Powerhouse CVA Decision
As clients who attended our Property Industry Seminar on Administrations last year will be aware, a significant decision was awaited on the Powerhouse CVA and in particular the effect of the clause releasing the parent company guarantees.
The judgment was issued by the High Court in England on May 1st.
After getting into financial difficulties Powerhouse decided to close a large number of its stores. Powerhouse’s lease obligations were supported by a variety of guarantees given by its parent company, PRG.
Powerhouse then proposed entering into a company voluntary arrangement (CVA) which they hoped would allow them to continue to trade in the remaining stores. Broadly all creditors in relation to the remaining stores would be paid in full while creditors in relation to the closed stores would have to give up all claims in return for a dividend. In particular the arrangement provided for release of all parent company guarantees.
The CVA was approved by a majority of the creditors including those who were to be paid in full and thus was binding on all creditors in terms of the relevant statutory provision.
A group of landlords including Prudential, Land Securities and Scottish Widows raised proceedings against Powerhouse to have the CVA entered into by Powerhouse declared invalid on the following grounds:
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The CVA could not directly release the liability of PRG under the guarantees
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The CVA could not preclude the landlords from enforcing the guarantees
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The CVA was unfairly prejudicial to the landlords
The court decided that in general a CVA could not bind a third party and therefore could not directly release the parent company from its obligations though it was possible for a CVA to provide, for its duration, that a creditor would not enforce a right against a third party (like a guarantor) where that third party could in turn claim against the debtor.
The landlords succeeded because it was held to be unfairly prejudicial to force the CVA on the landlords in this case against their wishes without recognising the value of the guarantees both in monetary terms and as a lever. The stripping out of the guarantees left the landlords in a much less advantageous position than they would have been in an insolvent liquidation.
Accordingly albeit guarantees may be in effect suspended by CVAs in certain circumstances landlords must ensure they challenge such proposals within the 28 days prescribed by the Insolvency Act to protect their position.
In addition landlords may be well advised to take slightly more care in assessing at lease grant the covenant quality of parent companies providing guarantees or, better, to look for more substantial Rent Deposits or other security for rent.
FOR FURTHER INFORMATION PLEASE CONTACT: ALISON GOW OR SCOTT KERR
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