Strand, London, WC2A 2LL
B e f o r e :
| Prudential Assurance Company Ltd and others Luctor Limited and others
|- and -
|PRG Powerhouse Limited and others
Anthony Murphy and others
Mr Richard Sheldon Q.C. and Ms Blair Leahy (instructed by Addleshaw Goddard) for the Luctor Applicants
Mr Paul Morgan Q.C. and Ms Marcia Shekerdemian (instructed by Charles Russell) for the Respondent
Hearing dates: 21-23 March 2007
Crown Copyright ©
The Preliminary Issues
"(1) (a) Whether or not on the correct interpretation of section 5(2) of the Insolvency Act 1986 ("the Act"), and on the true construction of Powerhouse's Company Voluntary Arrangement ("the CVA") and of the guarantees or indemnities given by PRG to the Claimants in respect of Powerhouse's obligations, as tenant, to the Claimants ("the Guarantees/Indemnities"), any of the Guarantees/Indemnities has been released or ought to be treated as having been released by reason of the CVA;
(b) If the answer to (a) above is yes, which Guarantee/Indemnity is, or which Guarantees/Indemnities are, so released or so affected by reason of the CVA;
(c) If the answer to (a) above is no, are any of the Claimants otherwise precluded from enforcing any of their Guarantees/Indemnities against PRG by reason of the CVA;
(d) If the answer to (c) above is yes, which of the Guarantees/Indemnities are the Claimants precluded from enforcing against PRG by reason of the CVA.
(2) If the answer to 1)(a) or (c) above is yes, on the basis of the facts set out in the Agreed Facts document attached hereto, does the CVA unfairly prejudice the interests of the Claimants as creditors of Powerhouse within the meaning of section 6(1)(a) of the Act."
The Statement of Agreed Facts
"1. PRG Powerhouse Limited ("Powerhouse") is a subsidiary of PRG Group Limited ("PRG"), registered in New Zealand. On the date Powerhouse's company voluntary arrangement ("the CVA") was approved, PRG was listed on the New Zealand Stock Exchange.
2. In about September 2003, Powerhouse acquired, with financial support from PRG, the assets of the Powerhouse business for £17.4 million, including 24 high street stores and 110 superstores. A number of the landlords of these stores, including Prudential and Luctor (a British Land Plc company), took parent company guarantees or indemnities from PRG in respect of Powerhouse's obligations under the leases.
3. Powerhouse got into financial difficulties and its directors informed its creditors that it needed to close 35 underperforming stores (the "Closed Premises") and to retain 53 stores which they hoped would enable it to trade profitably.
4. The directors of Powerhouse proposed the CVA, which had the following terms, amongst others.
5. The rights and obligations of all creditors other than the Scheme Fund Creditors were to be unaffected by the CVA.
6. The Scheme Fund Creditors consisted of employees, landlords, local authorities and others who were creditors in respect of Powerhouse's Closed Premises. For these creditors, PRG agreed to provide a fund equal to the lesser of £1.5 million and the sum required to pay a dividend to Scheme Fund Creditors of 28 pence in the pound on their respective claims as valued pursuant to the CVA's Valuation Mechanism. The CVA contained provisions designed to release all the Scheme Fund Creditors' claims against Powerhouse related to Closed Premises. It also included terms designed to release any guarantees or indemnities given by PRG to the Closed Premises Landlords. PRG was willing to make the Scheme Fund available for the benefit of the Scheme Fund Creditors in consideration for the releases and compromises of the liabilities of Powerhouse and PRG.
7. All of the rents and rates payable to the Applicants (as defined in the Order of Blackburne J. dated 1 March 2007) pursuant to the leases of the Applicants' Closed Premises had been paid by Powerhouse up to the March 2006 quarter day. The Respondents maintain that: (a) all of the rents and rates payable to the other Closed Premises landlords pursuant to the leases of their Closed Premises had been paid by Powerhouse up to the March 2006 quarter day; (b) all employees of the Closed Premises were paid all arrears of wages, commission and accrued holiday pay up to 1 February 2006 (the date from which the Closed Premises ceased to trade), together with a payment equivalent to the sum they would be entitled to by way of statutory redundancy payment; and (c) all suppliers (including all Landlords in relation to the supply of accommodation) were paid for all supplies provided and invoiced for up to the date of the CVA, to the extent that such invoices had fallen due for payment by that date. The Luctor Applicants (as defined in the Order of Blackburne J. dated 1 March 2007) maintain (but the Respondents deny) that a sum of approximately £2,000 in respect of service charges and insurance payable by Powerhouse to the Sixth Luctor Applicant: (a) fell due for payment prior to the date of the CVA; and (b) remains unpaid.
8. The directors represented to the creditors that in the CVA the likely dividend to Scheme Fund Creditors was to be 28 pence in the pound; other creditors were not affected by the CVA and, it was said, would see their debts paid through the ongoing trading of Powerhouse. The directors represented to the creditors that in a liquidation of Powerhouse, the dividend to all unsecured creditors would be nil. The directors represented to the creditors that Powerhouse's future viability depended upon an arrangement of Powerhouse's affairs involving the compromise and release of liabilities inter alia of PRG on the terms set out in the CVA. The directors also represented that they considered that such an arrangement was "desirable in the interests of all creditors".
9. Powerhouse declared that the Scheme Fund was to be held by the CVA Supervisors on trust but that if the CVA failed, the Scheme Fund would be held on trust for PRG, enabling PRG to demand the return of the funds.
10. At a meeting of all the creditors of Powerhouse, including the creditors whose rights and obligations are not affected by the terms of the CVA, the CVA obtained the requisite statutory majority.
11. Scheme Fund Creditors other than Closed Premises Landlords were, according to the representations of the directors, expected to receive 28p in the pound from the CVA as opposed to nil in a liquidation. Closed Premises Landlords were expected to receive 28p in the pound from Powerhouse in the CVA, and nothing from PRG under any guarantees or indemnities which had been provided in relation to the Closed Premises. In a liquidation, Closed Premises Landlords were expected to receive nothing from Powerhouse.
12. Two groups of Closed Premises Landlords have challenged the CVA.
13. Powerhouse has subsequently gone into administration and ceased carrying on business."
" any variation in the terms of the Lease or any other act, omission, matter or thing whatever whereby (but for this proviso) the Guarantor would be exonerated either in whole or in part from its obligations under this guarantee (other than a deed of release given by the Landlord) shall not release or in any way lessen or affect the liability of the Guarantor hereunder."
"The guarantee and covenant contained in paragraph 1 shall impose upon the Guarantor the same liability as if the Guarantor were itself the principal debtor in respect of the Secured Obligations and such liability shall continue notwithstanding (and shall not be discharged in whole or in part or otherwise be affected by):
(g) any increase or reduction in the Premises or in the rent payable under the Lease or any other variation to the Lease whether or not the Guarantor is a party to such variation:
(h) any change in the constitution structure or powers of the Guarantor the Assignee or the Landlord or the administration liquidation or bankruptcy of the Assignee or the Guarantor;
(i) any other act omission of the Landlord or any other circumstances (other than a deed of release by the Landlord) which but for this paragraph 1.4 would discharge the Guarantor;
and for the purpose of this paragraph 1 the Assignee shall be deemed to be liable to continue to pay and discharge the Secured Obligations notwithstanding any of the above matters and any money expressed to be payable by the Assignee which may not be recoverable from the Assignee shall be recoverable by the Landlord from the Guarantor as principal debtor."
The Statutory Provisions
"The directors of a company (other than one which is in administration or being wound up) may make a proposal under this Part to the company and to its creditors for a composition in satisfaction of its debts or a scheme of arrangement of its affairs (from here on referred to, in either case, as a "voluntary arrangement")."
"5(2) The voluntary arrangement
(a) takes effect as if made by the company at the creditors' meeting, and
(b) binds every person who in accordance with the rules
(i) was entitled to vote at that meeting (whether or not he was present or represented at it), or
(ii) would have been so entitled if he had had notice of it,
as if he were a party to the voluntary arrangement."
"6(1) Subject to this section, an application to the court may be made on one or both of the following grounds, namely
(a) that a voluntary arrangement unfairly prejudices the interest of a creditor, member or contributory of the company;
(b) that there has been some material irregularity at or in relation to either of the meetings.
6(4) Where on such an application the court is satisfied as to either of the grounds mentioned in subsection (1) it may do one or both of the following, namely
(a) revoke or suspend any decision approving the voluntary arrangement or, in a case falling within subsection (1)(b), any decision taken by the meeting in question ;
(b) give a direction to any person for the summoning of further meetings to consider any revised proposal the person who made the original proposal may make or, in a case falling within subsection (1)(b), a further company or (as the case may be) creditors' meeting to reconsider the original proposal."
Preliminary Issue (1)
"3.12 The Arrangement is a proposal for a compromise of the Company's affairs under which the Scheme Fund Creditors agree to accept the Dividend payable in relation to a claim against the Scheme Fund calculated in accordance with the Valuation Mechanism and the Proposal Document in satisfaction of all debts, liabilities or obligations due from or owed by the Company and/or PRG howsoever arising (including but not limited to all obligations and liabilities of the Company and/or PRG that have been guaranteed or indemnified by PRG and any other rights against PRG howsoever arising in relation to the Closed Premises) or any such claims or rights that they might have against the Company and/or PRG (whether present, prospective, contingent or otherwise) and the delivery of the dividend calculated in accordance with this Arrangement to any Scheme Fund Creditor will operate in full and final settlement of that Scheme Fund Creditor's debts, claims and rights to the intent and effect that it shall release all debts, liabilities and obligations whosoever and howsoever owed by the Company and/or PRG to such Scheme Fund Creditor and all claims against the Company and/or PRG under any guarantee or surety or contract or lease or licence of any kind given in respect thereof.
3.13 Consequently, in the event that any Closed Premises Landlord is not paid in full and any such Closed Premises Landlord pursues any remedy against any Closed Premises Guarantor, then that Closed Premises Guarantor shall have no right or recourse against the Company such right of recourse having been compromised and released by this Clause and/or by the Arrangement and furthermore Closed Premises Landlords agree to account for any funds received from the Scheme Fund in reduction or set-off against any claim they may have against any Closed Premises Guarantors .
3.14 Further, and for the avoidance of doubt, any guarantee or surety of any kind given by the Company or PRG for the debts, liabilities and obligations or any one or more of them shall, insofar as it relates to any debt, liability or obligation owing to a Closed Premises Landlord be treated as having been released.
3.15 Upon and following the Effective Date, no proceedings can be commenced or continued against PRG by a Scheme Fund Creditor in respect of any debt, obligation or liability compromised or released in the Arrangement ."
"It is obviously well arguable that the attempt to deal with matters wholly outside the company, and to bind persons who are not the company in respect of their rights against third parties, might be outside the scope of [IA s.1]".
" the effect of the creditors' approval of the debtors' proposal is, as is well-established, to give rise to a species of statutory contract between the creditors bound by the arrangement on the one hand and the debtor on the other."
" the contractual status of any outsider vis a vis the company or any creditor or member must have some other basis than the court's approval of the arrangement between the company and its relevant creditors or members".
"Nevertheless, as is demonstrated by the decision in that case (and in many other cases see Shaw v Royce  12 Ch 138: Re Guardian Assurance Co  1 Ch 431; Re National Bank  1 WLR 819; Re A & C Constructions  SASR 565; Singer Manufacturing Co v Robinson  SC 11; Re Bank of Adelaide (1979) 22 SSASR 481 and Re Savoy Hotel  Ch 351), an arrangement between a company and its relevant creditors or members is not outside the scope of such a provision as s.315 merely because it is part of a wider scheme involving outsiders, or an outsider is a necessary party to its implementation. This is in any event made abundantly clear by the provisions of s.317."
"Turning back to [IA] s.5, does 'binds every person' have any effect outside the voluntary arrangement? I think not. The effect of the binding is solely as between the parties bound, those entitled to vote, whether they did or not. An outsider, such as T1, can get no assistance from the terms of the voluntary arrangement as such. Of course if something is actually done as a result of the arrangement (eg property transferred, or as might have but did not happen here, surrender of a lease) then an outsider can rely upon that. But his right to rely upon it must result from an actual act done, not the arrangement".
Conclusion on Preliminary Issue (1)
Preliminary Issue (2)
The Legal Principles
"Unless it can be shown that the treatment of the general body of creditors under the voluntary arrangement is likely to be at least as advantageous as that obtainable by Court proceedings, then a dissatisfied creditor will have reasonable grounds for complaint and will normally be entitled to have the debtor's affairs administered by the Court: otherwise he would be bound by the wishes of the majority voting in favour of the voluntary arrangement".
"We believe that the loss by a dissentient creditor of what at present is virtually an absolute right to a receiving order against the debtor, is justified, but only if the voluntary arrangement proposed by the debtor confers upon the creditor at least the same advantages as Court proceedings would provide".
"While I am wary of laying down in advance of a hearing on the merits of any scheme or CVA any particular rule, there is one element which can be mentioned at this stage. I find it very difficult to envisage a case where the court would sanction a scheme of arrangement, or not interfere with a CVA, which was an alternative to a winding up but which was likely to result in creditors, or some of them, receiving less than they would in a winding up of a the company, assuming that the return in a winding up would in reality be achieved and within an acceptable time-scale: see Re English, Scottish and Australian Chartered Bank  3 Ch 385."
"Unless the court is satisfied that better terms or some other compromise would have been on offer, the comparison must be between the proposed compromise and no compromise at all judging matters as of the date of the vote on the CVA. If an administrator or liquidator puts forward a proposal which he considers to be fair then, unless it is established that he acted other than in good faith or that he is partisan to the interests of some only of the creditors, the court should not speculate about what other proposals might have gained acceptance and been capable of implementation (an essential element, since there is not much point in gaining approval unless the resulting arrangement can be implemented)."
See also Chadwick LJ in Re Greenhaven Motors Ltd  BCC 463 at p. 469 C-E.
"Unfair prejudice is a reference to the degree of prejudice to one creditor or class of creditors as compared with other creditors or class of creditors. It involves an assessment of any imbalance between possible prejudices to one or the other The concept of unfair prejudice is aimed at disproportionate prejudice on one side or the other".
"81. There is no statutory guidance on the criteria for judging fairness either for a scheme of arrangement under s.425 of the Companies Act 1985 or for the CVA under s.6 of the 1986 Act. There is a difference in the onus. Under s.425, it is for the proponents to satisfy the court that it should be sanctioned, whereas under s.6 it is the objector who must establish unfair prejudice. I do not, however, consider that there is any difference in the substance of the underlying test of fairness which must be applied. It is deliberately a broad test to be applied on a case by case basis, and courts have struggled to do better than the approach adopted by the Court of Appeal in Re Alabama, New Orleans, Texas and Pacific Junction Railway Co  Ch 213 and summarised in the often cited passage from a leading textbook, Buckley on the Companies Acts (14th edn.) vol 1, pp 473-474:
"In exercising its power of sanction the court will see, first, that the provisions of the statute have been complied with, second, that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve. The court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting, but, at the same time, the court will be slow to differ from the meeting, unless either the class has not been properly consulted or the meeting has not considered the matter with a view to the interests of the class which it is empowered to bind or some blot is found in the scheme"
That paragraph is directed to schemes of arrangement. The crucial difference with a CVA is that there is just one meeting of creditors, so that necessarily means that there may be sub-groups who would constitute separate classes for a scheme. In considering unfair prejudice, the court will have regard to the different position of different groups of creditor. This, too, will be the case with a scheme of arrangement where groups of creditors with different interests or even rights none the less have been included in the same class for the purpose of considering and voting on the scheme."
"76. The citation of the passage from Buckley on the Companies Acts of decision of the Court of Appeal of Re Alabama, New Orleans, Texas and Pacific Junction Railway Co  Ch 213 shows the reasonable and honest man to be a welcome guest also at the home of the CVA. Ultimately, if I judge that this reasonable and honest man in the same position as the applicants might reasonably have approved the CVAs which are challenged, the applicants fail."
"134. There is, in any case, a material difference between the two processes. In relation to a scheme of arrangement, there needs to be approval from each voting class. Accordingly, a separate class can block a scheme of which it does not approve even though the overall scheme may fall within the range of reasonable proposals which that class could adopt without unfairness to any particular member of that class. In contrast, a CVA is determined by a single vote of all creditors. A group of creditors forming a separate class who would be able to block a scheme of arrangement may well not have sufficient voting power to block a CVA. Their only remedy, if they do not like the result of the vote, is to challenge it on the grounds of unfair prejudice under s.6. The mere fact that they would be able to block it as a separate class were the matter proceeding by way of a scheme of arrangement does not entail that they are necessarily unfairly prejudiced when the vote of the CVA goes against them."
Conclusion on Preliminary Issue (2)