Debenhams – a sporting chance for all creditors
The recent High Court judgment in a challenge to Debenhams’ CVA (Company Voluntary Arrangement) demonstrates the extent to which CVAs can affect the terms of a lease.
A Company Voluntary Arrangement enables a company with insolvency problems to reach an agreement with its creditors to govern repayment of debts over time. The arrangement must be accepted by the creditors of 75% of its debts, after which all creditors are bound by the CVA.
In this case, some landlords (funded by Mike Ashley’s Sports Direct) challenged the CVA on grounds including:
1. that future rent was not a debt but an unearned future payment so landlords were not creditors under any voluntary arrangement
2. that the applicant landlords were treated less favourably than other creditors without any justification
3. the right to forfeiture cannot be altered by a CVA.
The High Court rejected all but one of these challenges on the following grounds:
1. future rent can be compromised under a CVA, the term creditor being given a wide meaning
2. differential treatment of landlords (providing long term accommodation at historic and above market rates of rent) and suppliers (providing goods/services under competitive order by order basis and assumed market rates) is justified for business continuity
3. that the right to forfeiture cannot be modified by the CVA, therefore the agreement was changed to remove these provisions.
This case clarifies for landlords that future rent due under a lease can be compromised under a CVA and differential treatment of landlords and supplier creditors could in circumstances be justified. However, a point to note from the judgment is that there would be unfairness to landlords if the rents were to be reduced to below market value of the premises.
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