Discovery (Northampton) Ltd v Debenhams Retail Ltd

The court considered a landlord challenge under section 6(1) of the Insolvency Act 1986 to the company voluntary arrangement (CVA) proposed and approved by Debenhams Retail Limited. The central legal questions were whether (i) claims for future rent under existing leases can fall within the scope of a CVA; (ii) a CVA can lawfully reduce contractual rent or otherwise vary landlords' rights; and (iii) a CVA can abrogate or prevent exercise of a landlord's proprietary right of forfeiture/re-entry. The court held that (a) landlords have a sufficiently wide pecuniary claim such that future rent may be included in a CVA (so there was jurisdiction under section 1(1)); (b) a CVA may vary contractual obligations (including temporary rent reductions) and such variations are not automatically unfair provided fairness is assessed by reference to vertical and horizontal comparators; but (c) a CVA cannot directly extinguish or displace a landlord's proprietary right of forfeiture/re-entry: the provisions in the Debenhams CVA purporting to restrain forfeiture for CVA-related events exceeded the statutory jurisdiction and were therefore severed. The remainder of the CVA was declared valid as modified.

Background and parties

The applicants were six institutional landlords who granted long-term commercial leases to Debenhams Retail Limited (the Company). The Company proposed a retail model CVA to reduce certain landlord obligations and restructure property costs. The landlords challenged the CVA under section 6(1) of the Insolvency Act 1986 on a number of grounds.

Nature of the application

• The landlords sought relief under section 6(1) on grounds that the CVA (i) included claims beyond the statutory jurisdiction (notably future rent), (ii) unfairly prejudiced creditors by reducing contractual rents, (iii) abrogated proprietary rights (forfeiture/re-entry), (iv) treated landlords less favourably than other unsecured creditors without justification, and (v) failed to comply with the content requirements of rule 2.3(1) of the Insolvency Rules 2016 (material irregularity).

Issues framed by the court

• Whether a landlord’s claim for future rent is a pecuniary claim within the scope of a CVA.
• Whether the CVA could lawfully reduce contractual rents and whether such reductions were unfairly prejudicial.
• Whether a CVA could restrain or alter a landlord’s proprietary right of forfeiture/re-entry.
• Whether differential treatment of creditors (horizontal comparator) was justified by commercial necessity.
• Whether omissions in the proposal with respect to potential avoidance claims (notably sections 239 and 245 of the Insolvency Act) amounted to a material irregularity under rule 2.3(1).

Court’s reasoning and findings

• On jurisdiction over future rent: the court adopted the established line of authority and statutory context and concluded that while future rent may not be a presently provable debt it is a pecuniary liability arising from an existing legal relationship and therefore a creditor for CVA purposes. Ground 1 failed.
• On rent reduction and fairness: a CVA can vary existing obligations and temporary rent reductions are not inherently unfair. Fairness must be judged by reference to comparators (vertical and horizontal) and the overall circumstances; the court accepted the company’s evidence that the CVA passed the vertical comparator in the aggregate. Ground 2 failed.
• On forfeiture/re-entry: the right of forfeiture/re-entry is a proprietary right annexed to the reversion; it is not a security interest that a CVA can itself extinguish. The CVA provisions that attempted to restrain forfeiture for CVA-related events went beyond the statutory power under Part 1 and were struck down. Ground 3 succeeded.
• On differential treatment of creditors: the court accepted the company’s commercial evidence that treating suppliers and other operational creditors differently was justified to avoid contagion and preserve trading; Ground 4 failed.
• On IR 2.3(1) disclosure: the court held that the CVA communicated the relevant substance about potential avoidance claims (sections 239 and 245) and any lack of technical wording was not material; Ground 5 failed.

Remedy and disposition

The court declared specified forfeiture restraint provisions in the CVA to be beyond jurisdiction, directed deletion of those clauses pursuant to the CVA’s severance clause and declared the CVA valid and enforceable as so modified. Permission was given to apply to vary that order and to seek permission to appeal by short written submissions.

The application succeeded in part. The court held that future rent can fall within the extended meaning of a 'debt' for CVA purposes and that temporary reductions of contractual rent are not inherently unfair; however, a CVA cannot directly extinguish or restrain a landlord's proprietary right of forfeiture/re-entry. Accordingly the court declared the CVA provisions restraining forfeiture to be beyond the jurisdiction conferred by Part 1 of the Insolvency Act 1986, ordered those provisions deleted under the CVA severance clause, and declared the CVA valid as modified.