Vol 8 (2011) - Issue 2

Article preview

Company Voluntary Arrangements: Recent Developments

Over the last twelve months there have been a number of notable challenges to the terms of company voluntary arrangements (CVAs). Cases include those brought by creditors testing the time limits within which they must act and applications seeking clarification of the circumstances in which a CVA can remove third party guarantees as considered by the Powerhouse decision in 2007.



Powerhouse applied in Sixty UK but with the opposite outcome: Mourant & Co Trustees Limited and Mourant Property Trustees Limited v Sixty UK Limited (in administration) [2010] EWHC 1890 (Ch)

In September 2008 the fashion retailer Sixty UK Limited, trading as Miss Sixty (‘Sixty UK’) was placed into administration. A creditors’ meeting took place in April 2009 at which CVA proposals made by the administrators were approved. Sixty UK operated out of a number of retail units which it had leased, including two leases with an unexpired term of seven and a half years. Sixty UK’s Italian parent company Sixty SpA (‘Sixty SpA’) had given guarantees over each of the leases (the ‘Leases’).

As a result of financial difficulties, Sixty UK needed to close four of its shops, including both properties subject to the Leases benefiting from the guarantees given by Sixty SpA. Upon such closure, the effect of the CVA terms was to release Sixty SpA from its position as guarantor, leaving the landlords of the two retail units without any of their rights under the guarantees during the remainder of the term of the Leases. The CVA provided for a limited sum to be paid to the landlords of the closed shops, however there was no provision for payment in full. Notably, under the terms of the CVA all external creditors of Sixty UK, with the exception of the landlords, would be paid in full. The CVA terms provided for payment of GBP 300,000 to the landlords for the surrender of the Leases. It was stated in the proposal that this figure had been calculated on the basis of advice given to Sixty UK and in light of assumptions about the landlords’ ability to re-let the premises. The CVA was passed at the creditors’ meeting by the requisite majority of votes from unsecured creditors, all of whom were to be paid in full.

The landlords were alone in voting against the terms of the CVA. The application, which was heard by Mr Justice Henderson, was brought by the landlords under both sections 6(1) (a) and (b) of the Insolvency Act 1986 (‘IA 1986’) on grounds that the CVA unfairly prejudiced their interests and contained material irregularities.

The following five core submissions were made with reference to the argument of unfair prejudice:

(i) the CVA left the landlords in a substantially worse position than on the liquidation of Sixty UK; irrespective of the amount the landlords may have received in dividend payments upon the company’s liquidation, their contractual rights under the guarantees provided by Sixty SpA would have remained in place;

(ii) it was unfair in principle that the CVA should ‘guarantee-strip’ in the way it was seeking to do;

(iii) the estimate of Sixty UK’s liability to the landlords was based upon unrealistic assumptions, including a view taken on the landlords’ ability to re-let the premises in an increasingly difficult market and, in reality, was founded on the maximum figure that Sixty SpA was willing to make available by way of compensation payment for the surrender of the Leases;