The landlords of six Debenhams stores in England failed in its attempt to challenge the company’s CVA in a significant victory for the CVA model. The CVA for the struggling retail outlet was approved in May 2019 by a majority of its creditors and voting landlords.
The landlords were backed to challenge the CVA by Sports Direct, following attempts by Mike Ashley to take control of Debenhams before the CVA was entered into. Of course
What is a CVA?
A Company Voluntary Arrangement is an insolvency procedure contained with Part 1 of the Insolvency Act 1986. The CVA provides a lifeline for potentially insolvent companies to stay afloat by allowing the company to enter into a binding agreement with unsecured creditors to enable a rescheduling or reducing of the company’s debts, among other things.
Grounds for challenge of the Debenhams CVA
The five grounds of challenge which Justice Norris was asked to address were:-
- The Applicants are not "creditors" for future rent within the scope of section 1 of the 1986 Act.
- A CVA cannot operate to reduce rent payable under leases, because it is automatically unfairly prejudicial to do so, or because there is no jurisdiction to do so.
- The right of forfeiture is a proprietary right that cannot be altered by a CVA.
- The Applicants are treated less favourably than other unsecured creditors without any proper justification.
- The CVA fails to comply with the content requirement of Insolvency Rules 2016 - 2.3(1).
Mr Justice Norris rejected the challenge on all but one of the grounds, that being ground three (3) in relation to the landlords’ proprietary rights of forfeiture. The court ruled that the CVA be deemed modified to delete the offending forfeiture provisions and declared that it otherwise remained valid and enforceable.
Interestingly, Mr Justice Norris also commented that it was entirely plausible that Sports Direct was trying to disrupt Debenhams in order to acquire the business at a competitive price or eliminate them as competition but “that did not mean the applicants had no legitimate interest in pursuing” the case.
Final thoughts
With the landlords challenge now swept aside, it’s expected that Debenhams will proceed with its plan to close a significant number of stores in the New Year with a rent reduction on many other shops.
Whilst job losses are inevitable and some landlords will undoubtedly lose out, the hope is that the CVA will help Debenhams re-shape its business and allow for its survival.
In any event, the case is a significant milestone in cementing CVA’s as a valid alternative to administration or liquidation for company’s which find themselves in an insolvency situation.
