This week we have seen the headlines about the Focus DIY Corporate Voluntary Arrangement (CVA). It is reported that landlords have accepted the CVA and that will enable Focus to continue a significant part of the business and to retain a large number of jobs. Welcome news in many respects.

CVAs can have a significant impact on a property investment so this posting considers how CVAs work and their impact on leases?

In Butters and ors v BBC Worldwide Ltd and ors, decided on 20 August 2009, the Court held that contractual provisions in a joint venture agreement taken together with termination provisions in a licence of IP rights were void since the effect of those provisions on insolvency was to deprive creditors access to assets and therefore contrary to public policy in the light of insolvency laws.

BUSINESS IMPACT

With ever increasing numbers of corporate insolvencies, it is likely that the courts will see an increase in litigation raised by insolvency practitioners and creditors arising out of restructuring arrangements entered into by companies in an attempt to stave off insolvency.

While debt restructurings must always remain a significant part of the corporate recovery toolkit, all stakeholders must be aware of the underlying rules relating to the challengeability of transactions in the run up to insolvencies.

There are two main challengeable areas in Scots law:

The Pensions Regulator recently became involved in the current controversies attaching to pre-pack arrangements.

With the economy in poor shape and personal debt still at high levels, the outlook is less than rosy for people who are facing insolvency. Even after the changes made by the Enterprise Act 2002, bankruptcy is still a difficult experience. This is especially true where the family home is the main asset of the bankrupt’s estate.

The trustee in bankruptcy will normally seek a possession order over the property so that it can be sold to satisfy the claims of creditors.

When deciding whether the possession order is to be granted, the court is obliged to consider:

The court will not always set aside a property transfer order in matrimonial proceedings where the party transferring the property, as part of a clean break order, becomes bankrupt shortly afterwards, and there are allegations of lack of consideration or transfer at an undervalue.

In September 2003, PRG Powerhouse Limited bought the Powerhouse business and its leases. As a condition of the sale, the landlords of various stores accepted a guarantee from Powerhouse’s parent company in respect of Powerhouse’s obligations under the leases.

Re Powerhouse Limited: Prudential Assurance Company Limited v PRG Powerhouse Limited [2007] EWHC 1002 Ch Guarantees are widely used in commercial transactions to provide assurance to creditors that debts or other obligations owed to them are discharged fully in the event the principal debtor fails to perform. This assurance was shaken by the steps taken in early 2006 by PRG Powerhouse Limited (Powerhouse) to enter into a company voluntary arrangement (CVA) that contained proposals to release certain parent company guarantees given to landlords of premises being vacated by Powerhouse.

The Powerhouse CVA, which sought to strip away guarantees provided by the parent company to landlords of Powerhouse, has been struck down as unfairly prejudicial by the High Court. However, certain aspects of the judgement remain unclear and could be subject to future appeal…

BACKGROUND TO THE POWERHOUSE CVA

Powerhouse (an electrical retailer) proposed a CVA on 1 February 2006 with the intention of closing 35 of its stores (the Closed Premises).

In an important decision for commercial property landlords, the High Court in Prudential Assurance Co Ltd and Others v PRG Powerhouse Limited and Others has ruled that a CVA (defined below) cannot operate so as to prevent landlords from enforcing a parent company guarantee. The Court's decision however was reached on the basis that to determine otherwise would have been "unfairly prejudicial" to the landlords.