The COVID-19 pandemic has exacerbated the problems faced by high-street retailers. Store closures during lockdown, changing consumer behaviour and the resultant loss of turnover and profits have caused many businesses to seek to reduce their rent payments. Company Voluntary Arrangements (“CVAs”) have become fashionable tools for trying to secure such rent reductions. In this blog, we consider Judge McDonald’s ruling in Apperley Investments Ltd & Ors v Monsoon Accessorize Ltd (Approved)  IEHC 523 which sheds light on how CVA terms impacting property rights may be enforced on landlords outside the UK.
- What are the upshots of this case for CVA drafting?
Two main points emerge from this decision:
- UK companies proposing a CVA must grant an opportunity to Irish landlord creditors to make representations before votes are cast at the meeting of the creditors. Whether this will have a tangible effect on the behaviour of other creditors remains to be seen, but doing so will limit the ability of Irish landlords to challenge the CVA in the Irish courts or in the UK under s.6 Insolvency Act 1986 (the “IA 1986”).
- A CVA which purports to modify a lease in Ireland will not be permissible because such a mechanism does not exist under Irish law.
- CVAs: A Reminder
A CVA is a tool under the IA 1986 for distressed companies to agree a compromise with their creditors in respect of their debts. Terms typically involve the creditors agreeing to receive only a proportion of the debt owed to them over an agreed period of time.
Once agreed by three quarters or more (in value) of the company’s creditors, the CVA binds all unsecured creditors who were entitled to vote and they are prevented from taking steps to enforce their debts against the company.
Dissenting creditors do not currently have an opportunity to make representations to a court before the CVA vote. It is only after a CVA has been approved by creditors, that a dissenting creditor can bring an application under the IA 1986, for unfair prejudice or material irregularity.
- Case Background
Monsoon Accessorize Ltd (“Monsoon”) is a UK-based fashion retailer operating internationally with a large leasehold portfolio in the UK and Ireland. Monsoon Accessorize Ireland Limited guaranteed the performance of one of the leases by Monsoon.
On 8 July 2019, Monsoon’s creditors approved a CVA which aimed to rationalise leasehold obligations, restore business viability, improve liquidity and enable Monsoon to meet its financial obligations (the “Monsoon CVA”). The terms of the Monsoon CVA purported to reduce significantly (by 65%), the amount of rent payable by Monsoon on leases of stores in Dublin and Cork.
CVAs commenced in England and Wales are recognised in Ireland pursuant to the European Insolvency Regulation (the “EIR”). Important points to note from the EIR are:-
- save as otherwise provided in EIR, the law applicable to insolvency proceedings (and their effect) is that of the Member State in which proceedings were opened (Art 7(1) EIR)
- the law of the Member State where the proceedings are opened, determines the conditions for the opening of proceedings, their conduct, their closure, and other specific matters (Art 7(2) EIR) and
- the effects of insolvency proceedings on a contract concerning immoveable property (such as a lease) are governed solely by the law of the Member State where the property is located (Art 11 EIR).
There are inbuilt legal mechanisms to ensure that the constitutional rights of landlords and tenants are respected. Irish insolvency laws do not permit the variation of lease terms in the way that CVAs can under English law. However, the Monsoon CVA sought to do just this, to the obvious detriment of the landlords of the Monsoon Dublin and Cork premises (the “Monsoon Landlords”).
Consequently, the Monsoon Landlords (who were unsurprisingly opposed to the rent reductions on their properties) claimed that they were not bound by the CVA because it contradicted domestic Irish law which prevents modification of property rights without court intervention.
- Objections by the Monsoon Landlords to the CVA
Separate solicitors for the Monsoon Landlords wrote to the directors of Monsoon at the end of June and early July 2019 stating that the CVA proposal would not be recognised or enforceable in Ireland for the reasons set out above. However, on 8 July 2019, the CVA was approved by the required threshold of Monsoon’s creditors.
On 19 July 2019, the landlords of the Cork premises commenced proceedings in Ireland and on 7 August 2019, the landlord of the Dublin premises did likewise.
- Representations made in the Monsoon case
The Monsoon Landlords sought:
- specific performance by Monsoon of the original leases (in unmodified form) or
- alternatively, a declaration under EIR that the CVA was not entitled to be recognised or enforced in Ireland on the grounds that enforcement would be manifestly contrary to the State’s public policy.
- The Court’s decision
The High Court held that Monsoon Landlords were entitled to full rent on their premises and were not bound by the CVA.
In reaching this conclusion, the Judge considered the exceptions to the general rule under EIR. Below we consider the exemption for immoveable property and the exemption which allows a Member State not to accept an insolvency procedure for public policy reasons.
- Immoveable property (Article 11 EIR)
Counsel for the Monsoon Landlords argued that Art 11 EIR meant that Irish law would have to be applied to the effects of the CVA on landlords in Ireland. Conversely, counsel for Monsoon argued that the territory opening the main insolvency proceedings must be entitled to apply its own (English) law to the effects of the CVA in Ireland.
Judge McDonald was satisfied that the Article 11 exception to the general rules of the EIR applied to the leases such that Irish law should be applied to the effects of the CVA process on the rights of Irish landlords. Since the changes to the leases proposed in the Monsoon CVA could not be achieved under Irish law, the Monsoon Landlords were not bound by the terms of the CVA.
At  of the judgment, Judge McDonald stated:
‘While the court opening main insolvency proceedings will be entitled to exercise jurisdiction, there is no mandate within Article 11 [of the EIR] conferring any power on that court to apply its own law. […] Thus, the effects of insolvency proceedings on a contract falling within Article 11(1) remain governed “solely by the law of the Member State within the territory of which the immoveable property is situated”’.
2.The public policy discussion (Article 33 EIR)
Judge McDonald also held that the Monsoon CVA did not bind the Monsoon Landlords because it was manifestly contrary to Irish public policy and therefore procedurally deficient (Art 33 EIR). This is an exemption usually reserved for exceptional circumstances
A party’s right to be heard before its property rights are interfered with is a fundamental principle of Irish constitutional law. Judge McDonald accepted the argument of the Monsoon Landlords that this opportunity was not given to them in the process which led to the adoption of the CVA. Having already concluded that Irish law was the law to be applied, an opportunity to be heard before the creditors meeting should have been extended to the Monsoon Landlords. While the Monsoon Landlords had the opportunity to attend and make representations at the meeting of creditors, the manner in which the meeting was convened did not allow for a prior opportunity to be heard.
The CVA failed for public policy reasons because ‘there was a fundamental failure to provide an appropriate opportunity to the [Monsoon Landlords] to make representations at the meeting of creditors which was to take a decision which would have such significant effects on their property rights under the Cork and Dublin leases’.
Judge McDonald held that the procedural unfairness which arose in this case could have been avoided had ‘appropriate steps’ been taken in the course of the CVA process.
- Concluding thoughts
Judge McDonald was mindful to say that this was a case of particular procedural unfairness and that he did not expect this decision to have serious repercussions for the enforcement of CVAs in Ireland.
However, his finding will likely encourage a change to the process of adopting CVAs involving Irish landlords. Companies should consider having a more open forum for Irish landlords to raise opposition to the terms of a proposed CVA ahead of a creditors’ meeting. Judge McDonald suggested that the web portal which had been used to bring drafting clarifications to the attention of all creditors could also have been used to allow representations to be made by the Monsoon Landlords.