From Across the Pond: The BHS Saga Continues – Can a Company Voluntary Arrangement (CVA) Ever Permanently Vary the Terms of a Lease?
March 26, 2018
Authored by: Ben Jones, Simon Clarke and Sophie Taylor
Editors’ Note: The upcoming merger between Berwin Leighton Paisner and Bryan Cave will create a 1500 lawyer, fully integrated firm with best-in-class offices in the US, UK, Europe, Russia, Hong Kong, and the UAE. The combined Firm, to be known as Bryan Cave Leighton Paisner LLP, will have particular strengths in real estate, financial services, litigation, and corporate practices. Most importantly for followers of The Bankruptcy Cave, this merger will result in a cadre of restructuring professionals able to handle insolvency matters around the globe, with proven expertise in cross-border workouts, restructurings, and any other insolvency featuring international flavors. We look forward to speaking with you any time on any insolvency matter that includes any cross-border implications.
In Wright (and another) (as joint liquidators of SHB Realisations Ltd (formerly BHS Ltd) (in liquidation)) v Prudential Assurance Company Ltd, the court held that, when the BHS CVA terminated, the landlord was entitled to claim the full rent due under its lease. With more recent retail CVAs seeking to push the envelope even further, is the continued compromise of landlord creditors post-CVA the next issue to be tested in the courts?
On 6 March 2018 the court heard an application for directions from the joint liquidators of SHB Realisations Limited (in liquidation) (formerly BHS Limited and referred to in this article as “BHS”). BHS was the principal trading company of the BHS group. BHS had entered into a company voluntary arrangement (“CVA”) with its creditors under which certain landlords agreed to accept lower rents. The CVA was terminated, on its terms, for non-payment of the compromised rent to landlords, following BHS moving from administration to liquidation. The question before the court was whether landlords were entitled to claim the full amount of rent due under their leases or only the compromised rent agreed under the CVA.
|4 March 2016||BHS proposes a CVA.|
|23 March 2016||The CVA is approved by the members and creditors of BHS.|
|25 April 2016||BHS goes into administration with the CVA continuing to run in parallel.|
|3 August 2016||The joint administrators vacate the relevant properties.|
|2 December 2016||BHS moves from administration into creditors’ voluntary liquidation.|
|16 December 2016||Following the service of notices under the CVA in connection with non-payment to landlords, the CVA is terminated.|
What was the dispute?
The BHS CVA provided that certain landlords would receive less than the full amount of rent due under their respective leases. On termination of the CVA:
“…the compromises and releases effected under the terms of the CVA shall be deemed never to have happened, such that all Landlords and other compromised CVA Creditors shall have the claims against [BHS] that they would have had if the CVA Proposal had never been approved (less any payments made during the course of the CVA)”.
As a result of the CVA terminating on 16 December 2016, the landlord claimed that:
- it was entitled to recover the full amount of outstanding rent payable under the relevant leases (less any amounts received during the CVA) and not just the compromised rent permitted by the CVA;
- where the rent had accrued during the joint administrators’ occupation of the relevant property (from 25 April to 3 August 2016), that should be paid as an administration expense;
- where the rent had accrued when the joint administrators’ were not in occupation, that should rank as an unsecured claim.
- The subsequently appointed joint liquidators of BHS sought the court’s direction on the issue.
What was the decision?
The court agreed with the landlord.
It held that, following termination, the landlord was entitled to claim the full amount of outstanding rent (less any amounts received under the CVA), not just the compromised rent. The amount attributable to the period when the joint administrators were in occupation of the premises should be paid as an administration expense, with the remainder to rank as an unsecured claim.
Why is this case interesting?
The decision itself was made largely on the facts of the case and the wording of the termination clause. However, it provides a very timely reminder of the fact that “…a variation of a lease granted by deed has to be by deed”. A CVA is not a deed; it is, or operates as, a contract (albeit a hypothetical one) and is not a variation of the lease itself.
Starting with Toys “R” Us in December 2017, 2018 looks set to be the year of the CVA, especially in the retail and casual dining sectors. Unlike BHS, a number of the CVAs we have seen in 2018 so far expressly purport to extend the landlord compromise beyond any termination of the CVA. This seems somewhat inconsistent with the bargain between a debtor and its creditors which sits at the core of CVAs, which is that the creditor accepts a compromise to help the debtor avoid an insolvency, not to worsen its position in an insolvency (which is textbook unfair prejudice). It can also lead to absurd results which cannot have been intended. For instance, imagine the scenario where a CVA is approved, but then successfully challenged on unfair prejudice grounds. Can it be right that a creditor continues to be compromised even though unfair prejudice has been demonstrated?
With Toys “R” Us now also in administration, we look ahead with interest to see how the administrators and creditors will navigate the CVA.
- The Restructuring & Insolvency team at BLP have had significant roles for landlords and other creditors on all the recent retail and casual dining CVAs. If you would like to know more about CVAs or Restructuring & Insolvency generally, please contact Ben Jones at firstname.lastname@example.org.