Landlords secure victory in the latest insolvency battle
Wright & Rowley as joint liquidators of SHB Realisations Ltd.(formerly BHS Ltd.) (in liquidation) vs. The Prudential Assurance Company Ltd. 2018 EWHC 402 (Ch)
Nobody involved in the retail, leisure, or hospitality sectors will need to be reminded that BHS collapsed during the course of 2016, moving through various stages from seemingly healthy, to being subject to a Company Voluntary Arrangement, falling into administration, and finally into liquidation. This case is likely to send shivers down the spine of the insolvency sector, and only time will tell where the market practice ends up as a result. At this moment in time, it is the landlords who will be celebrating the minor revival in their fortunes when faced with a struggling tenant that eventually fails to revive itself despite best efforts.
There are a number of key dates that are relevant to the issue at stake and the outcome. These are:-
- the date of entry into the CVA
- the date of entry into administration
- the termination of the CVA (administration does not automatically terminate a CVA) and
- the date on which the company ceased trading from each store
The date of liquidation has no bearing on the important points.
The Prudential was the landlord of only two of the stores, but the ruling will apply across the entire BHS store estate forced to accept reduced rents as part of the CVA which provided that, in the event that the CVA was terminated (i.e. that its purpose of restoring the company to financial health had failed) the landlords would be entitled to the full rent payable under each lease as if the CVA had never existed. When the Pru claimed the difference between those full rents and the discounted rents that it had received under the CVA, the liquidators sought guidance from the Court.
There were three issues:-
- was the provision in the CVA restoring the rents a penalty and therefore unenforceable?
- did payment of such restored rents breach the pari passu principle on which the insolvency regime is based?
- were the restored rents (if claimable) payable as an administration expense i.e. at the front of the queue of unsecured creditors and even before the administrators' fees?
The judge found in favour of the Pru on all three issues.
The CVA provided for the reduced rents and their restoration in certain circumstances as part of the same unified package that was voluntarily presented to the creditors, including the landlords, for approval; there was no oppression or imbalance of bargaining position driving its terms. In addition, the Insolvency Act provides that an approved CVA binds all parties, including the company that proposed it, whether or not any particular creditor had approved it, substituting in a "statutory hypothesis" of consent to turn the CVA into a binding contract from which one could not subsequently pick and choose individual clauses that suited a particular argument. The restoration of the rents was therefore part of the contract and not a punishment for breaching its terms, and so not a penalty.
The fact that the CVA was a contract also answered the pari passu question. As the rents due under the leases had never been irretrievably reduced, and had been restored in accordance with the agreement freely entered into between the parties, the Pru was not getting an unfair advantage vis a vis the other creditors by asking for the amounts properly due to it.
Finally, the same point answers the last question as well. The administrators continued to trade from the two stores for a tidy period after the company had been placed in administration, including after the CVA had been validly terminated during the administration period when rent continued to be paid at the reduced rate. The Pru claimed as an administration expense the difference between the full rent and the discounted rent that had been paid for the period starting with the company's entry into administration (while the CVA was ongoing) and the company ceasing to trade from each store, i.e, as if the CVA had never existed (as it provided), and the Court ruled that this was payable.
The upshot of the decision is that landlords who accept reduced rents during a CVA will be entitled to a bit more of the pot if the struggling tenant subsequently falls into administration and continues trading for a while to see if a buyer can be found for the business as a going concern, at the expense of the other unsecured creditors of course. With so many CVAs already in place and in the pipeline in the leisure, retail, and hospitality sectors, the next few months are going to be interesting for landlords, tenants, insolvency specialists, and their lawyers.