Mourant & Co Trustees Ltd & Anor v Sixty UK Ltd & Ors

A company voluntary arrangement may restrict a creditor’s enforcement of a third-party guarantee, but the arrangement must not unfairly prejudice that creditor. Fairness requires both a vertical comparison with the creditor’s position in a liquidation and a horizontal comparison with the treatment of other creditors. A guaranteed landlord should not ordinarily be compelled to surrender valuable, enforceable guarantees for compensation based on uncertain assumptions, particularly where the guarantor is solvent. Differential treatment requires sufficient justification. Administrators must act independently, in good faith and objectively when proposing a CVA. They must not allow one creditor or connected group to dictate terms which prejudice another class. A CVA structured to release guarantees while paying unaffected or connected creditors in full may be unfairly prejudicial.

The applicants were landlords of two retail units occupied by Sixty UK Ltd. The company’s obligations were guaranteed by its Italian parent, Sixty SpA. After Sixty entered administration, its administrators proposed and obtained approval of a CVA under which the applicants would receive £300,000 and release the guarantees, while most other creditors would be paid in full.

The applicants applied under section 6(1) of the Insolvency Act 1986 to revoke the CVA for unfair prejudice and material irregularity. The respondents did not participate in the substantive hearing. The central issues were whether the guarantee release and compensation were unfairly prejudicial, whether the applicants were treated unfairly compared with other creditors, and whether the administrators had acted properly.

1. The application succeeded. The CVA was fatally flawed and was set aside under section 6(1) of the Insolvency Act 1986.

2. A CVA can, in principle, release or restrict enforcement of a third-party guarantee where payment by the guarantor would create rights of recourse against the company. The principle established in Prudential Assurance Co Ltd v P R G Powerhouse Ltd [2007] EWHC 1002 (Ch) was applicable. It did not, however, make every such arrangement fair.

3. Fairness required a vertical comparison between the applicants’ position under the CVA and their position in a liquidation, together with a horizontal comparison between their treatment and that of other creditors. In a liquidation the applicants would retain enforceable guarantees and could require the guarantor to take equivalent leases after disclaimer. Those rights had substantial commercial value and were not reflected in the CVA.

4. It was unfair in principle to compel the applicants to exchange valuable guarantees for a fixed payment based on uncertain assumptions about re-letting the premises, especially when the guarantor was a substantial and apparently solvent company. The £300,000 figure was also objectively unjustified. The available expert and valuation evidence indicated that a fair figure was approximately £1 million or more.

5. The horizontal comparison also established unfair prejudice. The CVA compromised the claims of landlords of closed stores while leaving associated-company debts substantially unaffected and leaving the Trafford Centre landlord with the benefit of rights against Muji, whose position was similar to that of a guarantor. No sufficient justification existed for the differential treatment.

6. Administrators must maintain an independent stance, act in good faith and propose a CVA only if satisfied that it will not unfairly prejudice creditors. The administrators had allowed Sixty SpA to dictate the critical offer and had misrepresented the basis of the valuation. The judge directed that the judgment be sent to the relevant professional bodies because there was a prima facie case of misconduct.

First-instance decision. The judgment does not state any subsequent appellate history.