Mourant & Co Trustees Ltd v Sixty UK Ltd

This is an application under section 6(1) of the Insolvency Act 1986 to set aside a creditors' decision approving a company voluntary arrangement (CVA). The central legal principles are that (i) a CVA can in principle operate to remove a creditor's contractual rights against a third-party guarantor (the Powerhouse principle), (ii) the court must determine whether any prejudice to a creditor arising from a CVA is "unfair" by reference to all the circumstances, including vertical (liquidation) and horizontal (treatment of other creditors) comparisons, and (iii) administrators proposing a CVA owe duties to act independently and to propose arrangements they regard as fair to creditors.

The court found that the CVA was unfairly prejudicial to the landlords. The proposed £300,000 compensation was materially understated when compared with contemporaneous expert advice and the applicant expert's valuation; the figure was, on the evidence, dictated by the parent guarantor and not founded on objective advice; and guaranteed landlords were treated less favourably than other creditors (including associated companies and the Trafford Centre landlord/Muji). The administrators failed to preserve independence and misrepresented the basis for the compensation. The application therefore succeeded and the CVA was set aside.

Background and parties:

• The applicants are the landlords of two retail units at the Met Quarter, Liverpool. The respondent tenant, Sixty UK Ltd, went into administration and the administrators proposed a CVA which would close four loss-making stores and require certain landlords to release parental guarantees given by Sixty SpA in exchange for fixed compensation. The CVA was approved at a creditors' meeting on 2 April 2009.

Nature of the application and issues:

• The applicants applied under section 6(1) Insolvency Act 1986 seeking revocation of the creditors' decision on grounds that the CVA unfairly prejudiced them and/or involved material irregularity. The principal issues were (i) adequacy and basis of the compensation (£300,000) offered in return for release of Sixty SpA's guarantees and (ii) whether it was unfair to deprive the landlords of third-party guarantees when other creditors were to be paid in full or treated differently (horizontal comparison), as well as the vertical comparison with a liquidation.

Procedural posture:

• The administrators did not participate at the final hearing; the applicants led expert evidence and ran their challenge at first instance before Henderson J. The respondents had earlier disclosed documents after a specific disclosure application and served expert evidence, and correspondence showed negotiation between administrators and Sixty SpA.

Court's reasoning:

• The court accepted the Powerhouse principle that a CVA can in law deprive a creditor of rights against a third-party guarantor but emphasised that such structure demands close scrutiny for unfair prejudice.
• On a vertical comparison, the landlords would have retained enforceable guarantees in a liquidation and those guarantees were of commercial value: Sixty SpA had strong balance sheet indicators and was prima facie enforceable as guarantor.
• On a horizontal comparison, other creditors (including associated companies and the landlord of the Trafford Centre whose position was akin to a guarantor) were treated more favourably, without adequate justification.
• Expert evidence: Colliers' internal valuation (Cartwright) estimated landlord loss materially higher than £300,000; the applicants' expert (Wright) produced a higher figure still and explained assumptions. The court found the administrators had substituted a reduced Appendix C and that the £300,000 figure was dictated by Sixty SpA rather than objective advice.
• Administrators' conduct: the court found failures of independence, misrepresentation in the proposal about the basis of the figure, and a refusal to engage at trial; this conduct was material to the decision to set aside the CVA.

Result and consequence:

• The application succeeded: the CVA was set aside as unfairly prejudicial. The judge directed that the administrators' professional bodies be notified of the prima facie misconduct.

The application under section 6(1) of the Insolvency Act 1986 succeeded and the CVA was set aside. The court held that although a CVA can in principle operate to remove a creditor's rights against a third-party guarantor (the Powerhouse principle), in this case the compensation offered was inadequately founded and dictated by the parent guarantor, the guaranteed landlords were unfairly disadvantaged compared with other creditors, and the administrators failed in their duties of independence and candour. Those factors made the CVA unfairly prejudicial and fatally flawed.