SHB Realisations Limited (in Liquidation [2018] EWHC 402 (Ch)

The Facts

In what was ultimately a doomed attempt to rescue its ailing business, in March 2016, BHS Limited entered into a CVA with its creditors. Integral to the CVA was a restructuring of BHS' rental commitments on some of its weaker sites. Various premises were identified which, at the time, BHS believed would be viable if the rents were reduced. Under the CVA, the landlords of these sites agreed to various restrictions and reductions to the rent they received under their leases for an agreed period. BHS entered Administration shortly afterwards - in April 2016 - but this did not trigger the termination of the CVA and it continued to run simultaneously.

As has been widely publicised, the Administration failed and BHS entered Liquidation in November 2016. One of the clauses in the CVA enabled the landlord creditors to send a notice demanding payment of certain monies owed, which would in turn cause the CVA to be terminated. A month after Liquidators were appointed over BHS, one of the landlords served a notice to this effect, terminating the CVA.

A clause in the CVA provided that the landlords were entitled, on termination, to disregard any of the compromises made in the CVA and to claim against BHS for any monies owed in full, "as if the CVA Proposal had never been approved". One landlord maintained that its claim in the Liquidation was for the full amount of the outstanding rent payable under the original leases, rather than the reduced amount agreed under the CVA. It further claimed that part of the balance was payable as an Administration expense, in respect of the period during which the Administrators had continued to trade from their stores.

The Liquidators applied to court for directions, claiming that (1) the CVA provisions which enabled the breach of the CVA were a penalty, and therefore unenforceable; and (2) that the effect of disregarding the reduced amount owed to the landlords was a breach of the pari passu principle.

The Decision

The judge rejected both of the Liquidators' arguments.

With regard to the "penalty" claim, it was held that a CVA is not strictly speaking a contract in the common sense, and as such the law against "penalties" did not apply. The judge maintained that a CVA is a "hypothetical contract" which will not be subject to every attribute or principle applicable to ordinary contracts. With this in mind, it was held that as a CVA is effectively a proposal by the company itself, the oppression against which the law against penalties was designed to prevent - i.e. that which arises between two contracting parties of unequal bargaining power - could not apply, and the company could not expect relief in such a circumstance.

As for the pari passu  argument, the judge held that the "true" position was in fact the position decided before the CVA. The CVA was a temporary waiver of debts owed by BHS to its landlord creditors, and could not be interpreted as a final reformulation of those debts. Allowing the landlord creditors to claim the full amounts owed therefore gave them no advantage.

The judge also agreed with the Landlord's argument that payments of rent during the Administration period should have been characterised as an Administration expense, and that once the CVA had been terminated, the full amount under the original leases should have been paid. This was effectively because the CVA contained a term providing for this outcome.

Our Comment

This will likely be one of the most relevant and contemporary cases arising from the fallout of the collapse of BHS: with the high street struggling, high-profile CVAs are announced on an almost weekly basis, most of which concern rent restructuring. This case provides clarity on how landlords will be treated when CVAs fail, and is useful guidance on the contractual status of CVAs. It is clear that once a company enters Liquidation, unless there is a provision to the contrary, the courts will effectively treat CVAs as temporary agreements to waive monies which, once breached, become null and void retrospectively. Although this may cause some headaches for insolvency practitioners, it will no doubt make CVAs more attractive to creditors, which could avoid liquidations in the long run.