advice will be needed where leases beyond the borders of England and Wales are in issue, as well as other in rem rights of creditors that are not governed by English law.

It should be noted that neither form of English Companies Act Schemes of Arrangements nor the new monitored moratorium procedures (brought forward under the Corporate Governance and Insolvency Act 2020) are relevant procedures under the EU regulation and would not therefore attract automatic recognition in other EU Member States and that the automatic recognition of Main Proceedings will change from 1 January 2020

The distinction between rights and obligations as debtor/creditor and as owner-landlord/occupier-tenant are important ones: the protection of landlords rights in land will continue even if their rights as creditor can be adjusted by an English CVA or English Scheme of Arrangement and other procedures.

Equally, proposals for the compromise of liabilities or to determine English leases in procedures advanced in other EU states will require careful consideration.

…and Brexit still lies before us with new changes to come.

 

Case details:

Court: High Court (Ireland)

Judge: Mr. Justice Denis McDonald

Date of judgment: 20/10/2020

 

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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.