Anthony John Wright and Geoffrey Paul Rowley as joint liquidators of SHB Realisations Ltd (formerly BHS Ltd) ((in Liquidation)) v The Prudential Assurance Company Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Christopher Pymont |
| Judgment Date | 06 March 2018 |
| Neutral Citation | [2018] EWHC 402 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CR-2016-002220 |
| Date | 06 March 2018 |
[2018] EWHC 402 (Ch)
IN THE HIGH COURT OF JUSTICE
IN THE BUSINESS AND PROPERTY COURTS
OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Christopher Pymont QC
Case No: CR-2016-002220
In the matter of SHB Realisations Limited (Formerly BHS Limited (In Liquidation))
And In the matter of The Insolvency Act 1986
Stephen Robins (instructed by Jones Day) for the Applicants
Blair Leahy (instructed by Hogan Lovells International LLP) for the Respondent
APPROVED JUDGMENT
Mr Christopher Pymont QC:
This is an application by the liquidators of SHB Realisations Limited (“the Company”) for directions under section 112 of the Insolvency Act 1986. The Respondent (“Prudential”) is the Company's landlord under two leases demising to the Company premises in, respectively, Chester and Southend. The liquidators are concerned to establish whether certain sums claimed by Prudential are (i) payable at all (ii) provable in the liquidation and (iii) payable as an administration expense (an administration having preceded the liquidation).
The issues arise in the following circumstances. The Company (under its former name of BHS Limited) was the principal trading company in the BHS group, the well-known retailer of clothing, household goods, furniture and lighting. Following several years of increasing losses, the Company proposed a company voluntary arrangement (“CVA”) on 4 March 2016. The CVA was approved by separate meetings of the Company's creditors and members on 23 March 2016. The CVA left the management of the affairs, business, Assets (as defined) and properties of the Company in the hands of its Directors (clause 4.1), but it quickly became apparent that the Company had insufficient funds to continue to trade in the short to medium term and the Company went into administration on 25 April 2016. The CVA did not automatically terminate on the Company's administration and so, for a period, the CVA and the administration ran in parallel. Concurrent administrators (Mr Anthony Wright and Mr Geoffrey Rowley) were appointed on 22 July 2016 so as “ to commence additional investigatory work into the Company's affairs with the [original] Administrators remaining in office to conclude trading activities and assist realisations ahead of a creditors' voluntary liquidation” (I quote from the filed Notice of Result of Meeting of Creditors dated 23 June 2016). Ultimately, however, the Company was put into creditors' voluntary liquidation on 18 November 2016 and Mr Wright and Mr Rowley were appointed its joint liquidators.
The Company's liquidation led indirectly to the termination of the CVA. Clause 25.8 of the CVA entitled any landlord creditor to send a notice demanding payment within 14 days of sums due within the categories set out; if payment were not made, a further notice could bring about the termination of the CVA on receipt by the Company. One of the Company's landlords (not Prudential) served the relevant notices on the Company and the CVA accordingly terminated with effect from 16 December 2016.
As I will explain in greater detail below, the CVA provided for some of the landlords of the Company to receive less than the full amount of the rent falling due under the leases granted to the Company. While the CVA was in force, these landlords were paid the reduced rents and other sums due under the leases to the extent provided for in the CVA. However, on the termination of the CVA, clause 25.9 of the CVA took effect, which provided as follows:
“ Upon a termination under this Clause 25 …, the compromises and releases effected under the terms of the CVA shall be deemed never to have happened, such that all Landlords and other compromised CVA Creditors shall have the claims against [the Company] that they would have had if the CVA Proposal had never been approved (less any payments made during the course of the CVA).”
On the basis of this clause Prudential's submission is that (a) it is owed the full amount of the outstanding rent payable under the relevant leases (giving credit for the amounts actually received during the currency of the CVA) and (b) part of the outstanding balance is payable as an administration expense for the period during which the original administrators continued to trade from the premises the subject of those leases in furtherance of the aims of the administration (the period being from 25 April 2016 to 3 August 2016 for each of the Chester and Southend premises).
The liquidators say that this raises the following issues, which they seek to have resolved on this application:
i) The penalty issue. The liquidators ask the Court to determine whether the provisions of clause 25.8 and clause 25.9, which (it is said) require the Company to pay additional sums upon breach of the CVA, render Prudential's claims unenforceable as a penalty or penalties.
ii) The pari passu issue. The liquidators ask the Court to determine whether the effect of these provisions, which are said to have substantially increased the Company's liabilities to Prudential after the commencement of the liquidation, is that Prudential's claims contravene the pari passu principle (that is, the principle which precludes a company from agreeing to distribute its property among its creditors other than pari passu on insolvency).
iii) The administration expense issue. The liquidators ask the Court to determine whether Prudential can claim the additional sums as an administration expense when (if they are recoverable at all) they only fell due after the period during which the original administrators were trading from the relevant premises and were payable by virtue of clause 25.9 rather than the relevant leases.
To address these issues, I turn first to the CVA to set out what seem to me to be the relevant provisions in their proper context.
The CVA
The reasons for and objectives of the CVA were explained in a summary provided to creditors in advance of the meetings at which the CVA was approved. One commercial problem explained in the summary had been the extent of the Company's property costs. Many of the Company's stores were too big in the prevailing retail landscape and many of them were subject to upward-only rent reviews negotiated decades earlier, with the result that a significant proportion of the Company's properties were over-rented. The Company had been unable to sell or surrender a sufficient number of properties, or to re-negotiate the rent payable, to reduce its cost base. Without a reduction in its lease obligations of the order proposed by the CVA, the Company did not have the capability to meet its debts and working capital requirements beyond the next rent quarter date. The proposal was therefore to impose rent reductions on certain landlords through a CVA.
The proposed terms of the CVA would achieve this by dividing the Company's premises into three categories and imposing restrictions on the respective landlords' rights.
i) The obligations arising on Category 1 premises were subject to the least interference, those being the premises considered currently viable.
ii) The Category 2 premises were those considered viable if a reduction in rent could be achieved. The landlords of these premises were to receive 75% (Category 2A) or 50% (Category 2B) of the rent payable, and 100% of the contractual amounts payable in respect of insurance and service charge, for three years from the next date on which rent was payable.
iii) The Category 3 premises were those considered uneconomic. The landlords of those premises were to receive only 20% of the rent payable, a further 5% of the rent payable in lieu of dilapidations and 100% of the contractual amounts payable in respect of insurance and service charge for 10 months from the next date on which rent was payable, after which the Company would have no liability to the relevant landlords unless it elected to remain in occupation.
Prudential was a Category 2A Landlord, in respect of both of its leases to the Company.
The CVA terms were expressed (so far as relevant) as follows:
“ 9.1 During the Rent Concession Period, [the Company] shall not be obliged to pay Contractual Rent or Turnover Rent to the Category 2 Landlords in the amounts provided for in the Category 2 Leases. Instead, [the Company] shall be obliged to pay Amended Contractual Rent in accordance with Clauses 9.2, 9.3 and 9.4 below, and Clause 12 ( Rent Concession Agreement).
9.2 The amount payable to each Category 2A Landlord under each category 2A Lease shall be 75% (seventy-five per cent) of the Contractual Rent and of the Turnover Rent (if any) in the period from the Next Payment Date until expiry of the Rent Concession Period, plus all contractual amounts payable in respect of insurance and service charge.”
(Clause 9.3 provided for Category 2B Landlords to be paid 50% of the rent; and clause 9.4 dealt with the dates upon which payments were to be made).
The Rent Concession Period was defined for each Category 2 Lease as
“ the period commencing on the Next Payment Date and ending on the earlier of:
(i) the date that the relevant Lease expires or is otherwise determined; or
(ii) the Category 2 End Date”.
The Category 2 End Date was 24 March 2019 or, if later, such other date as would fall three years after the Next Payment Date for the relevant Lease. The Next Payment Date was 25 March 2016 or such later date as Contractual Rent was first payable after the creditors' meeting under the relevant Lease.
When the Rent Concession Period was over, the rent payable to Category 2 Landlords was to be restricted as follows:
...To continue reading
Request your trial
-
Richard Heis v Financial Services Compensation Scheme Ltd
...contractual interpretation apply (see, for example, In the matter of SHB Realisations Limited (formerly BHS Limited) (in liquidation) [2018] EWHC 402 (Ch) especially at [28], and the cases there cited). 44 These principles, which were not a matter of contention, have recently been revisited......
-
Retail CVAs – update for landlords
...including the recent decision in Wright and another (Liquidators of SHB Realisations Ltd) v The Prudential Assurance Company Ltd [2018] EWHC 402 (CH) which is commented on below: Case Facts BHS Limited (later renamed SHB Limited) (“BHS”) agreed a CVA with its creditors and members in March ......
-
BHS To Repay Rental Discounts Says High Court
...and another (as joint liquidators of SHB Realisations Ltd (formerly BHS Ltd) (in liquidation)) v Prudential Assurance Company Ltd 2018 EWHC 402 (Ch) Speed LEGAL UPDATE: The High Court has said that BHS cannot challenge the terms of its own company voluntary arrangement (CVA) as unenforceabl......
-
BHS CVA: Landlords Win On Penalties
...of its administration, they were payable in full as expenses of the administration. In SHB Realisations Limited in liquidation [2018] EWHC 402 (Ch) the liquidators sought directions from the Were the additional sums payable at all? The penalty issue The court was required to consider whethe......
-
Recovering Rent After A CVA
...(and another) (as joint liquidators of SHB Realisations Ltd (formerly BHS Ltd) (in liquidation)) v. Prudential Assurance Company Ltd, [2018] EWHC 402 (Ch) The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your ......
-
Revisiting the Precedential Status of Crown Court Decisions
...10) 409.Sed quaere Bristol & West Building Society v Trustee of the Property of Back [1998] 1 BCLC 485, 488; In re SHB RealisationsLtd [2018] EWHC 402 (Ch); [2018] Bus LR 1173, 21. [2007] EWCA Civ 499; [2008] Ch 26.22. Ibid [92]–[95]. This was questioned in Morgan (n 1) but since then the S......