Vol 7 (2010) - Issue 6

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Mourant & Co Trustees Limited & another v Sixty UK Ltd (in liquidation) & others: Release of Parent Company Guarantees by Way of Company Voluntary Arrangement

The judgment of Henderson J. in Mourant & Co Trustees Limited & another v Sixty UK Ltd (in liquidation) & others ('Mourant') is a further consideration of the issues surrounding the use of a company voluntary arrangement to release the claims of a company’s landlord under third party guarantees.

Introduction
The English law company voluntary arrangement ('CVA') procedure is set out in Part I of the Insolvency Act 1986 (the 'Insolvency Act'). A CVA may be proposed by directors, an administrator or a liquidator in relation to a company and its creditors in order to achieve a 'composition in satisfaction of its debts or a scheme of arrangement of its affairs'. A CVA proposal requires approval of a simple majority of a company's members and seventy-five per cent. in value of the company's creditors present and voting (provided that fifty per cent. or more of creditors voting in favour are not connected with the company). Even if a company's members do not approve the CVA proposals, the CVA may still be implemented if the requisite majority of creditors so approve.
One issue which has arisen in the context of CVA's is the extent to which this procedure may be used to effect the release of a creditor's rights under parent company guarantees. This has arisen in particular in relation to the rights of landlords under guarantees provided by a parent company in respect of the lease obligations of its subsidiary. This article considers the issues arising on any such CVA proposal and the extent to which the judgment of Henderson J in Mourant provides further guidance on the availability of this course of action.

Powerhouse

The case of Prudential Assurance Co Ltd and Others v PRG Powerhouse Limited and Others ('Powerhouse') appeared to endorse the possibility that a release of parent company guarantee obligations could be effected in connection with a CVA, even if the guarantor is not the company proposing the CVA, nor a party to the CVA. However, Etherton J. emphasised that the fundamental issue to be considered in such circumstances is whether the proposed arrangement was unfairly prejudicial to the interests of the landlords whose claims were being compromised, i.e. while any CVA which puts a creditor in a less advantageous position than prior to the CVA will be prejudicial, the key question is whether such prejudice is in fact 'unfair'. In Powerhouse, the landlords affected by the CVA were not adequately compensated for the loss of their rights against the guarantor and so the CVA unfairly prejudiced their rights.