Vol 4 (2007) - Issue 4

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Prudential Assurance Co Ltd v PRG Powerhouse Ltd [2007] EWHC 1002 (Ch)

In Prudential Assurance Co Ltd v PRG Powerhouse Ltd [2007] EWHC 1002 (Ch), the issue of differential treatment of creditors within a company voluntary arrangement (‘CVA’) again came before the Court.

Facts

The company which proposed the CVA, PRG Power-house Limited (‘Powerhouse’) was the subsidiary of PRG Group Limited (‘the Parent’), registered in New Zealand and listed on its stock exchange.
Powerhouse was said to be the UK’s third largest electrical retailer, trading from a large number of retail outlets. Powerhouse got into financial difficulties. Pow-erhouse decided to close 35 underperforming stores in the hope that it would trade profitably thereafter. The 35 underperforming stores (‘Closed Premises’) were shut on 1 February 2006. Powerhouse continued to trade from the remainder. Powerhouse, with the assist¬ance of the Parent, proposed a CVA to its creditors.
Under the CVA, the creditors were effectively split into two categories.
First, there were the creditors (the ‘Scheme Fund Creditors’) whose debts related to the 35 Closed Premises. The Scheme Fund Creditors consisted of employees, landlords, local authorities and others who were creditors in respect of the Closed Premises. It appears that substantially all of the debts owing to the Scheme Fund Creditors which were due and pay¬able as at about the date of the CVA were paid in full by Powerhouse. The landlords were paid rent and rates in full up to the March 2006 quarter day. Employees were paid arrears of wages, commission and holiday pay up to 1 February 2006 (when the Closed Premises closed) and also an amount equivalent to their statutory re-dundancy entitlement. All suppliers’ invoices which had fallen due for payment by the date of the CVA were paid in full. Under the CVA, the Parent was to pay into the CVA a sum of around GBP1.5 million, anticipated
to be sufficient to pay the Scheme Fund Creditors a dividend of about 28 pence in the pound on their li-abilities. The CVA contained a mechanism to value the claims of the Scheme Fund Creditors. The claims of the Scheme Fund Creditors against Powerhouse were to be released.
Secondly, there were all other creditors of the Com¬pany. Their rights and obligations were to be unaffected by the CVA. The intention was that debts owing to them would be paid in full by Powerhouse in the usual way, as its business continued from the remaining stores.
According to the directors of Powerhouse, if Power¬house went into liquidation, the Scheme Fund Creditors (indeed all creditors) would receive no dividend at all. The estimated comparative statement of affairs ap¬pended to the CVA showed that on liquidation, there would be a large deficiency as regards secured credi¬tors, whereas if the CVA were approved, there would be the GBP1.5 million (or thereabouts) to pay the an¬ticipated dividend of 28 pence in the pound to Scheme Fund Creditors.

In substance, the purpose of the CVA was to affect future rather than accrued rights – primarily the fu¬ture rights of the landlords of the Closed Premises (‘the Closed Premises Landlords’).
Crucially, at least some of the Closed Premises Landlords (‘the Guaranteed Landlords’) had the ben¬efit of guarantees and/or indemnities from the Parent, securing the obligations of Powerhouse under the leases of the Closed Premises. The CVA provided for the guarantees against the Parent to be treated as released, so the Guaranteed Landlords were to lose the benefit of those guarantees. The valuation provisions in the CVA, which determined the value of the dividend pay¬able to, in particular, Closed Premises Landlords made no provision for the Guaranteed Landlords to receive any larger dividend than those without the benefit of any guarantees. The claims of the Closed Premises Landlords were to be valued as the total of any accrued arrears, plus a sum equal to 8 months’ rent (for leases with a minimum of 5–8 years to run) or 12 months’ rent (those with a minimum of in excess of 12 years).
At the meeting of creditors held on 17 February 2006, the creditors of Powerhouse approved the CVA by the requisite majority.