Last week the High Court of England and Wales revoked a company voluntary arrangement (CVA) promoted by retailer Miss Sixty in a damning judgment that called into question the conduct of the practitioners involved. The case of Mourant & Co Trustees Limited v Sixty UK Limited (in administration) [2010] could end so-called guarantee stripping – where the CVA purports to discharge guarantees given by a third party – and provide powerful ammunition to landlords seeking to negotiate future CVAs with tenant companies.
The decision goes further than that in The Prudential Assurance Co Limited v PRG Powerhouse Limited [2007] by making it clear that guarantee stripping can only be justified if there is a payment to landlords based upon a thorough evaluation and genuine pre-estimate of their losses. Anyone promoting such a CVA must therefore be very sure indeed that they have accurately calculated and compensated landlords fully for their losses. That is likely to be impossible in difficult times when the future is uncertain – precisely when CVAs are used. Guarantee stripping may be appropriate where the guarantee is of limited value because the guarantor is itself insolvent, but in that case the guarantor will probably be part of the insolvency process. Solvent guarantors should expect to pay full value for the removal of guaranteed rights.
The case highlights the importance of the checks and balances within the CVA and scheme of arrangement procedures to protect struggling companies and their creditors from third parties who seek to use the procedures for their own financial gain. It is a salutary reminder to practitioners of their obligations to be seen to act independently and to make full disclosure in any CVA proposals to which they put their names.
Having seen increasingly radical CVAs in recent months, landlords and other creditors are likely to rely upon Sixty UK to negotiate for more favourable treatment and if they consider a CVA has been unfairly prepared or formulated to challenge its terms in Court accordingly.
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