Prudential Assurance Company Ltd & Ors v PRG Powerhouse Ltd. & Ors

A company voluntary arrangement may regulate creditors’ conduct towards a third-party guarantor where the restriction protects the company’s own interests. It cannot, merely through its statutory binding effect, directly release the guarantor’s separate contractual liability. Unfair prejudice under the Insolvency Act 1986 requires consideration of all the circumstances known when the arrangement was approved, including comparisons with winding up and the treatment of other creditors. A CVA is unfairly prejudicial where it removes valuable guarantee rights, attributes them no value, and uses the votes of creditors who lose nothing to impose that result.

Creditors of PRG Powerhouse Ltd challenged a company voluntary arrangement approved by Powerhouse’s creditors. The arrangement provided a fund for creditors connected with stores that had closed, while purporting to release, or prevent enforcement of, parent-company guarantees given by PRG to landlords.

The preliminary issues were whether the CVA released or otherwise affected PRG’s guarantee liabilities, and whether that treatment unfairly prejudiced the landlord creditors under the Insolvency Act 1986.

1. Direct effect on guarantees. Approval under section 5(2) of the Insolvency Act 1986 creates a hypothetical bilateral agreement between each creditor, in the capacity of creditor of the company, and the company. It does not itself bind a third-party guarantor or directly alter the guarantor’s separate contractual obligations. Clause 3.12 therefore could not directly release PRG’s liabilities under the guarantees.
2. Restriction on enforcement. A CVA may require creditors not to enforce a third-party obligation where that restriction forms part of a scheme of arrangement of the company’s affairs and protects the company from a resulting recourse claim. Clause 3.14 was enforceable by Powerhouse as an obligation of the guaranteed landlords to treat the guarantees as released, necessarily preventing proceedings against PRG. Clause 3.15 added nothing because the guarantee liabilities had not been directly compromised or released. Clause 3.13 was consequential upon clause 3.12 and did not remove PRG’s recourse rights where the assumed basis of clause 3.12 was absent.
3. Unfair prejudice. Prejudice is assessed by comparing the creditor’s position before and after the CVA, including present and future rights. There is no single universal test for unfairness. The court must consider all the circumstances, including the available alternatives and the practical consequences of confirming or rejecting the arrangement.
4. Relevant comparisons include winding up, the treatment of other creditors or creditor groups and, with caution, a formal scheme under section 425 of the Companies Act 1985. Differential treatment may be justified, for example to preserve trading, but it is only a factor and does not automatically establish unfair prejudice. The court should not speculate about a better arrangement without evidence that one was available.
5. The guarantees had real value when the CVA was approved. Their removal also deprived the landlords of negotiating leverage. The CVA paid guaranteed and non-guaranteed closed-premises landlords the same dividend, placed no value on the guarantees and paid other creditors in full. The guaranteed landlords would have retained valuable rights on a winding up and would have formed a separate class capable of blocking a scheme. The CVA therefore unfairly prejudiced them under section 6(1)(a).