Strand, London, WC2A 2LL
B e f o r e :
| (1) MOURANT & CO TRUSTEES LIMITED
(2) MOURANT PROPERTY TRUSTEES LIMITED
|- and -
|(1) SIXTY UK LIMITED (in administration)
(2) PETER HOLLIS
(3) NICHOLAS O'REILLY
(in their capacity as joint administrators and supervisors of SIXTY UK LTD)
Hearing dates: 6 and 7 July 2010
Crown Copyright ©
Mr Justice Henderson:
"on one or both of the following grounds, namely
(a) that a voluntary arrangement which has effect under section 4A unfairly prejudices the interests of a creditor of the company;
(b) that there has been some material irregularity at or in relation to either of the meetings [i.e. the meetings of the company and its creditors]"
The background facts
(a) a basic rent of £100,000 per annum subject to annual increases, based on the retail prices index or (if higher) 80 per cent of the previous year's turnover rent;
(b) a turnover rent based on 10 per cent of Sixty's turnover up to £1.25 million and 9 per cent of turnover above that level, to be determined in accordance with the detailed provisions in schedule 3 of the standard terms incorporated in each of the leases;
(c) service charges (as set out in schedule 2 of the standard terms); and
(d) an insurance rent.
The provisions of the CVA
(a) Sixty had the exclusive UK rights to original sales of garments under six brands, including Miss Sixty and Energie. The goods were sold through the network of retail shops and concessions which I have mentioned, and also through a network of independent fashion retailers who bought the items wholesale from Sixty.
(b) The garments were supplied to Sixty by Sixty SpA, which was described as "the company's majority shareholder and major creditor". Here, as elsewhere in the CVA, the intermediate holding company, Sixty International SA, appears to be ignored. Sixty SpA had the right to call in its debt and/or to cancel further supplies at any time.
(c) Sixty had traded at a loss for the last three years, with pre-tax losses of approximately £5 million for the calendar year 2007, £3.6 million for 2006 and £3.7 million for 2005, as shown in its audited accounts.
(d) Throughout this period, Sixty had been supported by Sixty SpA which had funded those losses by the provision of short term loans and equity. The purpose had been to enable Sixty to develop a programme of carefully controlled expansion, including the acquisition of additional retail outlets which it was hoped would increase direct sales and brand-awareness, thereby generating more sales for wholesale clients and at the concessions.
(e) The wholesale side of the business would be profitable on a stand-alone basis, and it was the retail side which had reached a crisis. However, the proposals in the CVA, if adopted, were intended to result in the survival of Sixty as a going concern, thus preserving the jobs of around 250 employees.
"3.1 The Company's expansion plan has proved not to be successful. The Company relies on financial support from [Sixty SpA] that will not be provided indefinitely. The Company became insolvent after failing to repay a loan due to [Sixty SpA].
3.2 The Company needs the approval of its creditors to the proposals set out below. The main features of the proposal are that [Sixty SpA] will defer due repayment of £14,974,510 due from the Company. This will be to the benefit of general creditors (who should all be paid in full) and for the landlords of four loss making stores that will have to close for the Company to continue as a going concern. The key points are:
(a) the four loss-making stores will close ..., with trading continuing from the Company's other stores;
(b) the landlords of the Closed Stores will receive 21% of the amount which it is estimated the Company would be liable to pay on the surrender of the leases;
(c) the landlords of the Closed Stores who have a guarantee from [Sixty SpA] will in addition receive a compensation payment from the Company financed by [Sixty SpA] of an additional 79% of the amount which it is estimated the Company would be liable to pay on the surrender of the leases, in return for their releasing [Sixty SpA] from the guarantees; and
(d) all other creditors will continue to be paid in full under normal terms and conditions.
3.3 The proposals should be attractive to the landlords of the Closed Stores who do not have a parent guarantee for the reason that, if these proposals are not approved, [Sixty SpA] will not commit to further supplies to the Company and the Company may have to be broken up and even put into liquidation. The landlords can expect to receive a dividend of no more than 13p in the £1 if the Company goes into liquidation.
3.4 The proposals should be attractive to the landlords of the Closed Stores who do have parent guarantees for the reason that they will receive additional compensation in fair return for the release of their guarantees. They will benefit from receiving prompt payment of a specified amount, avoiding the potential risks, delay, costs and inconvenience entailed in bringing proceedings to enforce the guarantees against [Sixty SpA] in Italy. The landlords of the Closed Stores who have parent guarantees should take their own view on the enforceability of their guarantee and the extent to which any enforcement shall lead to a recovery or payment by [Sixty SpA]. Guaranteed creditors should take their own view on the likely defences to possible claims."
"4.7 The Company is advised that in a liquidation, the rule of thumb will be that the landlords on the surrender of the leases of the Closed Stores will be entitled to a year's rent before they can reasonably be expected to find new tenants. On an individual basis, the estimated extent of the Company's liability is as follows:
(a) 39a and 39b Met Quarter (£300,000)
(b) Unit 65 Trafford Centre (£675,000)
(c) Unit 4, Bridgewater Park (£42,500)
4.8 The assumptions and qualifications on which these estimates are based are set out in Appendix C to these proposals. They include assumptions, based on advice concerning:
(a) the prospects of finding a new tenant to the expiry of the term at current market rents and the income stream from re-letting;
(b) the benefit to the landlord in being able to take early possession of the premises, for example for re-development or amalgamation and the possibility of advantageous re-letting for a different term; and
(c) the benefit of being paid compensation ahead of the time when payment would have been due under the lease.
4.9 [This set out the proposal that the landlords of the two Closed Stores without parental guarantees would receive a settlement payment representing 21% of the estimated liabilities on the surrender of the relevant leases.]
4.10 It is proposed that the landlords under the Guaranteed Leases will receive:
(a) a settlement payment representing 21% of the Company's estimated liability under the leases, that is to say £63,443 in respect of the Liverpool premises; and
(b) a compensation payment from [Sixty SpA] or an affiliate of [Sixty SpA] representing a further 79% of the Company's estimated liability under the leases, that is to say £236,557 in respect of the Liverpool premises.
4.11 The compensation payment payable to the landlords of the Guaranteed Leases has been calculated to reflect the fair value of the guarantees, taking into account the costs, risks and delays of enforcement if it were necessary to enforce the guarantees against [Sixty SpA].
4.12 The receipt of this compensation payment by the landlords under the Guaranteed Leases will immediately and automatically operate to release all liability of [Sixty SpA] under the guarantees of the leases of the Closed Stores and the landlords under the Guaranteed Leases shall not take any steps to enforce the guarantees provided to them.
4.13 Employees at the Closed Stores will be paid all outstanding wages, salaries and holiday pay, and will receive notice and redundancy pay.
4.14 All remaining creditors will continue to be paid in full under normal terms and conditions.
4.15 The full terms of the voluntary arrangement will comprise this proposal together with the standard conditions of CVA annexed in Appendix E hereto
4.16 The landlords of the Guaranteed Leases shall on approval of these proposals and as far as is permitted by law release the Company from any obligation (except to enforce the payments referred to at 4.10 above) and agree with the Company not to claim against [Sixty SpA] under its or their guarantees or otherwise, except to enforce the payments referred to at 4.10 above. The purpose of this latter restriction is to avoid the risk to the Company of [Sixty SpA] bringing any claim for indemnity or contribution against the Company further to any guarantee claims on [Sixty SpA]. The Company may enforce or assign the benefit of this restriction on claims against [Sixty SpA] by landlords of the Guaranteed Leases."
- "A one year vacancy period landlord incurring empty rates and inability to collect service charge.
- A three month rent free incentive to a new tenant.
- The rent on a new lease will be in line with that under the old lease as it has been less than 2 years since the last rent review."
The history of events leading up to the CVA
|Unit 114, Bluewater, Kent||£320,000|
|Unit 39a, Met Quarter, Liverpool||£490,000|
|Unit 65, Trafford Centre, Manchester||£1,350,000|
|47-49 Neal Street, Covent Garden, London||£470,000|
|Unit L109, Bluewater, Kent||£1,020,000|
"Assumptions we have used to estimate extent of loss to the landlord are:
- A one year vacancy period landlord incurring empty rates and inability to collect service charge.
- A three month rent free incentive to a new tenant.
- An incentive of £275,000 paid to new tenant.
- Marketing cost of £1,000 per quarter during the vacancy period.
- Legal costs associated with drawing up a new lease £10,000.
- The rent on a new lease will be in line with that under the old lease as it has been less than 2 years since the last rent review. This is in addition to our experience of rents at this location.
- Yield up cost of £40,000 [TBC] [i.e. to be confirmed]."
The estimated yield up cost of £40,000 was based on information given to Mr Cartwright by Jane Wilkinson, and represented her rough assessment of what it would cost to return Unit 39a to its original condition.
"[Mr Cartwright's] initial findings were well in excess of our expectations; maybe here at Sixty we're being naοve to think that the Landlords would take a greatly reduced offer?
In many of the cases, the offers we have had on the open market have been less than in Tom's report; therefore I doubt we (Sixty UK & SpA) would consider attempting a CVA.
Do you think there [are] any other angles we can pursue to attempt [to] try to mitigate the offers in an equitable manner?"
Judy Lane's initial reaction, therefore, was that a CVA would not be acceptable to the Sixty group if it was based on Mr Cartwright's figures, which were considerably higher than Sixty had expected. Nevertheless, it appears that the decision was taken to continue to work up proposals for a CVA, and to make use of Colliers' report in order to place a sale value on the business in an administration, in the event that the proposed CVA proved unacceptable to creditors.
"The landlords can then choose to accept this, or to vote against the CVA. In the event that their votes are insufficient to stop the CVA (which is what we understand will be the case) then they have an option to claim that the arrangement is unfair and ask the High Court to overrule it. For this reason we are seeking the Barrister's assistance (to ensure that any such challenge would not be successful). In the normal course of events such a proposal would not be unfair but in this case, as there are guarantees, it is not so straightforward.
What I am saying is, calculate the maximum the parent is willing to inject (i.e. between £300 and £500k), deduct from this the costs and possible future costs of defending any challenge and then you have the maximum amount you can offer. From that you can work out your initial offer. I assume that the better the offer to the guarantee landlords, the more likely they are to accept."
"Administration remains to be an appropriate tool for us to put pressure on the Landlords to settle a deal with us. In the opinion of Mark Parkhouse [of McGrigors], Landlords would rather have the money up front than wait months or longer to overturn a CVA creditors vote, or in the case of Bluewater go to the Italian courts to enact [sic] the guarantee. The ideal outcome and potentially the likely outcome is that the landlords will settle with us without having to start the CVA proceedings, but unfortunately we need to enter Administration to prove to the Landlords we are serious."
"The latest budget that has been supplied was £500k which is, as we all know, not high enough and well below the realities of the marketplace."
In his reply sent 20 minutes later, Mr Hollis said:
"I agree with you entirely on the "budget" better to hold a realistic figure, even if the negotiations mean you won't need to spend it all. Being bullish though, "backing out" [i.e. by the landlords] would mean no meaningful funds and empty premises for landlords in a background of rent payment quarterly rebellion, retail downturn and in a week when three new shopping centres have opened. More likely an agreement will be reached."
"With such an amount almost any Court would see that we did try to take care of all aspects and did our best to mitigate the loss An evaluation from Experts of this field [i.e. Mr Cartwright's report] indicated that the Landlord loss would be about £3.6m."
"We understood, as I wrote several times, that the CVA shall temporarily prevent Landlord to use [the guarantees]. On how long this "temporary" period is we may have interpretations, but Mark [Parkhouse] assured us that in case the CVA is challenged in Court, we may adopt delaying tactics, stretching things up to 15-18 months. We know that at the end of the stretched period the landlord shall probably win and obtain CVA reversal. At this point they shall have to obtain a summary judgment and attack Sixty SpA in Italy, where, with delaying tactics, we can bring things forward for additional 5-8 months
If the Administrator could reconfirm that things are like that, I will probably stop bothering, because this type of situation/risk was known, evaluated and accepted."
"I am not sure how this affects the CVA possibilities. We are already aware that the chances of a successful challenge are good, and the possible creation of a further class of creditor is likely to weaken the position further.
This could have serious effects as, with our budget of £550k for the exit landlords, we would not have sufficient to make a realistic offer to buy Muji's claim. They could therefore overturn the efforts in negotiations with the other exit landlords, leaving only a CVA route available. This is not at all sure to succeed."
"I intend to spend tomorrow preparing different sets of documents for a CVA showing different outcomes relating to the amounts we offer Liverpool. For each different amount there will be different effects on the chances of the challenge failing, the dividend payable to [Sixty SpA], and balance of Loan left on the books of [Sixty]. I will send these options to you and ask you to confirm which one you would want me to send out as the final proposal."
"and, most importantly,
- Whether you would wish to revert to Liverpool again with another suggested negotiated settlement figure. You will recall that their lawyers had suggested negotiation was possible around the £1 million mark. There may be a point where both parties could agree."
Mr Hollis concluded:
"Once you have decided your preferred route, or indeed should you wish to suggest a further option, please revert back to me accordingly as we approach this final point, I would stress to you the importance of these decisions and respectfully suggest you take a short while to ensure you are comfortable with your chosen route prior to responding to me."
"The amendments to the CVA are likely to be slight. Your clients' claim has been uplifted to £300k, to match [Appendix C]. This too has been amended in the light of advice on current market conditions/options. I attach a copy (still draft, of course at this stage)."
The attached revision of Appendix C was in the reduced form subsequently included in the final proposal. There is no trace in the papers disclosed by the administrators of the "advice on current market conditions/options" which was said by Mr Hollis to justify the amendment. I am driven to conclude that this was a deliberate misrepresentation of the true position, and that Mr Hollis was unwilling to disclose the truth, which was that the level of the payment offered to the landlords was being dictated by Sixty SpA and bore no relation whatever to the only advice which had been obtained on the subject, namely Mr Cartwright's report. The inclusion of the original Appendix C in the draft proposal sent to Davies Arnold Cooper must have been a mistake, and the administrators now had to invent a justification for the reduced version which eliminated (for each unit) the reverse premium of £275,000 payable to the new tenant and the yield up costs of £40,000.
The expert evidence
"(a) The CVA proposal to compensate the landlord in the sum of £300,000 is inadequate. I calculate that even if the assumptions made at Appendix C were fair and reasonable the actual sum should be no less than £387,755.56.
(b) I have examined the three stated assumptions in Appendix C. I have accepted the assumption of 12 months to find an alternative occupier for these premises as being representative of a band of possibilities but I do not accept the other assumptions which have been made as being realistic or reasonable. Indeed in the current economic climate I fear that the twelve month assumption may also prove to be optimistic. If letting were to take 18 months my calculation of loss to the landlord would increase by £126,000.
(c) In my view assuming a 12 month reletting period to a tenant of suitable covenant strength, it would be reasonable to expect such a letting to be achieved only on the provision of substantial incentives in the form of a capital payment of £200,000 for each Unit and the grant of a 12 month rent free period, that is to say in practice no less than was required in October 2006 to secure the current Tenant. Assuming these incentives I believe the maximum rent achievable for each Unit is £75,000 per annum.
(d) I have calculated the loss suffered by the Landlords as a result of an enforced "surrender" of the existing leases applying the above assumptions, and adopting the Park Air Services discount to reflect the current value of the Landlords' claim for future rent. I arrive at a figure of £1,164,000 excluding VAT and costs as being the appropriate figure."
(1) When it opened in March 2006 the Met Quarter was Liverpool's first high class retail shopping centre and met a long-standing need. However, in 2008 the larger Liverpool One Shopping Centre also opened, providing competition and a large increase in available space for upmarket retailers, at a time which coincided with the global financial crisis.
(2) Within the Met Quarter itself, Units 39a and 39b occupied one of the less attractive positions, being at the rear and on the upper level, furthest from the main entrance and the highest footfall.
(3) In April 2009 the national retail market was more difficult than at any time in Mr Wright's career. The problems associated with the "credit crunch" had led to a decline in rental values and an increase in the level of incentives which landlords found it necessary to offer in order to attract retailers to take accommodation. The number of transactions had also substantially reduced.
(4) Accordingly there was "huge competition to secure the small number of retailers who might trade in the Met Quarter and fit properly into the tenant mix policy", and the landlords' task in securing covenants of a similar standard to those given by Sixty SpA would be "an extremely difficult one". Furthermore, the landlords of Liverpool One were offering substantial incentives to retailers, as well as very favourable rental terms, in order to secure first lettings at their Centre. There were already a number of vacant units at the Met Quarter, and "in order to secure a covenant of equivalent strength to the international brand of Sixty SpA a soft rental deal and substantial incentive would be required (a) to persuade the retailer to come to Liverpool and (b) to persuade the retailer that the Met Quarter was the more attractive location when compared with say Liverpool One or elsewhere within Liverpool City Centre" (paragraph 7.8).
(5) If the units were vacated, it might take anywhere between six months and two years to achieve a re-letting, and the assumption of 12 months in the CVA might well prove optimistic in the current economic climate.
(6) The three month rent free incentive referred to in Appendix C was "totally inadequate", and the starting point would be the incentives given to Sixty in 2006 which represented the absolute minimum that the landlords would have to provide in order to secure a re-letting. The appropriate package to offer for each unit would be a 12 month rent free period, plus a capital contribution of £200,000.
(7) The assumption in the CVA that the current passing rents of £109,145 per annum would be achievable on re-letting was also unrealistic. Even assuming an equivalent guarantor's covenant to that of Sixty SpA, the rental value of each unit was no more than £75,000 per annum exclusive of rates.
(8) Upon a disclaimer of the two leases in a hypothetical liquidation, the landlords would be entitled to prove for compensation in accordance with the principles laid down by the House of Lords in In Re Park Air Services Plc  2 AC 172. On that basis, the landlords' loss should be quantified as £1.164 million.
The applicants' grounds of challenge
(a) the CVA leaves them in a substantially worse position than on a liquidation of Sixty, when regardless of the amount that they might have expected to receive as a dividend in the liquidation, their contractual rights against Sixty SpA would have been unaffected;
(b) it is anyway unfair in principle for the CVA to abrogate their contractual rights against Sixty SpA under the guarantees, which they were entitled to enforce against Sixty SpA for the remainder of the terms of the leases and without any obligation to mitigate their loss, in return for a compensation payment based on uncertain and untested assumptions about the applicants' ability to re-let the premises in a very difficult market;
(c) the estimate of Sixty's liability to the landlords adopted in the CVA, namely £300,000, is in any event based (ostensibly) on the unreasonable and unrealistic assumptions in Appendix C, and (in fact) on the maximum amount that Sixty SpA was prepared to make available, and in either case is far too low; the minimum sum required fairly to compensate the applicants for the loss of their contractual rights against Sixty SpA would have been £1.2 million;
(d) it is also unfair to fix the amount of compensation payable to the applicants in a predetermined sum, without any provision for it to be determined by independent adjudication, and without the ability to take into account events post-dating the CVA;
(e) the CVA treats the applicants differently from at least two other creditors or classes of creditors, without any proper justification for such differential treatment; and
(f) finally, the CVA creates no enforceable obligation upon Sixty SpA to make any of the compensation payments in return for which the applicants are obliged to give up their guarantees, nor does it make the release of the guarantees conditional upon the receipt of such payments.
(a) Any CVA which leaves a creditor in a less advantageous position than before the CVA will be prejudicial to the creditor. The real issue is generally whether the prejudice is "unfair".
(b) There is no single and universal test for judging unfairness in this context, and the question must depend on all the circumstances of the case, including in particular the alternatives available and the practical consequences of a decision to confirm or reject the arrangement.
(c) In assessing the question of unfairness, a number of techniques may be used, including what may be described as "vertical" and "horizontal" comparisons. A vertical comparison is a comparison between the position that a creditor would occupy and the benefits it would enjoy in a hypothetical liquidation, as compared with its position under the CVA. The importance of this comparison is that it generally identifies the irreducible minimum below which the return in the CVA cannot go. As David Richards J said in Re T & N Limited  EWHC 2361 (Ch),  2 BCLC 488 at paragraph 82 of his judgment:
"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 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."
(d) A horizontal comparison, on the other hand, is a comparison between the position of the applicant and the position of other creditors, or classes of creditors. The fact that a CVA involves differential treatment of creditors is a relevant factor which calls for careful scrutiny, although it will not automatically render a CVA unfairly prejudicial: see Re a Debtor (No.101 of 1999)  1 BCLC 54 (Ferris J). In considering the question of differential treatment, it is necessary to ask whether the imbalance in treatment is disproportionate, and also whether the differential treatment may be justified, for example by the need to secure the continuation of the company's business by paying essential suppliers or service providers.
"106. The unusual feature of the present case, however, is that on a winding up the guaranteed landlords would still have had the benefit of the valuable guarantees, whereas all the other unsecured creditors (of this apparently substantially insolvent company) would receive nothing.
107. In summary, the guaranteed landlords are the class or group of unsecured creditors that would suffer least, if at all, on an insolvent liquidation of Powerhouse, but they are the class or group that is most prejudiced by the CVA, under which their claims against Powerhouse and PRG, as surety, are to be compromised by payment of a dividend that places no value on the very rights (i.e. the guarantees) which improved their position over all other unsecured creditors and which were intended to and would benefit the guaranteed landlords on the insolvent liquidation of Powerhouse.
108. Such an illogical and seemingly unfair result could not have been achieved if there had been a formal scheme of arrangement under [section 425 of the Companies Act 1985, now section 899 of the Companies Act 2006]. It is common ground that, under such a scheme, the guaranteed landlords would have been in a class of their own, separate from other unsecured creditors. Moreover, the scheme would not have needed to include, and would not have included, creditors who were to be paid in full. Accordingly, as was accepted by [counsel for the company], the guaranteed landlords could and would have vetoed any such scheme. The only reason a different result has been achievable with the CVA is that all creditors form a single class for the purposes of a CVA, and that class includes every creditor entitled to a notice of the meeting to approve the CVA, including creditors who would be paid in full. In effect, the votes of those unsecured creditors who stood to lose nothing from the CVA, and everything to gain from it, inevitably swamped those of the guaranteed landlords who were significantly disadvantaged by it."
The financial position of Sixty SpA
Discussion and conclusions
"It is not for the officeholders to advocate the interests of one group of creditors as against another group, nor to engage in brinkmanship, or attempt to extract ransom payments, on their behalf by refusing to put forward what he, the officeholder, regards as a fair proposal in order to extract a better proposal for the first group. They simply put forward proposals (which, if they are acting properly are ones which they must consider to be fair to all the creditors of the company and to the company itself)."
Warren J went on to say, in paragraph 118, that the responsibility of an office holder, in attempting to fulfil the purpose for which he is appointed, is "to try to structure an arrangement that will be capable of achieving the necessary statutory majorities and will not be unfairly prejudicial to any creditor". These principles should have been well known to the administrators, but they chose to disregard them. They allowed Sixty SpA to dictate the offer to be made to the applicants, secure in the knowledge that the CVA would be passed by the large majority of unsecured creditors who would be paid in full, and that the applicants would then face lengthy and expensive court proceedings before the CVA could be overturned. If this is indeed what happened, it was in my judgment inexcusable.