Debenhams CVA survives court challenge

Debenhams has largely fended off a challenge to its company voluntary arrangement that was brought by the landlords of six of its stores but funded by Mike Ashley’s Sports Direct. The landlords had sought a High Court ruling that the CVA, approved in May by a vote of Debenhams’ creditors, is void or should be revoked as a result of unfair rent reductions. However, today Mr Justice Norris ruled that the CVA could stand, save in one respect, in relation to forfeiture provisions. The judge rejected four out of five grounds of attack, but held that a forfeiture restriction in the CVA was in excess of powers under the Insolvency Act 1986. The CVA had purported to compel the landlords to waive any rights of forfeiture arising out of the CVA. Now, the judge has severed that restriction from the CVA, but otherwise upheld it. Had the challenge succeeded, the case could have had major repercussions not only for Debenhams, if its restructuring plans were forced back to the drawing board, but also for the future of controversial retail CVAs, which typically see landlords forced to accept rent reductions in order to keep stores open. Julie Gattegno, partner at CMS, said that, at first sight, many landlords affected by the tide of landlord-only CVAs will “no doubt be disappointed by the court finding that the terms of the Debenhams Retail CVA did not amount to unfair prejudice”, although she noted that the fact the court confirmed that interference with a landlord’s right to forfeit is outside the scope of a CVA will help. She added: “However, the judgment leaves it clearly open for landlords to argue that CVAs proposing rent reductions which are below market rent would be unfair. This should mean that rent reductions proposed in future CVAs will have to be very carefully considered by companies and their advisers, and give landlords some comfort that the ability to propose ‘unfair’ CVAs will be tempered.” The landlords claimed they had suffered “financial turmoil” as a result of the CVA, and argued that it “unfairly prejudices” certain landlords and local authorities, for the benefit of other unsecured creditors who therefore voted in its favour. Debenhams Retail Ltd branded the action as an “abuse of process” with no merit, being funded by Mike Ashley’s Sports Direct as an attempt to “eliminate a competitor”. The landlords had asked Mr Justice Norris to make a declaration that the decision of the creditors’ meeting is void for want of jurisdiction, and/or an order revoking that decision under section 6(4)(a) of the Insolvency Act 1986. The CVA was approved at a meeting of Debenhams’ creditors on 9 May 2019, with more than 94% of voting creditors by value (with claims worth £989.5m out of total unsecured claims of £1.5bn) voting in favour. Debenhams Retail Ltd says the CVA was also approved by 82.1% of landlords by value of claims. It provides for: Rent reduction on certain stores. The CVA divides leases into six categories. Category 1 leases are substantially unaffected, but the other categories are subject to substantial modifications, including future rent reductions and/or new break clauses. The landlords in this case, in categories 3, 4 and 5, face a rent reduction of between 35% and 50%. Reduction in business rates payable to certain local authorities by a similar amount. Potential store closures. Under the CVA, certain leases can be terminated many years before the agreed contractual termination date. Payment in full to many other unsecured creditors. Stefaan Vansteenkiste, Debenhams’ chief executive, said: “We are delighted that the court has today confirmed that our CVA is effective and will continue to be implemented as planned. We note that the only aspect that the judge required to be adjusted was a technical provision of the CVA relating to landlord forfeiture provisions. “Our proposals had unprecedented levels of support from our landlords, and today’s outcome is good news for our 25,000 employees, our pensioners and our suppliers. We retain the support of our lenders, and everyone at Debenhams can continue to focus on trading ahead of the important Christmas period.” READ MORE: Debenhams CVA battle: the case in detail To send feedback, e-mail jess.harrold@egi.co.uk or tweet @estatesgazette Photo: Mark Thomas/Shutterstock