Protecting the IP from unfair prejudice claims in a CVA


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This article originally appeared in the summer 2014 edition of Recovery magazine.

There are only two grounds on which a creditor may challenge a CVA (under section 6(1)(a) of the Insolvency Act 1986 (“IA 1986”)). The first ground is “unfair prejudice”, that the CVA unfairly prejudices the interests of a creditor, member or contributory of the company. The second ground is that there has been some material irregularity at or in relation to either of the meetings (for instance, creditors were told that the creditors’ meeting would be at 9am on Tuesday in London and it was held at 10am on Thursday in Manchester). This article focuses on the unfair prejudice ground for challenge, and how the recent spate of innovation in CVAs has advanced the analysis when it comes to compromising the interests of landlords.

An application under section 6 IA 1986 must be made within 28 days of the creditors’ decision to approve the CVA being notified to the court, or, if the creditor was not given notice of the creditors’ meeting, within 28 days of the day on which he became aware that the meeting had taken place. Great care is taken in practice to ensure that all creditors who will be affected by a CVA are given due notice and receive copies of the proposal so that the company and its stakeholders can be certain that the risk of challenge is extinguished once the 28 day period has passed (and a short buffer may be built into the timetable to cater for a creditor making an application at the eleventh hour which is not immediately notified to the company). Much can turn on the timing of expiry of the “cooling off period” as often any wider restructuring will have as its trigger this period passing without any creditor intervening. It is important therefore that the stakeholders who are party to the restructuring have a contingency plan, as it can be relatively inexpensive for a dissenting creditor to make an application under this section, the effects of which can be amplified if the future of the company is dependent on the completion of the restructuring, and there is insufficient liquidity available to fund the business and legal expenses throughout a fight in court. The CVA proposal will therefore usually have the fingerprints of a contingency plan throughout it, and the nominee or another IP will be prepared to take an administration appointment to deliver that plan if a challenge with any merit is made.

At the hearing of an application under section 6, the court may revoke or suspend any decision approving the CVA, or give directions for the summoning of further meetings to consider any revised proposal that the person who made the original proposal may make.

The requirement of “unfair prejudice” is a two-fold test. Firstly, the creditor must show that he has been prejudiced by the CVA, especially by comparison with other creditors, and secondly, that the prejudice is unfair.

In reviewing whether there has been prejudice, the court will compare the relevant creditor’s position under the CVA with:

  • the treatment of other creditors under the CVA (the “horizontal comparison”), i.e. is the relevant creditor worse off when compared to other creditors?
  • the position which the creditor would be in absent the CVA (the “vertical comparison”), i.e. what is the likely alternative scenario to the CVA – typically an insolvent liquidation or administration – and would the creditor be better off in that scenario? This issue tends to be most acute on the most profitable leases from the perspective of the company (e.g. the store on Oxford St) because in an administration the landlord might expect its lease to be assigned to a better covenant with no adverse economic changes. In contrast even the most light touch under the CVA of that lease, such as putting it onto monthly rental payment terms, might fall foul of the vertical test.

For the purpose of the horizontal test, a differential treatment of creditors under the CVA is not automatically unfair; it may be if it can be demonstrated that it is necessary to treat creditors differently to ensure the continuation of the company’s business which underlies the voluntary arrangement by paying essential suppliers in full to guarantee continuation of service . This is an absolutely essential justification for landlord CVAs, without which they would fail. This is because, typically, the “compromise” under the CVA is borne principally by landlords, who are asked to accept reductions in rent for the short to medium term, whereas other unsecured creditors, such as suppliers and employees, from whom the continuation of provision of service is essential to the continuation of the company’s business, are kept whole. The rub for landlords is that under a CVA all creditors can vote on the proposals, as a single class, including connected creditors, even if the CVA does not affect them. In practice, most nominees will insist on obtaining the support of at least 75% of the landlords to the proposals, even if technically that is not required, as a matter of best practice.

Some CVA proposals have also sought to effect ongoing variations to the terms of some of the categories of lease, for example by altering the amount of the rent payable pursuant to a rent review, or by changing the basis on which rent is paid from a contractual rent to a turnover rent, to align more closely the tenant’s business with the landlord. These terms sometimes seek to effect permanent changes to the terms of the relevant leases, which will continue in effect after the CVA itself has been completed.

Would the court view such variations as fair and reasonable if the landlord challenged the CVA?

Neuberger LJ, in Thomas v Ken Thomas Ltd said that it would seem wrong that a tenant should be able to trade under a CVA for the benefit of its past creditors, at the present and future expense of its landlord. If the tenant continues to occupy the property in order to trade under the CVA, and hopefully trade out of the CVA, it should expect to pay the full rent under the lease. He went on to say that he considered that a CVA should so provide, and if it did not, in the absence of special circumstances, the landlord might well be entitled to object to the proposals as unreasonable.

So why don’t they? The answer is that in Thomas v Ken Thomas the landlord had lost both his right to receive the full rent, and his right to forfeit the lease for non-payment of that full rent. The reasoning goes that if a CVA provides for future rent to be varied, and the landlord retains his right to take back the premises, then on this potential ground at least, the CVA is not unfair. Whilst CVAs will remove the landlord’s right to forfeit as a result of the CVA (not doing this would remove the benefit of the CVA) they tend to counter-act this with a contractual right for the landlord to call for a surrender or assignment of the lease. Indeed, several retail CVAs have proceeded on this basis (for example the Bowlplex, Travelodge and Fitness First CVAs), although the concept has not to date been the subject of court proceedings. CVAs typically also contain provision for a “pot” of cash, generated from profits realised in the CVA, to be set aside for landlords of compromised leases, to compensate them for the cost to them of the compromise.

Can a CVA bind landlords to future changes to the underlying leases?

A legal lease cannot be varied other than by deed , and a CVA is not a deed. However, a CVA can impose a contractual moratorium on the enforcement by the landlord of their rights against the company in CVA. If it is approved correctly, the CVA binds all creditors including those who dissented. These two concepts appear contradictory, and the question has not yet been considered by the courts. It would seem logical that, following the conclusion of a CVA, the rights of creditors are no longer subject to the conditions contained within the CVA, and revert to the pre-CVA position. It is certainly arguable that there is a risk that a court may find that the terms of a voluntary arrangement cannot effect a valid amendment to a lease. Alternatively, a court may take a commercial, pragmatic view, and conclude that a CVA proposal containing purported amendments to a lease, which was effected to save a business, was supported by the majority of creditors, and was approved correctly, should be upheld. Given the inherent risk, it may be that the CVA should simply contain a framework for negotiation of permanent changes to leases within agreed parameters set out in the CVA, such negotiations to be commenced within 12-18 months of the end of the CVA. This means that the company and its directors will have to undertake a programme of engagement with individual landlords but it may be necessary if an extension of the CVA is to be avoided.

Can a CVA unilaterally effect a surrender of a lease?

A surrender of a lease is a consensual act, requiring the agreement of both landlord and tenant. It can occur by operation of law, or by express agreement between landlord and tenant in a deed of surrender.

The work-around which was tested in the Bowlplex CVA and has been used in other subsequent CVAs is as follows. Landlords whose leases are categorised as not forming part of the business going forward, but who have a “soft landing” of the agreement of the company to pay, say, 6 months’ reduced rent until the leases have to be terminated, have the right to deliver to the tenant a notice to vacate.

However, if the landlord has not forfeited the lease, or it has not been surrendered by deed or by law, or assigned to an assignee of the landlord’s choosing before the expiry of the 6 month period, then the relevant lease is deemed to be terminated at that date. The tenant agrees to move out of occupation, hand back the keys, and deliver a deed of surrender to the landlord, along with a completed deed of assignment of all the tenant’s fixtures, fittings and chattels at the premises. Effectively, the terms of the CVA purported to amend the underlying lease to insert new rental obligations, and create an agreement for surrender.

Why would landlords accept these terms? The thinking is that for 6 months the business rates are paid by the company and the properties are occupied. There are no soaped-up windows and the landlord has a fair run at attracting another tenant. At the end of the term, the premises would be left with all tenant fixtures and fittings intact, which would be beneficial in terms of finding a new operator for the business.

Why not merely commute the rent? One of the biggest liabilities associated with being an occupier is business rates. These are payable by the person entitled to possession of the relevant property. Actual occupation does not matter. In order to avoid this liability the tenant needs to put itself in a position of no longer being entitled to possession. It is doubtful that a CVA can effect a valid surrender of a lease since this would require some form of acceptance by the landlord. However by unilaterally giving up all its rights and passing the power to the landlord to complete the deed of surrender at any time the tenant would argue it is no longer “entitled to possession”.

Whether these terms would stand up to challenge through the courts remains to be seen both in terms of unfair prejudice to a landlord and to remove the tenant from being considered “entitled to possession” for rates liability.


When preparing a CVA proposal which will compromise the claims of a company’s landlords, the directors and advising insolvency practitioner must be mindful of the potential for a landlord, or group of landlords, to bring a claim of unfair prejudice, and take advice as to how likely the proposed terms would be to result in such a claim, and how likely that claim would be to succeed. Statement of Insolvency Practice 3.2, in force from 1 July 2014 makes it clear that an IP advising in relation to a CVA should be satisfied that a fair balance is struck between the interests of the company and the creditors, and he should take into account the likely attitude of any key creditors and the general body of creditors, in particular as to the fairness and balance of the proposals. It will always be beneficial to enter into negotiations with affected landlords at an early stage, and to try to find benefits for the landlords in the proposed terms – such as mitigation of their potential liability to empty rates.

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