Discovery (Northampton) Ltd & Ors v Debenhams Retail Ltd & Ors

A company voluntary arrangement may compromise or vary existing contractual obligations, including future rent under subsisting leases. Future rent is a pecuniary liability, although it may not be presently provable, and the landlord is a creditor for CVA purposes.

A rent reduction is not automatically unfair. Fairness must be assessed in the round, with the landlord receiving at least market value and the modification limited to what is necessary. Differential treatment may be justified by business-continuity considerations.

A CVA may modify the covenant whose breach permits forfeiture, but it cannot alter the landlord’s proprietary right of re-entry itself. Provisions restraining forfeiture for CVA-related events were therefore outside the statutory jurisdiction.

The applicants were landlords of stores occupied by Debenhams Retail Ltd. They challenged the company’s retail CVA under section 6 of the Insolvency Act 1986. The CVA reduced rent for certain leases, varied lease termination rights, restricted forfeiture for CVA-related events, and treated landlords differently from other unsecured creditors.

The applicants argued that future rent was outside the CVA jurisdiction, that rent reductions and new obligations were unfair or impermissible, that forfeiture rights were proprietary rights which could not be altered, and that the proposal contained material irregularities. The central issues were the scope of the CVA jurisdiction, the fairness of the differential treatment, and the consequences of the forfeiture restraints.

1. Future rent and jurisdiction. The term “creditor” in Part 1 of the Insolvency Act 1986 has a wide meaning. “Debt” includes a pecuniary liability which may become payable in the future or on a contingency. A landlord with an existing lease therefore has a contingent or other pecuniary liability in respect of future rent and is a creditor for CVA purposes. Future rent may be included in a CVA even though it is not presently provable in an administration or liquidation. Ground 1 failed.
2. Rent reductions and fairness. The statutory concept of unfair prejudice is not replaced by the vertical or horizontal comparator. Those comparators are useful heuristics only. A CVA may vary existing lease obligations, including rent, because a scheme of arrangement of the company’s affairs is intended to permit such variations. Fairness must be assessed in the round. The landlord should receive at least market value, and the variation should go no further than necessary to achieve the CVA’s purpose. The reduced rents and exit rights did not make this CVA unfair. Ground 2 failed.
3. Proprietary right of re-entry. A right of re-entry is a legal interest in land annexed to the landlord’s reversion. It is not merely security for payment of rent. Applying the reasoning in Re Lehman Brothers International [2010] Bus LR 489, a CVA cannot vary the landlord’s right to its own property. It may modify pecuniary covenants, so that forfeiture operates by reference to the covenant as modified, but it cannot directly restrain forfeiture for the CVA or a CVA-related event. The forfeiture restraint provisions were outside the jurisdiction. Ground 3 succeeded.
4. Differential treatment. Treating landlords differently from suppliers was justified by the need to preserve business continuity. Suppliers provided goods and services on an order-by-order basis, whereas landlords supplied long-term accommodation which was said to be over-rented. The horizontal comparator did not require identical treatment. Ground 4 failed.
5. Material irregularity. The content requirements in IR2.3 focus on substance rather than prescribed wording. An irregularity is material only if, objectively, there was a substantial chance that it would have made a material difference to creditors’ assessment of the CVA. The disclosure concerning possible claims under sections 239 and 245 was sufficient in substance, and any omission would not have been material. Ground 5 failed.
6. Orders. The provisions in clauses 11.14, 12.14 and 13.14 restraining forfeiture were declared to be beyond the jurisdiction conferred by Part 1 of the Insolvency Act 1986. They were directed to be deleted under the CVA’s severance clause. The CVA as modified remained valid and enforceable. Permission was given to apply to vary the order. Costs were adjourned generally.

Not an appeal. The judgment records the first-instance determination of the applicants’ challenge to the CVA.