High Court doesn't buy Debenhams CVA challenge

Today (19 September), following an expedited trial, the High Court rejected the application brought by affected landlords to challenge the CVA entered into by Debenhams Retail Limited.

The landlord applicants sought to challenge the CVA which closed stores and imposed rent reductions on landlords according to different categories. 'Category 5' landlords took the biggest hit with rents halved and early termination dates imposed. The CVA proposal was approved by Debenhams' creditors on 9 May 2019.

Five grounds were advanced by the landlords during the hearing:

Ground 1: the CVA goes beyond the scope of the relevant insolvency legislation because landlords are not "creditors" in respect of future rent and so this liability could not be compromised by a CVA.

Ground 2: the reduction in rent is unfairly prejudicial to the landlords or the rent reduction was beyond the scope of the legislation because a CVA cannot provide for a company to trade from leasehold premises at less than the contractual rent.

Ground 3: a removal of the landlord's right to forfeiture as a result of the CVA erodes the landlord's property interest and is therefore beyond the scope of the legislation.

Ground 4: the landlords are treated less favourably than other unsecured creditors without proper justification.

Ground 5: the CVA fails to disclose the possibility of claw back claims in an administration and therefore does not comply with the relevant rules.

Ground 3 was upheld, but the others were dismissed. In relation to that ground, it was held that the CVA's attempt to take away the landlords' right to forfeit constituted the removal of a property right and this was not permissible under a CVA.

However, owing to a severability clause included within the CVA proposal, the judge was able to delete the offending clauses and declared that, subject to this alteration, the CVA was valid and enforceable.

This is, of course, unlikely to be the end of the story. The question of whether the landlords were given leave to appeal the judgment was adjourned to a later date. Also, due to the expedited nature of the trial, the grounds of challenge brought by the landlords were confined to relatively short legal points. On that basis, it can't safely be concluded that similar CVA proposals by retail tenants are "fair" or immune from further challenge by landlords.

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