Mourant & Company Trustees Ltd v Sixty UK Ltd ((in Administration))

Hearing dates: 6 and 7 July 2010

Mr Justice Henderson:

Introduction

This is an application by the landlords of two retail units at the Met Quarter shopping centre in Liverpool to revoke the decision taken at a creditors’ meeting on 2 April 2009 to approve a company voluntary arrangement (“CVA”) proposed by the administrators of the tenant of the units, Sixty UK Ltd (“Sixty”). The application is made under section 6(1) of the Insolvency Act 1986, which provides (so far as material) that an application may be made by any creditor entitled to vote at the meeting

“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 … of the company;

(b) that there has been some material irregularity at or in relation to either of the meetings [i.e. the meetings of the company and its creditors]”

The administrators of Sixty, Mr Peter Hollis and Mr Nicholas O'Reilly, are licensed insolvency practitioners and partners of Vantis Plc. They were appointed on 29 September 2008, and at an initial creditors’ meeting held on 8 December 2008 they said that they intended to propose a CVA. The proposal was issued on 17 March 2009. It was then approved at the meeting on 2 April, subject to certain modifications proposed by HMRC which have no bearing on this application. The administrators are also the supervisors under the CVA.

The CVA sought to take advantage of the decision of the High Court in the Powerhouse case ( Prudential Assurance Co Ltd v P R G Powerhouse Ltd [2007] EWHC 1002 (Ch), [2007] BCC 500), which had established that a CVA could lawfully be structured in a manner which would deprive a creditor landlord of the benefit of a third party guarantee of the liabilities of the tenant debtor company. In the present case, the liabilities of Sixty as the tenant of the two units were guaranteed by its ultimate Italian parent company, Sixty SpA. The effect of the CVA was to release Sixty SpA from all liability under the guarantees upon payment of a sum of £300,000 to the applicants as landlords of the units. The figure of £300,000 was said in the proposal to represent 100 per cent of Sixty's estimated liability to the landlords on a surrender of the leases, and to be calculated on the basis of advice received and certain specified assumptions. Thus the applicants were ostensibly to receive full compensation on the basis of a notional surrender of the leases, but they were to be deprived of any recourse against Sixty SpA as guarantor during the remainder of the 10 year terms of the leases, which had been granted in 2006 and still had approximately seven and a half years to run.

The CVA also provided for two other stores occupied by Sixty to close, and for their landlords to receive 21 per cent of Sixty's estimated liability to them under the relevant leases. Those leases were said in the CVA not to have the benefit of any guarantees: hence the much lower level of compensation payable.

All other creditors under the CVA would continue to be paid in full, subject to normal terms and conditions. They also had the benefit, for what it was worth, of an apparent agreement by Sixty SpA to defer repayment of a sum of just under £15 million due to it from Sixty. It was intended that Sixty would continue to operate as a going concern, and with the exception of the landlords of the four closed stores no other external creditors were asked to accept any reduction in, or compromise of, their debts. Unsurprisingly, therefore, a sufficient number of those creditors voted in favour of the proposal to ensure that it was passed by the necessary majority of 75 per cent in value of those present and voting in person or by proxy at the meeting: see rule 1.19(2) of the Insolvency Rules 1986. Indeed, the only creditors present at the meeting who voted against the proposal were the applicants.

The applicants’ challenge to the CVA is advanced on a number of grounds, but centres on (a) the alleged inadequacy of the compensation payment to them of £300,000, and (b) the compulsory deprivation of the benefit of Sixty SpA's guarantees. Reliance is placed on both of the grounds in section 6(1) of the 1986 Act, although with the main emphasis on unfair prejudice. The nub of the applicants’ case is that they have been unfairly treated in comparison with the generality of the external unsecured creditors, all of whom are to be paid in full. The applicants say that they are being asked to accept compensation which is much too low, and that far from being based on advice, as represented in the proposal, it actually amounts to less than one third of the sum recommended in the only advice on the question which the respondents have disclosed. Furthermore, the applicants say that there can be no justification for requiring them to give up the valuable benefit of the guarantees in precisely the situation they were designed to meet, namely the inability of the tenant to honour its obligations under the leases. Nor is there any suggestion that Sixty SpA would have been unable to meet its liabilities as guarantor. On the contrary, submit the applicants, the documentary evidence gives rise to the clear inference that the sums offered to them in the CVA were dictated by Sixty SpA, and represented the most that the parent company was willing to make available for the purpose.

Apart from their complaint of unfair treatment in relation to the generality of creditors who are to be paid in full, the applicants say they have also been unfairly treated in comparison with at least one creditor with claims in relation to one of the other closed stores. That creditor is the original tenant of the store at the Trafford Centre in Manchester, Ryohin Keikaku Europe Ltd trading as Muji (“Muji”). Muji assigned its lease to Sixty, but remained liable to the landlord for the rent during the remainder of the term. If and when called upon to pay the rent, Muji would then have a right of indemnity against Sixty. The applicants’ point is that no steps were taken in the CVA to curtail or remove Muji's right of indemnity in such circumstances, with the result that Muji would be able to prove for the amounts it was called on to pay, and under the CVA it could then expect to recover those amounts in full. Indeed, this is what subsequently happened, and although the supervisors rejected Muji's proof, Muji commenced proceedings in the Bristol district registry of the High Court which vindicated its right to prove for the full amount of its debt in the CVA. Muji is, in effect, a guarantor, but the landlord of the Trafford Centre unit has not been forced to give up its guarantee in the same way as the applicants have.

Apart from the documents disclosed by the respondents, the applicants rely on two expert reports prepared by Mr Eric Russell Wright, FRICS, who has been in practice in Liverpool since 1970 specialising in retail property. The applicants’ only witness of fact is Mrs Caroline Barry Howard, a partner in their solicitors Davies Arnold Cooper LLP. In her witness statement in support of the application, dated 29 April 2009, she sets out the background and exhibits the relevant documents which were then in the applicants’ possession.

The respondents are Sixty and the two administrators. They have throughout been represented by solicitors, McGrigors LLP, and the case proceeded towards trial in the usual way, although an application for specific disclosure was required in order to elicit disclosure of the communications passing between the respondents and Sixty SpA, and the valuation advice which they received, in the period leading up to the proposal for the CVA, and also in relation to the claims made by Muji. The return date of the application for specific disclosure was 2 February 2010, and shortly before that date the respondents provided a list of documents relevant to those issues. On that basis, the application was adjourned generally and the respondents were ordered to pay the applicants’ costs of the application to date.

By way of evidence, the respondents put in an argumentative witness statement by Mr Mark Parkhouse, the partner of McGrigors LLP with conduct of the matter, and an expert report, which expressed the view that the payment of £300,000 to the applicants provided fair compensation for the release of Sixty SpA's guarantees. On 30 June 2009 the two experts prepared a brief joint statement, recording the areas of agreement and disagreement between them.

The application was set down for trial last October, with a time estimate of three days, and on 2 November 2009 the parties were informed that the hearing would take place in a three day window from 5 July 2010.

Shortly before the hearing, however, matters took an unexpected turn. On 28 June McGrigors declined the usual offer to be supplied with a copy of the trial bundle, and on 1 July they informed the applicants’ solicitors that the respondents did not intend to attend or be represented at the trial. They said that there was no point in continuing with a substantive hearing of the application, because the CVA was either going to be modified on terms which would remove the features which gave rise to the application, or alternatively it would fail. In those...