Discovery (Northampton) Ltd v Debenhams Retail Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Norris |
| Judgment Date | 19 September 2019 |
| Neutral Citation | [2019] EWHC 2441 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CR-2019-002843 |
| Date | 19 September 2019 |
[2019] EWHC 2441 (Ch)
Mr Justice Norris
Case No: CR-2019-002843
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND & WALES
INSOLVENCY AND COMPANIES LIST (ChD)
Royal Courts of Justice
Rolls Building, Fetter Lane,
London, EC4A 1NL
Daniel Bayfield QC and Ryan Perkins (instructed by Shoosmiths LLP) for the Applicants
Tom Smith QC, Richard Fisher and Madeleine Jones (instructed by Freshfields Bruckhaus Deringer LLP) for the First Respondent
Jeremy Goldring QC and Andrew Shaw (instructed by Travers Smith LLP) for the Second and Third Respondents
Martin Pascoe QC and Matthew Abraham (instructed by Baker & McKenzie) for the Fourth Respondent
Judicial Assistant: Alex Cooper
Hearing dates: 2 – 6 September 2019
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
This case requires (on an expedited basis) a consideration of the currently evolving standard model “retail CVA”. I am grateful to Counsel for clear written and oral submissions completed within a tight timetable.
The Applicants are landlords who seek to challenge under section 6(1) of the Insolvency Act 1986 (the “Act”) (the “Application”) the company voluntary arrangement (“CVA”) entered into by the First Respondent, Debenhams Retail Limited (the “Company”).
The Company is one of the largest retailers in the UK and is a well-known name on the High Street. The Second and Third Respondents were the joint nominees of the CVA and are now the joint supervisors of the CVA (the “Supervisors”). The Fourth Respondent is a security trustee acting on behalf of certain financial creditors of the Company (the “Financial Creditors”), who have also been the beneficial owners of the Company since 9 April 2019.
The Applicants participated in a “sale-and-leaseback” transaction in 2010 as part of which they granted shop leases to the Company in a familiar “institutional” form. These leases all have thirty-year terms with automatically escalating rents for the first ten years of the term and thereafter the rent being reviewed on an “upwards-only” basis at five-yearly intervals.
Until 22 July 2019 Sportsdirect.com Retail Limited and Sports Direct International Plc (“Sports Direct”), companies under the control of Mr Ashley, were co-applicants. By a consent order dated 22 July 2019 Sports Direct were removed as co-applicants because they had been paid in full under the CVA, and thus did not have a sufficient interest to challenge the CVA. Despite being removed from the proceedings and being unaffected by the CVA, Sports Direct have agreed with the Applicants that Sports Direct will pay the Applicants' costs of maintaining the challenge and will indemnify the Applicants for any adverse costs order in these proceedings. According to the evidence of the Applicants' witness Mr Rose, Sports Direct indicated at the time of granting this indemnity that if the CVA is revoked in consequence of the Applicants' challenge and Company then enters into administration, and if Sports Direct purchases its assets or some of them out of administration, then Sports Direct would pay rent to the Applicants at a higher rate than the Applicants stand to receive under the CVA.
Mr Smith QC suggests that Sports Direct is not giving away its shareholders' money to the Applicants under these arrangements out of pure benevolence, but is doing so as part of a strategic plan to acquire Debenhams, perhaps with a view to eliminating it as a competitor to House of Fraser (a group already within the Sports Direct portfolio as a result of a purchase out of administration) or perhaps with a view to undertaking its own restructuring of Debenhams (as the terms of the “gentlemen's agreement” with the Applicant suggest). I am alive to the commercial context: but the legal challenges which Sports Direct is funding the Applicants to raise must be addressed as such. (I might also note in passing that the Financial Creditors include purchasers of distressed debt who pursue a “loan-to-own” strategy: and they too form part of the commercial context).
CVAs: a brief background
CVAs were introduced in the Act on the recommendations of Sir Kenneth Corks' Report of the Review Committee on Insolvency Law and Practice (1982) (Cmnd 8558) (the “Cork Report”). The Cork Report reviewed the statutory provisions governing schemes of arrangement which were then in existence under sections 206, 287 and 306 of the Companies Act 1948, and are now covered by Part 26 of the Companies Act 2006; and it concluded that these provisions were too cumbersome and complex to protect creditors of insolvent companies effectively. The Cork Report recommended that a new procedure should be created to give companies a more convenient way of restructuring their debts without the expense and complexity of a scheme of arrangement.
One of the defining features of the new CVA process is flexibility. In Inland Revenue Commissioners v The Wimbledon Football Club Limited [2004] EWCA Civ 655. Neuberger LJ said at [52]:
“52. ….Paragraph 364(2) of the Cork Report said this about the proposed voluntary arrangement system:
“ The proposed system has far more flexibility than is available in a creditors' voluntary winding up with regard to the type of proposal capable of being submitted to and accepted by the creditors or some of them. Unless such flexibility exists, the advantages accruing to the creditors from the provisions of third party monies or from any after-acquired property of the debtor will be lost.”
53. Two important points emerge from that brief passage, and, indeed, from the provisions of Part I of the 1986 Act, when read in the context of that Act as a whole. First, the CVA regime is intended to be an additional, and particularly flexible, option in the case of corporate insolvency, in addition to liquidation, administration and administrative receivership. Secondly, a particular feature of a CVA is that any proposal can include, or be based on, monies or other assets belonging to persons other than the company concerned — reflected in Rules 1.3(2)(b) and 1.12(3).”
CVAs provide a contractual mechanism through which a company can restructure its debts and liabilities, allowing it to continue trading for the benefit of the creditors as a whole. They facilitate compromises or variations of contractual rights or other obligations, whereas other insolvency regimes (in a broad sense) suspend enforcement of existing rights and obligations and substitute for them rights to participate in the collective insolvency process.
CVAs take effect under section 1 of the Act. Section 1(1) of the Act provides that:
“The directors of a company (other than one which is in administration or being wound up) may make a proposal under this Part to the company and to its creditors for a composition in satisfaction of its debts or a scheme of arrangement of its affair (from here on referred to, in either case, as a “voluntary arrangement”).”
Once made, the proposal must be approved by at least 75% of the company's creditors at a meeting of the company and its creditors (sections 3, 4 and 4A of the Act, rule 15.34 of the Insolvency Rules 2016). Once approved, the CVA is binding upon all creditors of the company who received, or were entitled to receive, notice of that meeting (section 5 of the Act). A single meeting of creditors is a key element.
Section 6 of the Act provides for applications to be made to the Court to challenge a CVA. Section 6(1) of the Act provides as follows:
“Subject to this section, an application to the court may be made, by any of the persons specified below, on one or both of the following grounds, namely—”
(a) that a voluntary arrangement which has effect under section 4A unfairly prejudices the interests of a creditor, member or contributory of the company;
(b) that there has been some material irregularity at or in relation to the meeting of the company, or in relation to the relevant qualifying decision procedure.”
The authorities identify two useful heuristics for assessing whether a CVA is “unfairly prejudicial” under section 6(1)(a). The first is commonly called “the vertical comparator”. It compares the projected outcome of the CVA with the projected outcome of a realistically available alternative process, and sets a “lower bound” below which a CVA cannot go: see Re T&N Ltd [2005] 2 BCLC 488 at [82] per David Richards J and Prudential Assurance Co v PRG Powerhouse Ltd [2007] BCC 500 at [75]–[81] per Etherton J. The second is commonly called “the horizontal comparator”. It compares the treatment of creditors under the CVA inter se. Whilst there is no prohibition on differential treatment, any differential treatment must be justified; see Powerhouse at [88]–[90].
These comparators are not to be treated as a statutory test; it is necessary to consider the particular facts of each case when deciding whether a given CVA is unfair: see Powerhouse at [74]–[75].
The Debenham's CVA
The Company's directors proposed the CVA in order to address what they had identified as unsustainable property costs associated with certain stores, by compromising future liabilities for rent and business rates. CVAs of this type have become common in recent years as a way for retail and casual dining companies to deal with burdensome leases. Since April 2009, there have been approximately 40 CVAs of this...
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