The CVA deal that saved Debenhams from administration was challenged in the High Court last week casting shadows again over the retailer’s future.
Whilst the outcome of the challenge is still awaited, if the challenge is successful it has been reported that Debenhams will likely enter administration. If that happens unsecured creditors could receive an additional £100 to £200 million.
However, and perhaps of more significance (to landlords at least) is whether the judgment will clarify whether a CVA can compromise a landlord’s proprietary rights, in particular the right to forfeit.
A point which has so far been untested in the Courts.
Evolution of the CVA and effect on landlords
In the last few years, CVAs have become increasingly more sophisticated in the way in which a landlord’s claim and the terms of leases are compromised as part of the CVA.
The terms of a CVA can effect a landlord in a number of ways. From changing rent payments from quarterly to monthly, introducing the ability to terminate the lease prematurely, proposing turnover rents, changes to break clauses and restricting the ability to forfeit.
The effect of approval means that a CVA binds unsecured creditors, whether they have voted in favour or not, and could therefore prevent a landlord from exercising rights which would otherwise exist under the lease if they have been compromised by the CVA, such as the right to forfeit.
There are a number of grounds upon which the Debenhams CVA has been challenged, one of which is whether a CVA is capable of affecting a landlord’s proprietary rights.
The judgment is expected shortly, but the hearing of the application to expedite the hearing gives some insight as to the points which the Court has been asked to consider – see further below.
The judge recognised at the hearing of the application to expedite, that the points of challenge have “potential significance for a large number of other CVAs, both past and future.”
It will be a decision on a point that has been a matter of debate for sometime.
Background to the Debenhams CVA challenge
The Debenhams CVA was agreed at a meeting of creditors on 9 May 2019 – overwhelming so.
Those principally affected by the terms were the claims of landlords (to varying degrees), local authorities in relation to rates and other property creditors. The majority of unsecured creditors, trade creditors and financial creditors were unaffected by the CVA.
The applicants who have sought to challenge the CVA are classed as category 4 and 5 landlords under the CVA. This means their leases to Debenhams will be subject to rent reductions, restrictions on the right to forfeit and in some cases a premature termination next year.
The applicants have challenged the CVA on nine grounds including lack of disclosure in the CVA documents, that the CVA is not capable of affecting the landlords’ proprietary rights (in particular the right to forfeit) and that the security granted as part of previous refinancing are voidable preferences.
Why has the hearing been fast tracked?
The expedition application was based on an attempt to have the CVA avoided by the 29 September 2019. The reason for this was because in March this year the Debenhams Group undertook a refinancing exercise, and as part of that exercise Debenhams granted security in respect of over £200 million previously unsecured debt lent by various lenders.
If the challenge to the CVA succeeds and Debenhams enters administration it is arguable that this grant of security could be challenged as a preference under the Insolvency Act 1986. If the preference challenge is then successful, this could move circa £200 million of assets into the pot for unsecured creditors.
However, such a challenge is time restricted and must be made within an administration which has an effective commencement date of no later than 6 months from the grant of the security, being 29 September 2019.
On 22 July 2019 the expedition application was granted and the trial of the challenge to the CVA was heard in the High Court last week with the intention that judgment be delivered before the critical cut-off date of 29 September.
Whatever the judgment brings it is likely to impact how landlord claims are dealt with in CVAs in the future. We will confirm the outcome as soon as the judgment is available.
On a different note, and a reminder to practitioners.
The Court was “far from” impressed that the landlords’ challenge was made on the last day of the challenge period – being 28 days from the date the Chairman’s report is filed at Court. Commenting that the landlords were close to “disqualifying themselves” from the application by reason of the delay to expedite – a curt reminder not to delay.