Miss Sixty CVA set aside

Sixty UK, which went into administration in 2008, proposed a CVA which provided that its trading creditors would be paid in full save for the landlords of four loss-making shops, including two in Liverpool’s Metquarter Shopping Centre.

The two 10-year Metquarter leases had seven years left to run and were guaranteed by Sixty UK’s Italian parent company. The CVA proposed a one-off payment of £300,000 to the landlord, Mourant & Co Trustees, as compensation for the release of liabilities of the tenant and the guarantor.

The High Court held that the purpose of the CVA was to compel Mourant & Co to give up its rights for a fraction of their fair value and to improve the Sixty group’s negotiating position. Therefore the CVA was set aside.

CVAs – Use or Abuse?

A CVA permits a company to come to an arrangement with its unsecured creditors to repay a proportion of its indebtedness. It must have the approval of the requisite majority of creditors and it binds all of the company’s unsecured creditors, even if they voted against the proposals.

If a creditor feels aggrieved, they can apply to the court to revoke or suspend a CVA if there is a material irregularity or the terms of the CVA unfairly prejudice its interests.

CVAs have increasingly been used by distressed retailers such as JJB Sports, Blacks Leisure and Focus DIY to pay reduced rents or to close underperforming stores. In a high profile case in 2007, the High Court overturned a CVA proposed in relation to electrical retailer Powerhouse on the ground that it unfairly prejudiced landlords. More recently, Stylo – owner of footwear chains Barratts and Priceless Shoes– failed to gain approval from its landlords for a CVA.

Powerhouse

In the 2007 case of Prudential Assurance Company Ltd & Others v PRG Powerhouse Ltd & Others, it was established that a CVA could lawfully be structured in a manner that would deprive a creditor landlord of the benefit of a third party guarantee of the liabilities of the tenant debtor company, even if the guarantor is not the company proposing the CVA, nor a party to it.

However, the relevant creditor had to be compensated for the loss of its rights against the guarantor, and there must not be unfair prejudice. This would depend on the circumstances of each case, including the alternatives available and the practical consequences of a decision to confirm or reject the CVA proposals. It would also involve applying “vertical” and “horizontal” comparisons:

• A vertical comparison is the comparison between the position of the creditor in a hypothetical liquidation as compared with its position under the proposed CVA.

• A horizontal comparison is a comparison between the position of the creditor and the position of other creditors, or classes of creditors.

Miss Sixty

In this particular case, Mourant & Co Trustees Limited v Sixty UK Limited (in administration), the liabilities of Miss Sixty under two leases were guaranteed by Sixty SpA. The effect of the CVA was to close loss-making shops and release Sixty SpA as guarantor upon payment of £300,000 to Mourant & Co, the landlord, which was said to represent 100% of the estimated liability to the landlord on the surrender of the leases.  This was based on assumptions that, following closure, there would be a rental void of 12 months, a three-month rent-free period for any new tenant, and new rent in line with the existing rent. (At the time of grant in 2006, the landlords had given incentives of 12-month rent-free periods and a reverse premium of £183,000 payable for each of the units. The total value of incentives was therefore at least £566,000).

The CVA also provided for two other stores to close and for their landlords to receive 21% of Sixty’s estimated liability to them under the leases. They were not guaranteed, so the amount of compensation was less. The remainder of the creditors would be paid in full.

However, the High Court found that on a vertical comparison, if the company went into liquidation, the landlord would still have the benefit of the Sixty SpA guarantees for the remainder of the terms of the leases. The guarantor company was a strong financial covenant and solvent. Even if the lease were disclaimed by a liquidator, the landlord would have the option under the leases to require the guarantor to take new leases. It was unfair and unreasonable in principle to expect the landlord to give up the guarantees in a time of economic uncertainty, and it was difficult, if not impossible, to determine the amount of compensation for the loss of these rights. The landlord’s expert valuation evidence showed that at least £1 million was more appropriate. It had also become clear in evidence that £300,000 was not a genuine estimate of compensation, but the amount dictated to the administrators (who proposed and supervised the CVA) by Sixty SpA, who stood to benefit from the release.

On a horizontal analysis, the CVA only imposed a compromise of the rights and claims of the landlords of the four shops which were loss-making. All other creditors, including associated companies, would have their indebtedness paid in full. In relation to one of the other closed shops, the lease had been assigned by Muji, the original tenant who remained liable to the landlord for the remainder of the term. On meeting that liability, Muji would then have a claim against Miss Sixty under a right of indemnity and the CVA did not seek to compromise this claim. Therefore favourable treatment had been given to the landlord under that lease due to Muji’s position as quasi-guarantor.

High Court ruling

Overall the High Court held that the CVA was fatally flawed and should be set aside. The administrators who proposed the CVA were also criticised for not maintaining an independent stance or acting in good faith. Mr Justice Henderson stated that they had sided with the guarantor company against the interests of the guaranteed landlords of the closed stores. He was satisfied that there was evidence of misconduct, which was referred to their professional bodies.