Wright & Anor (Liquidators of SHB Realisations Ltd) v The Prudential Assurance Company Ltd

A company voluntary arrangement (“CVA”) has contractual effect, but its statutory hypothesis does not make ordinary contractual doctrines applicable without qualification. The law on penalties does not apply to a CVA created and binding under the Insolvency Act 1986, because there is no negotiated contract or oppression of the company. In any event, a provision restoring creditors to their pre-CVA contractual position when the CVA fails is not a penalty where it forms part of the single concessionary transaction.

Such a provision does not breach the pari passu principle. Where office-holders retain premises for the benefit of an administration, the administration expense includes all sums attributable to the use of the premises during that period, including sums retrospectively restored by the CVA’s termination provisions.

The joint liquidators of SHB Realisations Ltd sought directions under section 112 of the Insolvency Act 1986 concerning rent claims made by the company’s landlord, Prudential, under two leases.

The company had entered into a CVA which reduced rent payable to certain landlords. The CVA later terminated under its terms. Clause 25.9 provided that the compromises and releases were deemed never to have happened, restoring the landlords’ claims as if the CVA had not been approved.

The court had to determine whether the restored claims were penalties, contravened the pari passu principle, or were payable as administration expenses for the period in which administrators occupied and traded from the premises.

1. Penalty issue. The application was rejected. A CVA takes contractual effect through the statutory hypothesis in section 5(2)(a) and (b) of the Insolvency Act 1986. That requires contractual analysis for construction and related questions, but does not make every ordinary contractual doctrine applicable. The penalty doctrine, which addresses oppression arising from negotiated contractual obligations, cannot sensibly apply to a statutory arrangement binding the company, members and creditors without an actual negotiation or contract between them (paras 27–30).
2. Alternatively, clause 25.9 was not a penalty. The CVA was a single transaction. The reduced rent was granted on the condition that, if the CVA failed and was terminated, the concession would be unwound. Restoring the landlords to their pre-CVA position protected a legitimate commercial interest and was not extravagant, exorbitant or unconscionable. The reasoning in Vivienne Westwood Ltd v Conduit Street Development Ltd was distinguishable because the higher rent there had never previously been payable (paras 31–39).
3. Pari passu issue. Clause 25.9 did not increase the landlords’ claims upon insolvency. It ended a temporary concession which was expressly conditional on the CVA remaining in force and restored the original contractual claims. The liquidators could not accept clauses 9 and 17 while rejecting clause 25.9 (paras 40–42).
4. Administration expense issue. Rent accruing for a period of beneficial possession includes all sums payable for the premises in respect of that period, even if contingent or not yet ascertained. This follows the principle in Jervis v Pillar Denton Ltd and related authorities. Clause 25.9 restored the landlords’ claims under the leases with retrospective effect. The additional rent attributable to the period of the administrators’ possession was therefore payable as an administration expense (paras 43–47).
5. Declarations were made accordingly. The additional sums falling due upon termination of the CVA were payable as administration expenses for the period during which the original administrators possessed the premises for the purposes of the administration. The parties had liberty to apply concerning any dispute over quantum (para 48).