Case No: 8403 of 2008
Neutral Citation Number: [2010] EWHC 1890 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 23/07/2010

Before :

MR JUSTICE HENDERSON
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Between :

	(1) MOURANT & CO TRUSTEES LIMITED
(2) MOURANT PROPERTY TRUSTEES LIMITED	Applicants	
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	(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)	Respondents	

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Mr Peter Arden QC and Mr Edward Francis (instructed by Davies Arnold Cooper LLP) for the Applicants

Hearing dates: 6 and 7 July 2010
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Judgment
Mr Justice Henderson: 
Introduction
1.	This is an application by the landlords of two retail units at the Met Quarter shopping centre in Liverpool to revoke the decision taken at a creditors’ meeting on 2 April 2009 to approve a company voluntary arrangement (“CVA”) proposed by the administrators of the tenant of the units, Sixty UK Ltd (“Sixty”).  The application is made under section 6(1) of the Insolvency Act 1986, which provides (so far as material) that an application may be made by any creditor entitled to vote at the meeting
“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]”
2.	The administrators of Sixty, Mr Peter Hollis and Mr Nicholas O’Reilly, are licensed insolvency practitioners and partners of Vantis Plc.  They were appointed on 29 September 2008, and at an initial creditors’ meeting held on 8 December 2008 they said that they intended to propose a CVA.  The proposal was issued on 17 March 2009.  It was then approved at the meeting on 2 April, subject to certain modifications proposed by HMRC which have no bearing on this application.  The administrators are also the supervisors under the CVA.
3.	The CVA sought to take advantage of the decision of the High Court in the Powerhouse case (Prudential Assurance Co Ltd v P R G Powerhouse Ltd [2007] EWHC 1002 (Ch), [2007] BCC 500), which had established that a CVA could lawfully be structured in a manner which would deprive a creditor landlord of the benefit of a third party guarantee of the liabilities of the tenant debtor company.  In the present case, the liabilities of Sixty as the tenant of the two units were guaranteed by its ultimate Italian parent company, Sixty SpA. The effect of the CVA was to release Sixty SpA from all liability under the guarantees upon payment of a sum of £300,000 to the applicants as landlords of the units. The figure of £300,000 was said in the proposal to represent 100 per cent of Sixty’s estimated liability to the landlords on a surrender of the leases, and to be calculated on the basis of advice received and certain specified assumptions. Thus the applicants were ostensibly to receive full compensation on the basis of a notional surrender of the leases, but they were to be deprived of any recourse against Sixty SpA as guarantor during the remainder of the 10 year terms of the leases, which had been granted in 2006 and still had approximately seven and a half years to run. 
4.	The CVA also provided for two other stores occupied by Sixty to close, and for their landlords to receive 21 per cent of Sixty’s estimated liability to them under the relevant leases.  Those leases were said in the CVA not to have the benefit of any guarantees: hence the much lower level of compensation payable. 
5.	All other creditors under the CVA would continue to be paid in full, subject to normal terms and conditions.  They also had the benefit, for what it was worth, of an apparent agreement by Sixty SpA to defer repayment of a sum of just under £15 million due to it from Sixty.  It was intended that Sixty would continue to operate as a going concern, and with the exception of the landlords of the four closed stores no other external creditors were asked to accept any reduction in, or compromise of, their debts. Unsurprisingly, therefore, a sufficient number of those creditors voted in favour of the proposal to ensure that it was passed by the necessary majority of 75 per cent in value of those present and voting in person or by proxy at the meeting: see rule 1.19(2) of the Insolvency Rules 1986.  Indeed, the only creditors present at the meeting who voted against the proposal were the applicants. 
6.	The applicants’ challenge to the CVA is advanced on a number of grounds, but centres on (a) the alleged inadequacy of the compensation payment to them of £300,000, and (b) the compulsory deprivation of the benefit of Sixty SpA’s guarantees.  Reliance is placed on both of the grounds in section 6(1) of the 1986 Act, although with the main emphasis on unfair prejudice. The nub of the applicants’ case is that they have been unfairly treated in comparison with the generality of the external unsecured creditors, all of whom are to be paid in full.  The applicants say that they are being asked to accept compensation which is much too low, and that far from being based on advice, as represented in the proposal, it actually amounts to less than one third of the sum recommended in the only advice on the question which the respondents have disclosed.  Furthermore, the applicants say that there can be no justification for requiring them to give up the valuable benefit of the guarantees in precisely the situation they were designed to meet, namely the inability of the tenant to honour its obligations under the leases.  Nor is there any suggestion that Sixty SpA would have been unable to meet its liabilities as guarantor.  On the contrary, submit the applicants, the documentary evidence gives rise to the clear inference that the sums offered to them in the CVA were dictated by Sixty SpA, and represented the most that the parent company was willing to make available for the purpose.  
7.	Apart from their complaint of unfair treatment in relation to the generality of creditors who are to be paid in full, the applicants say they have also been unfairly treated in comparison with at least one creditor with claims in relation to one of the other closed stores.  That creditor is the original tenant of the store at the Trafford Centre in Manchester, Ryohin Keikaku Europe Ltd trading as Muji (“Muji”).  Muji assigned its lease to Sixty, but remained liable to the landlord for the rent during the remainder of the term.  If and when called upon to pay the rent, Muji would then have a right of indemnity against Sixty.  The applicants’ point is that no steps were taken in the CVA to curtail or remove Muji’s right of indemnity in such circumstances, with the result that Muji would be able to prove for the amounts it was called on to pay, and under the CVA it could then expect to recover those amounts in full.  Indeed, this is what subsequently happened, and although the supervisors rejected Muji’s proof, Muji commenced proceedings in the Bristol district registry of the High Court which vindicated its right to prove for the full amount of its debt in the CVA.  Muji is, in effect, a guarantor, but the landlord of the Trafford Centre unit has not been forced to give up its guarantee in the same way as the applicants have.  
8.	Apart from the documents disclosed by the respondents, the applicants rely on two expert reports prepared by Mr Eric Russell Wright, FRICS, who has been in practice in Liverpool since 1970 specialising in retail property.  The applicants’ only witness of fact is Mrs Caroline Barry Howard, a partner in their solicitors Davies Arnold Cooper LLP. In her witness statement in support of the application, dated 29 April 2009, she sets out the background and exhibits the relevant documents which were then in the applicants’ possession.
9.	The respondents are Sixty and the two administrators.  They have throughout been represented by solicitors, McGrigors LLP, and the case proceeded towards trial in the usual way, although an application for specific disclosure was required in order to elicit disclosure of the communications passing between the respondents and Sixty SpA, and the valuation advice which they received, in the period leading up to the proposal for the CVA, and also in relation to the claims made by Muji.  The return date of the application for specific disclosure was 2 February 2010, and shortly before that date the respondents provided a list of documents relevant to those issues.  On that basis, the application was adjourned generally and the respondents were ordered to pay the applicants’ costs of the application to date.  
10.	By way of evidence, the respondents put in an argumentative witness statement by Mr Mark Parkhouse, the partner of McGrigors LLP with conduct of the matter, and an expert report, which expressed the view that the payment of £300,000 to the applicants provided fair compensation for the release of Sixty SpA’s guarantees. On 30 June 2009 the two experts prepared a brief joint statement, recording the areas of agreement and disagreement between them.  
11.	The application was set down for trial last October, with a time estimate of three days, and on 2 November 2009 the parties were informed that the hearing would take place in a three day window from 5 July 2010.
12.	Shortly before the hearing, however, matters took an unexpected turn.  On 28 June McGrigors declined the usual offer to be supplied with a copy of the trial bundle, and on 1 July they informed the applicants’ solicitors that the respondents did not intend to attend or be represented at the trial.  They said that there was no point in continuing with a substantive hearing of the application, because the CVA was either going to be modified on terms which would remove the features which gave rise to the application, or alternatively it would fail.  In those circumstances, they proposed that an order be made by consent giving directions for the summoning of a further meeting to consider the modifications to the CVA that were being prepared by the administrators. At the same time, the respondents offered to pay the applicants’ costs of the application on the standard basis, subject to detailed assessment.  
13.	This was clearly a most unsatisfactory proposal.  Despite the imminent trial date, no indication was given, either in the letter itself or before it was sent, of the nature of the modifications that were now proposed.  Nor was it conceded that the application was well-founded, although the offer to pay the applicants’ costs might be thought to carry the implication that it was.  A further problem is that the court has no power to given directions by consent for the summoning of a further meeting to consider a revised proposal.  The power in section 6(4)(b) of the 1986 Act, which appears to be what the respondents had in mind, is only exercisable where the court “is satisfied as to either of the grounds mentioned in subsection (1)”.  Thus a case on unfair prejudice and/or material irregularity has to be made out to the court’s satisfaction before such an order can be made.
14.	The applicants’ solicitors replied on 1 July, pointing out some of the difficulties which I have mentioned, and asking whether the respondents consented to an order being made under section 6(1).  They also said that the court would be in no position to give directions for the summoning of a further meeting if the respondents were not represented at the trial, and if there were no evidence from the supervisors about the current state of the CVA, the alternative proposals that they wished to put forward, the prospects of those proposals being approved by creditors, and the timescale within which these steps would be taken.  
15.	On 4 July McGrigors responded, saying that “due to the work and holiday commitments of the Supervisors they will not be in any position to provide the required information before 30 July 2010”.  It was suggested that the forthcoming hearing should be used as a case management conference to agree directions for the provision of the further evidence requested by the applicants. Alternatively, it was suggested that the parties should take steps, without a court order, to arrange a creditors’ meeting by 30 July, for consideration of proposed amendments to the CVA which the supervisors would circulate by 15 July.  
16.	This letter was in my judgment no more acceptable than its predecessor.  There was still no hint of the form that the proposed amendments would take, and there was still no admission that the CVA in its current form was flawed. On the day before the commencement of the trial window, nothing had been supplied in the way of evidence to support an application for an adjournment, although the respondents seemed to hope that the hearing could be put off until at least the end of the Trinity term, and thus in practice until the autumn.
17.	On 5 July the applicants wrote again, rejecting both of the respondents’ proposals and repeating that they would ask the court to make orders under section 6(1).  This elicited a reply from McGrigors, after the case had been listed to begin before me on 6 July, saying that the court would be asked for “a short adjournment of seven days” to allow the respondents to adduce the evidence requested in Davies Arnold Cooper’s letter of 1 July.  
18.	There matters rested until the beginning of the trial, when an application for an adjournment was made by counsel instructed at short notice on behalf of the respondents, Mr Edmund Nourse.  The application was made on the basis of instructions, and was still unsupported by any evidence.  Moreover, Mr Nourse made it clear that his instructions were confined to the making of the application.  If the trial proceeded, the respondents still had no intention of appearing at it or being represented.  In answer to a question from myself, Mr Nourse said that the effect of the proposed amendments to the CVA would be to provide for all the creditors to be treated on the same basis as if there were a liquidation. The supervisors no longer had enough money to continue the CVA in its current form, and it was for that reason alone that the amendments were now going to be put forward.  The supervisors expressly refused to concede that the present application was well-founded on the merits. Their position was simply that money had run out, and the only practical way forward was to convert the CVA into a shadow liquidation. Against this background, submitted Mr Nourse, no useful purpose would be served by continuing with the hearing, and the case should be adjourned to await the outcome of the proposed further creditors’ meeting.  
19.	I refused the request for an adjournment, which was opposed by counsel for the applicants.  The trial was a long-standing fixture, and if the supervisors had good reason for putting forward new proposals they should have done so in good time instead of leaving it until the last minute.  It is well known that very strong reasons are needed to persuade the court to adjourn a fixture, but the present application was wholly unsupported by evidence, and the correspondence which preceded it seemed to me to betray an attitude which was both equivocal and unrealistic.  The strong impression which I gained was that the respondents were concerned, above all, to avoid a trial of the application on its merits.
20.	After I had given my brief ruling, Mr Nourse and his instructing solicitor withdrew, and the case proceeded in their absence.  I have not, therefore, had the benefit of adversarial argument.  However, the matter was opened to me at some length by leading counsel for the applicants, Mr Peter Arden QC, and I was taken carefully through the relevant documents.  Mr Wright was called to give evidence, and verified his two reports.  I did not require Mrs Howard to be called, and admitted her evidence in the form of her two witness statements.
21.	With this introduction, I will now set out the uncontroversial background facts and the relevant terms of the CVA as approved.  I will then deal in more detail with the history of events leading up to the issue of the proposal in its final form in March 2009, before turning to the expert evidence and the grounds of challenge advanced by the applicants. 
The background facts
22.	Sixty is an English registered company.  It is wholly owned by Sixty International SA, a company registered in Luxembourg.  The ultimate holding company of the Sixty group is, as I have already said, Sixty SpA, which is an Italian public limited company based in Chieti in the Abruzzo region.  Since its incorporation in September 1998, Sixty has carried on business in the United Kingdom in the wholesale and retail sale of fashion garments under brands which include Miss Sixty (for women) and Energie (for men).  The goods which it sells are supplied to it by Sixty SpA, which is the global licence holder for the brands.  Sixty’s retail operations were carried out through eleven retail shops and a further 14 concessions in department stores.
23.	Two of the retail shops were at Unit 39a and Unit 39b at the Met Quarter shopping centre in Liverpool, an upmarket retail development which opened in 2006.  The landlords of the units are the applicants, in their capacity as trustees of the Met Quarter Property Unit Trust. The units were demised to Sixty by two leases dated 3 November 2006 for terms of ten years from 9 October 2006, for the retail sale of menswear and ladies’ wear respectively under the Energie and Miss Sixty brands.  Each of the leases reserved:
(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.
24.	Each of the leases contained qualified prohibitions against alienation, and an absolute  prohibition on assignment of the whole of the premises during the first three years of the term. Sixty also covenanted to keep the units open for the carrying on of the permitted retail trade for specified minimum trading hours, and in the event of failure to do so for a period in excess of two days, to pay on demand a sum equal to double the Basic Rent for each day of default. 
25.	Sixty SpA joined in the leases as guarantor of Sixty’s obligations. The guarantee provisions contained savings in a usual form preventing release of the guarantee by operation of law, for example upon the grant of any indulgence by the landlords to Sixty or upon any variation of the standard terms.  Sixty SpA also covenanted, among other matters, to take on request a new lease of the premises, upon the same terms and for the residue of the contractual term, if the tenant went into liquidation and the liquidator disclaimed the lease.  
26.	In order to procure the grant of the leases to Sixty with the benefit of the parental guarantees by Sixty SpA, the applicants had to grant Sixty substantial incentives which were set out in Agreements for Leases for each of the units dated 3 November 2006.  The principal incentives were the grant of a 12 month rent-free period, and a reverse premium of £183,000 payable for each of the units. The total value of these incentives was thus at least £566,000.  It is worth noting that incentives at this level were required even in the relatively buoyant market for retail lettings in the latter part of 2006.
27.	After increase in accordance with the retail prices index, the current basic rent payable under each lease in April 2009 was £109,145.43.  Sixty had not become liable to pay any additional turnover rent in respect of either lease at any time since its commencement.  The combined service charge and insurance rent for the two leases, at the same date, was around £36,000 for Unit 39a and £39,000 for Unit 39b. 
The provisions of the CVA
28.	The circumstances which had given rise to the CVA were described in section 2 of the proposal.  It was explained that:
(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.
29.	The basis of the proposal was then set out in section 3, as follows:
“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.”
30.	Particulars of the four Closed Stores were then given in clause 4.4.  Apart from Units 39a and 39b at the Met Quarter, they comprised Unit 65 at the Trafford Centre in Manchester and Unit 4 at Bridgewater Park, Banbridge, Northern Ireland.  Clause 4.5 then recorded that Sixty’s obligations under the two Met Quarter leases were guaranteed by Sixty SpA.
31.	The proposal then continued:
“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.”
32.	Appendix C set out the assumptions which had been used to estimate the extent of the loss to the landlords of the two Liverpool Units. They were: 
•	“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.”
33.	Appendix D contained a comparison of the estimated outcomes under the CVA and in a liquidation, in both cases as at 16 March 2009.  The potential dividend to unsecured creditors, on the basis of these calculations, was 13p in the pound in a liquidation, and 21p in the pound under the CVA.  It should be noted that the liquidation scenario included in the list of unsecured creditors inter-company debts of £25.145 million, and amounts due to landlords of £4,238 million, whereas the corresponding figures in the CVA calculation were £10.170 million and £1.018 million respectively. It appears, therefore, that the £15 million odd owed by Sixty to Sixty SpA was not treated as a debt for the purposes of the CVA.  This is consistent with the deferral proposed in clause 3.2, and to my mind implies that the deferral was intended to last until the purposes of the CVA had been achieved. The difference in the amounts shown as due to landlords in the two calculations presumably reflects the proposal for the closure of the four loss-making stores and the payment of compensation to the relevant landlords, including of course the applicants.
The history of events leading up to the CVA
34.	By the autumn of 2007 Sixty had been trading from the two units at the Met Quarter for about a year.  The rent free period was about to expire, and trading conditions had become very difficult.  The Energie brand, in particular, had not proved a success with Liverpool customers.  Sixty SpA was thinking of closing both stores, but if the surrender of one unit could be agreed with the landlords it was prepared to continue supplying and promoting the Miss Sixty brand at the other unit.  Sixty had instructed a firm of consultants, Insight Retail Consulting, and on 9 October 2007 a meeting took place with the landlords’ managing agents, Savills, at which representatives of Sixty and Insight explained the position.  They sought the landlords’ agreement to accept an unconditional surrender of the Energie store, and an extension of the rent free period. On 6 November, however, Savills wrote to Insight refusing both requests, although they said that the landlords would be prepared to relax the prohibition on assignment in the leases so as to allow Sixty to assign one of them, provided that Sixty continued to trade in the other unit under both brands, and provided also that Savills were instructed as joint letting agents. 
35.	Negotiations continued with Savills over the winter, but did not result in an agreement. Meanwhile, Sixty was also developing a strategy for the disposal of its loss-making Bluewater and Trafford Centre stores. For this purpose estimates were made of the surrender premiums which it was thought would probably have to be paid in order to secure surrenders of the Trafford, Bluewater and Liverpool stores.  The figures were substantial: between £750,000 and £1 million for Bluewater, £500,000 for Trafford and £200,000 for Unit 39a at the Met Quarter.  In early March 2008 Sixty’s property manager, Jane Wilkinson, submitted to Sixty SpA an updated schedule of projected store closure costs for the five stores which were then being considered for closure, including an estimate of £591,000 for Unit 39a.  In addition to the estimated surrender premium of £200,000, this figure included £170,000 for fixed assets written off and £204,500 for the work and professional fees involved in the stripping out of the Energie store and the reconfiguration of Unit 39b as a single unit.  Since the two units were adjacent to each other, considerable sums had been spent in uniting them with shared facilities, although to the shopper they appeared to be two separate stores. If Unit 39a was now to be surrendered, this work would have to be undone and both units restored to single occupancy.
36.	In April 2008 Vantis Plc were appointed by Sixty and Sixty SpA to advise on the potential restructuring of the business and the closure of loss-making stores. From the beginning, the partners of Vantis Plc who had conduct of the matter on Sixty’s behalf were Mr Hollis and Mr O’Reilly, the future administrators and supervisors of the CVA.  
37.	The next important development was in August 2008, when Sixty commissioned Colliers CRE, the well-known property consultants and part of the Colliers International group, to provide a report on the likely level of claims by the landlords against Sixty on a surrender of the loss-making leases as at 29 September 2008.  It is not clear from the papers before me whether this report was obtained on the advice of Vantis, or whether the initiative came from Sixty, but it was certainly envisaged from the outset that Vantis would have sight of the report. 
38.	On 8 August 2008 Colliers produced a draft report, prepared by Mr Thomas Cartwright, who was an associate director at their London office. It appears that the report was never finalised, no doubt because the draft report provided Sixty and Vantis with all the information they required. There is no suggestion in the papers that Colliers’ advice was questioned or regarded as unreliable, although it was evidently unwelcome to Sixty SpA.  Mr Cartwright’s assessment was that the aggregate level of loss suffered by the landlords in respect of the five stores now earmarked for closure was £3,650,000, made up as follows:
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	
	£3,650,000	
39.	Mr Cartwright explained the assumptions upon which these figures were based.  The properties had not been inspected, and he assumed that all repairing covenants had been complied with.  He relied on estimates provided by Sixty for dilapidations and yielding up costs.  The figures were based on a discounted cash flow calculation, assuming a surrender of the leases on 29 September 2008.  A number of detailed assumptions for the individual leases were then set out, including the following for Unit 39a:
“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. 
40.	It will be noticed that the first, second and sixth of the assumptions used by Mr Cartwright in relation to Unit 39a are worded identically to the three assumptions later set out by the administrators in Appendix C to the CVA: see paragraph 32 above.  However, the remainder of Mr Cartwright’s assumptions, including in particular the incentive of £275,000 to be paid to the new tenant, and the yield up cost of £40,000, were omitted from the CVA proposal in its final form. 
41.	Once the draft report had been received, it was forwarded by Sixty to its solicitors (then, as now, McGrigors LLP) and to Mr Hollis at Vantis.  In her covering email, Sixty’s director of finance, Judy Lane, said this:
“[Mr Cartwright’s] initial findings were well in excess of our expectations; maybe here at Sixty we’re being naïve 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.
42.	Mr Cartwright’s report evidently caused some consternation in Italy.  It is clear from emails passing between Sixty SpA, Sixty and Mr Hollis in mid-September 2008 that Sixty SpA was unwilling to contribute more than around £300,000 to £500,000, including legal costs, to pay off the landlords of all the closed stores.  Sixty regarded this budget as “quite low”, and asked whether it was really the maximum that Sixty SpA was prepared to make available.  For his part, Mr Hollis (in an email sent on 12 September at 12.16 pm) said that the amount offered to the landlords in a CVA would be based on the amount to be injected by Sixty SpA:
“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.”
43.	On 23 September Judy Lane prepared a summary of outstanding issues and potential threats to Sixty’s business, which she forwarded to her colleagues in Italy.  By way of introductory comment, she said this:
“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.”
44.	On 25 September, with the Michaelmas quarter day looming, a decision needed to be taken quickly on whether to place Sixty into administration. In an email to Mr Hollis timed 10.01 am, Judy Lane said that the decision would be taken on the following day, and the UK management was keen to proceed, but was concerned that the “budget” from Italy was insufficient:
“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.”
45.	On the evening of the same day, Mr Glauco Landi of Sixty SpA circulated an internal email dealing with the position in the UK. He said he had shared its content with Jonathan Richards, Judy Lane and Jane Wilkinson of Sixty, “[s]o this reflects the situation as we all perceived it”.  He expressly recognised that the group’s potential liability for the stores covered by Sixty SpA’s guarantee was considered to be more than £5 million.  He discussed the position under a CVA, comparing it with a similar procedure in  Italy, and pointed out that if the landlords were unfairly treated they could not simply enforce the guarantee but would first have to obtain a court judgment in their favour (which would take about 18 months) and then “fight in Italy for the payment of the guarantees”, which would take about a further 8 to 10 months.  He accepted that the matter of “fair treatment” was quite delicate, and referred to advice received from Mr Parkhouse to the effect that the landlords would have a reasonable chance of obtaining reversal of the CVA if they could show that “we did not take care of the loss that they are suffering (loss of rent, payment of current maintenance and charges, reverse premium to attract new tenants)”. Mr Landi went on to say that, to be on the safe side, Sixty SpA should offer a total of about £2 million, including a cash injection from Italy of £1.4 million. He then said:
“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.”
46.	On 29 September Sixty went into administration, and Mr Hollis and Mr O’Reilly were appointed as the administrators.  On 1 October Savills wrote to Vantis, expressing disappointment on behalf of the landlords of the two Liverpool units and asking the administrators to discuss the position under the guarantees directly with Sixty SpA.
47.	In the course of October discussions continued between the administrators, Sixty and Sixty SpA.  Mr Landi sought confirmation of his understanding that, in a CVA, the landlords would be unable to enforce the guarantees, and even if Sixty’s defence in court was weak, “the case could be long and costly for the landlords”.  On 29 October Judy Lane provided confirmation of this and other points to Mr Landi.  Mr Landi was evidently reassured, but still wished to obtain confirmation from Mr Hollis that he too shared the same views.  In an email to Judy Lane sent later on the same day, he said this:
“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.”
48.	Also on 29 October, Mr Hollis sent three spreadsheets to Sixty SpA containing detailed extrapolations over a two year period.  In his covering email to Mr Landi, Mr Hollis recorded his understanding that Sixty SpA “would only wish to inject up to £550k plus the costs of the Administration and trading losses”. He recommended that, once Sixty SpA had had an opportunity to examine the spreadsheets, it should reconsider its plans for Sixty’s future and meet the administrators to formulate a plan of action.
49.	On 2 November 2008 a first draft of a CVA proposal was prepared.  It appears to have been settled by counsel.  It was drafted on the assumption that 5 loss-making stores would close, including Unit 39a in Liverpool.  The estimated amount of Sixty’s liability to the landlords on surrender of the leases was stated to be £3.65 million, in accordance with Mr Cartwright’s report.  The draft was then sent to Mr Landi, who revised it on 12 November.  He sent his revisions to Sixty under cover of an email in which he explained that the number of stores earmarked for closure was no longer the five discussed by Mr Cartwright in his report, but would be either six or four, depending on the progress of negotiations with Bluewater.  In either case, the stores to close would now include both units in Liverpool, and also the Banbridge store in Northern Ireland.  Mr Landi said that Mr Cartwright should therefore work out two revised calculations of landlord loss, based on the new list of either six or four stores.  It should be noted that Mr Landi made no criticism of Mr Cartwright’s existing calculations, or of the figure of £490,000 which he had reached for Unit 39a alone.  The only reason why further calculations were required was the change in the stores earmarked for closure. 
50.	On 18 November Mr Hollis replied to a request from Judy Lane for clarification on a number of outstanding points.  One of those related to the Trafford Centre unit in Manchester and a projected meeting with the original tenant, Muji.  Mr Hollis said that there was a problem with Muji, which he feared might be “pivotal”.  He pointed out that Muji would be liable for the future rent not paid by Sixty, and the landlord was therefore unlikely to be greatly concerned by Sixty’s vacation of the store.  Muji would then have an indemnity claim against Sixty for the rent it had to pay, and would submit a claim in any CVA or liquidation accordingly.  Although it had previously been thought that any dividend payable to unsecured creditors would be minimal, and only £50,000 had been earmarked to be offered to Muji from Sixty SpA, it now appeared that realisations of assets were likely to result in a reasonable dividend payment, with the consequence that Muji would be unlikely to settle its claim for a figure less than the likely return to it in a CVA or liquidation.  This would give Muji a strong hand in negotiation.  Mr Hollis continued:
“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.”
51.	Discussion then continued about Muji’s position, but without any decision being reached.  On 23 January 2009 Sixty vacated its unit at the Trafford Centre.  
52.	On 16 February 2009 the administrators wrote to Davies Arnold Cooper, who were by now acting for the landlords of the Liverpool premises.  In the hope of avoiding the formalities and costs associated with a CVA, they sought to persuade the landlords that the most they could realistically expect to recover under a CVA would be around £72,000.  This figure was based on an estimated dividend of 18p in the pound, and an estimated claim in the CVA by the landlords in the region of £400,000 to £500,000.  No justification was offered for this estimate, which should on the face of it have been around twice as large (Mr Cartwright’s estimate of £490,000 had applied to only one of the two units, and there was no reason to suppose that his estimate for Unit 39b would be any different).  An offer was made on behalf of Sixty SpA to pay the landlords £250,000 in full and final settlement of any claims they might have, including under the guarantees.  This implied that the value of the landlords’ rights under the guarantees was only about £180,000.  
53.	A few days later, on 25 February, Mr Hollis sent a draft of a final version of the CVA proposal to Sixty SpA.  The draft said that the estimated liability to the landlords for the two Liverpool units was £560,000, and offered a compensation payment of only 4.5% of that sum (£25,200) in return for giving up the guarantees.  In his covering email, Mr Hollis said that the landlords would without doubt argue that this compensation figure was inadequate.  He also said Davies Arnold Cooper had intimated “that they were confident that the CVA would be successfully challenged by them if instructed and they thought little of the £250k offer”.  Mr Hollis therefore asked Sixty SpA to confirm that it was happy with the draft, to state what amount it would be prepared to offer the Liverpool landlords in the CVA as compensation for the loss of their guarantees, and whether it would be prepared to increase the offer through negotiation, and if so to what amount.  
54.	On 2 March, following telephone conversations with Davies Arnold Cooper, Mr Hollis sent them a draft of the CVA proposal. With nothing in the way of explanation, this draft now stated the estimated landlord liability for the two Liverpool units to be only £250,000, and offered a compensation payment of 4.5% of that amount (£11,250).  Nevertheless, Appendix C to the draft set out the assumptions that had been used for Unit 39a in precisely the same form as in Mr Cartwright’s report, and repeated the same assumptions for Unit 39b.  It is, of course, completely impossible to reconcile those assumptions with the estimated landlord liability of only £250,000, which was now approximately one quarter of the amount which Mr Cartwright’s calculations would have warranted.  Another feature of the draft proposal was that Sixty SpA would defer due repayment of £11 million due to it from Sixty, and this was reflected in the estimated dividend to unsecured creditors of 18p in the pound as set out in Appendix D. 
55.	Unsurprisingly, Davies Arnold Cooper asked questions about many features of the draft proposal, including the inconsistency between the derisory compensation payment offered and the assumptions in Appendix C, and the lack of any detail about the deferment of the £11 million due to Sixty SpA.  On the latter point, Mr Hollis sent an email to Davies Arnold Cooper on 5 March confirming that “the spirit” of the proposed arrangement was that the £11 million would stay with Sixty and not rank for payment at the CVA stage. It would be left outstanding on the current terms, that is to say free of interest and for an indefinite period.  Mr Hollis said it was not the intention of Sixty SpA to try to recover any of this sum until Sixty could properly afford to pay some or all of it back.
56.	On 9 March Mr Hollis reported back to Italy on the negotiations with Davies Arnold Cooper.  Mr Hollis said he assumed that the settlement offer, which had meanwhile been increased to £300,000, would be refused by the landlords.  He then said:
“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.”
57.	On the next day, 10 March, Mr Hollis sent various documents to Sixty SpA, including three different draft proposals for Sixty SpA to consider.  In his covering email, he acknowledged that one of the options (which mirrored the draft proposal sent to Davies Arnold Cooper) was unreasonable, and would not withstand any challenge.  That was in my view an accurate assessment.  The other two options, he said, “suggest a percentage of 75% of claim as being a fair payment”, and “would equate to [Sixty SpA] paying £225,000”.  He said that he considered this proposal to be “much more robust in terms of fairness”. He the set out a number of issues which Sixty SpA would “no doubt … want to weigh up” before reaching a decision, including the amount it would wish to pay in exchange for the guarantees,
“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.”
58.	Correspondence then continued with Italy, and in the course of the next few days agreement was reached with Sixty SpA on the final form of the proposal. Meanwhile, Mr Hollis informed Davies Arnold Cooper that the “wrong Appendix C” had been included in the draft proposal sent to them.  On 10 March, they asked for the right version of the appendix to be supplied.  In reply, Mr Hollis said this:
“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.
59.	Finally, on 17 March 2009, the proposal for a CVA was circulated to Sixty’s creditors in its final form.  I have already set out the salient features of this proposal in my description of the CVA, and I will not repeat them.  On 31 March Davies Arnold Cooper wrote to the administrators raising seven questions about the proposal, most of which are reflected in the challenge to the CVA that is now before me.
The expert evidence
60.	In his first report dated 29 April 2009 Mr Wright gave his opinion on the valuation issues arising from the final proposal for the CVA which had been circulated on 17 March.  His conclusions, based on his nearly 40 years’ experience of the retail sector in Liverpool, his inspection of the premises, his consideration of the documents, and consideration of a number of comparable transactions, were stated as follows in paragraph 10.1 of the report:
“(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.”
61.	These conclusions were in my judgment fully supported by the discussion and analysis which preceded them, and I have no hesitation in accepting his evidence.  Among the points which he mentioned, I would single out the following:
(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 [2000] 2 AC 172. On that basis, the landlords’ loss should be quantified as £1.164 million.
62.	In his second, much shorter, report dated 22 September 2009, Mr Wright dealt with certain points made by Mr Parkhouse of McGrigors in his witness statement.  Mr Wright said that there had been no signs of improvement in the retail market generally during the five month period since his first report, and he revised his estimate of the likely time needed to find a new tenant for the two units to “close to 2 years or longer”. 
The applicants’ grounds of challenge
63.	Against this background, the applicants’ basic case is simple and straightforward. They submit that the CVA is unfairly prejudicial to their interests as creditors of Sixty, for one or more of the following main reasons:
(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. 
The law
64.	While reserving the possibility of making a challenge in a higher court, the applicants accept for present purposes that a voluntary arrangement made between a tenant and its creditors, including landlords with the benefit of third party guarantees, is capable of imposing upon the landlords a binding release of their rights under such guarantees, even though the guarantor is neither the company which is proposing the arrangement, nor a party to it.  Furthermore, a CVA can have this effect even though the relevant guarantees contain provisions designed to prevent the release of the principal debtor from affecting the creditor’s rights under the guarantee.
65.	These principles were established by the decision of Etherton J (as he then was) in the Powerhouse case, loc cit. As he explained in paragraphs 58 to 66 of his judgment, there is no doubt that it is legally possible for a CVA to provide that a creditor cannot take steps to enforce an obligation of a third party to the creditor which would give rise to a right of recourse by the third party against the debtor company, such as payment by a guarantor who can then claim repayment from the debtor pursuant to a right of indemnity. There is no difference in substance between an obligation of that nature and an obligation of the creditor to deal with the third party as if the creditor’s contract with the third party did not exist.  If the former obligation is enforceable by the debtor company against the creditor, there is no legitimate policy reason, and nothing in the relevant legislation, which prevents the latter obligation from being likewise enforced by the debtor company.  
66.	In Powerhouse, the CVA provided for a fund of £1.5 million to be divided pro rata among all of the company’s “scheme fund creditors”, who were creditors (including landlords) in respect of 35 underperforming stores which were to be closed.  Some, but not all, of those landlords had the benefit of guarantees or indemnities from the company’s parent in New Zealand.  The CVA provided that the rights and obligations of all other creditors were to be unaffected, and it was intended that their debts would be paid in full through the ongoing trading of the company.  In an immediate liquidation, the dividend to unsecured creditors would have been nil.  The CVA also included provisions designed to release the guarantees or indemnities given by the parent to landlords of the closed premises. 
67.	Having decided that the release of the guarantees could in principle be effected through a CVA, Etherton J then had to consider whether the proposed arrangement was unfairly prejudicial to the interests of the guaranteed landlords.  He reviewed the authorities on unfair prejudice, and in paragraphs 71 to 96 of his judgment distilled from them a number of principles which may be summarised as follows:
(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 [2004] EWHC 2361 (Ch), [2005] 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 [1893] 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) [2001] 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.
68.	Applying these principles, Etherton J held that the CVA was clearly unfairly prejudicial to the guaranteed landlords.  On a vertical comparison, the landlords were left in a much worse position than in a liquidation, because they no longer had the benefit of guarantees which the parent company was apparently in a financial position to honour.  On a horizontal comparison, the non-scheme creditors were to be paid in full under the CVA, while the present and future claims of the guaranteed landlords were to be discharged at a fraction of their value.  There was no justification for this difference in treatment.
69.	Etherton J summed the matter up as follows, in paragraphs 106 to 108 of his judgment:
“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.”
70.	In my judgment those comments are all highly apposite to the present case. The only essential difference between the position in Powerhouse and the present case is that the applicants have been offered the full amount of the value placed on their rights.  That apart, the similarities are striking: on a winding up, the applicants would still have had the benefit of the guarantees, and there was no reason to doubt the ability of Sixty SpA to honour them (see below); the guaranteed landlords would have formed a separate class for the purposes of a formal scheme of arrangement under section 899 of the 2006 Act, and would clearly have vetoed any such scheme; and the CVA was passed by the votes of the unsecured creditors, who stood to lose nothing from the CVA and whose votes inevitably swamped those of the guaranteed landlords.  
71.	I would add, for completeness, that although the possibility of “guarantee-stripping” in a CVA was established in Powerhouse, and it has given rise to a good deal of debate among practitioners and academics, there is no subsequent reported case in which the court has had to consider whether and how a CVA might fairly effect a compromise of a landlord’s claim against a guarantor of the tenant debtor.
The financial position of Sixty SpA
72.	It is convenient at this point to refer briefly to the evidence about the financial position of Sixty SpA.  According to its filed accounts for the year to 31 December 2006 (the latest accounts available in April 2009) Sixty SpA made a profit of €8,284,360 on a turnover of €377,058,344 and had a balance sheet surplus of €95,626,047.  A report obtained by the applicants from Dun & Bradstreet classified the company as having a minimum risk of business failure, and only seven per cent of companies in Italy as having a lower risk of failure.  It is true that more recent accounts, for the year to 31 December 2008, show a net loss for the year of €20,463,937, and only a relatively modest profit of approximately €8.87 million in the previous year.  However, the balance sheet position remained healthy, with total shareholder equity of €116.8 million at the end of 2008.  I was also told that the company is still trading today.
73.	I conclude, therefore, that there was every reason to regard Sixty SpA’s covenant as a strong one at the date of the CVA, and although it suffered a trading loss in 2008 its underlying balance sheet position was still robust.
Discussion and conclusions
74.	In the light of the principles and evidence which I have reviewed, it is clear to me that this application must succeed.  
75.	On a vertical comparison, the critical point (as in Powerhouse) is that in a liquidation the applicants would still have had the benefit of the guarantees for the remainder of the term of the leases.  They would also have had the option, following a disclaimer of the leases by a liquidator of Sixty, to require Sixty SpA to step into Sixty’s shoes and to take equivalent leases in its own name.  These contractual rights were of obvious commercial value to the landlords, and formed an important part of the consideration for the package of incentives negotiated with the Sixty group in 2006. Neither Sixty nor Sixty SpA could unilaterally alter any of those contractual provisions, and but for the CVA it would have been open to the landlords to continue to enforce the guarantees against Sixty SpA regardless of the plight of Sixty, and regardless of whether it went into liquidation or the leases were disclaimed.  That is, of course, the very reason why the guarantees were taken in the first place.
76.	Nor is there any evidence that it would have been particularly difficult or time-consuming to enforce the guarantees in Italy.  It is likely, to judge from the documents, that Sixty SpA would have tried to use delaying tactics, but there is no suggestion that enforcement could have been prevented.  I therefore proceed on the footing that the rights in question are prima facie valid and enforceable. Sixty SpA is a substantial public company, with a strong balance sheet, and with a reputation to lose. Italy is a member state of the European Union, and bound by Council Regulation (EC) 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.  In my view it would require strong evidence to persuade the court, in such circumstances, that the guarantees were of significantly less commercial value than equivalent guarantees given by a UK company.  
77.	I also accept the applicants’ submission that, in the context of the present case, it was anyway unreasonable and unfair in principle to require the applicants to give up their guarantees.  In times of commercial and financial turmoil, the ability to enforce the terms of the existing leases against the guarantor for a further seven and a half years was a most valuable right, and there was no sufficient justification for requiring any of the guaranteed landlords (let alone just one of them) to accept a sum of money in lieu. At a time of market uncertainty it will be difficult, if not impossible, to determine what sum will fairly compensate the landlord for the loss of such rights, and in the absence of a compelling justification a landlord should not be forced to accept a sum which is based on numerous assumptions (for example about the landlord’s ability to re-let the premises) which may or may not prove to be well-founded.  To adopt such a procedure, in circumstances where the solvency of the guarantor is not in issue, is to undermine the basic commercial function of the guarantee, and to force the landlord to accept a commercially inferior substitute for it. 
78.	Even if my conclusion on the above point is wrong, the applicants’ challenge to the value of £300,000 assigned to their claim is in my judgment unanswerable. Both the expert evidence of Mr Wright, and the advice which Sixty itself obtained from Mr Cartwright, show that a figure in the region of £1 million was the least that could fairly be regarded as appropriate.  The position is made worse by the fact that £300,000 was not, in fact, a genuine estimate of the value of the applicants’ claim, but was instead dictated to the administrators by Sixty SpA, the company which stood to benefit from the release of the guarantees.  Mr Arden submitted, and I agree, that the picture disclosed by the documentary evidence is a disquieting one.  The administrators appear to have abdicated their responsibilities as office holders and put forward a proposal for the CVA which they must have known could not be objectively justified, and which was based on a cynical calculation by Sixty SpA of what it hoped it could get away with.  The administrators then compounded their dereliction of duty by falsely representing in the proposal that the figure of £300,000 was based on advice they had received.  The shameless substitution of the reduced version of Appendix C for the original version used by Mr Cartwright speaks for itself, and on the material before me  is impossible to justify.  Furthermore, if there were a justification, one would expect the administrators to have explained what it was in evidence, and to have appeared at the trial to ensure that the court had a full understanding of all the relevant circumstances.  
79.	In SISU Capital Fund Limited v Tucker [2005] EWHC 2170 (Ch), [2006] BCC 463, Warren J made some important observations on the duties of office holders in putting forward proposals for a CVA.  In paragraph 116 of his judgment, he said:
“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.
80.	I now turn to the assessment of fairness on a horizontal comparison.  The starting point here is that the CVA only imposes a compromise of the rights and claims of landlords of the four closed stores. It does not compromise the rights and claims of other creditors in respect of the closed stores, nor does it compromise the rights and claims of any other creditors, all of whom were entitled under the CVA to payment in full by Sixty of their present and future debts on normal trading terms.  The only justification offered for this differential treatment is the general statement that the closed stores were loss-making.  In two cases at least, say the applicants, the differential treatment cannot be justified: first, the favourable treatment afforded to Sixty’s associated companies, Sixty International SA and Sixty SpA; and secondly, the treatment of Muji.  
81.	I begin with the associated companies.  At the date of the CVA Sixty was indebted to Sixty International SA in the sum of approximately £7.4 million, but the CVA did not in any way affect the right to payment in full of this debt.  So far as Sixty SpA was concerned, the CVA did of course provide for deferment of its debt of just under £15 million, and as I have already said it seems to have been envisaged that this deferment would last until the CVA had run its course.  However, Sixty SpA was not a party to the arrangement, and there was no legal machinery in place which bound it to act accordingly.  Had it chosen to call in all or part of the debt during the currency of the CVA, it is hard to see what the administrators could have done to prevent it. Reliance on the “spirit” of a CVA is not a defence known to the law.  By contrast, the landlords of the closed stores were required to accept a compromise of their claims by payment of a dividend of 21 per cent of the estimated surrender liability under their leases. The level of dividend was justified as being higher than the dividend which they might have expected to receive in a liquidation, but even assuming that to be so, say the applicants, that still leaves unanswered the question why the landlords of closed stores should have to bear the burden of having their claims compromised while Sixty’s own associated companies were not required to carry any comparable burden, and at least in the case of Sixty International SA remained entitled to payment of the debts due to them from Sixty in full and without deferment.
82.	In my judgment these points are well taken, and I agree that no sufficient justification can be found for the difference between the treatment of the applicants and the other landlords of closed stores on the one hand, and the treatment of Sixty’s two associated companies on the other hand. 
83.	In relation to Muji, the applicants’ complaint is of unfair treatment as between creditors with claims arising in respect of the closed stores.  As I have already explained, Muji was the original tenant of the Trafford Centre store, and on assignment of its lease to Sixty it remained liable to the landlord for the rent payable during the remainder of the term.  Upon payment of such rent, it would then have a right of indemnity against Sixty.  The CVA did not purport to compromise Muji’s claims, and in due course Muji was obliged to bring proceedings in the High Court to vindicate its right to prove in full in the CVA for the rent which it had to pay after Sixty’s default. 
84.	The applicants argue that there is no justification for the favourable treatment given to Muji, as a creditor in respect of a closed store, when compared with the requirement for the applicants’ guarantees to be abrogated. It is clear from the disclosed documents that the administrators were well aware of Muji’s claim, and its potential to derail a CVA: see paragraph 50 above.  Nevertheless, the administrators chose to disregard the special position of Muji when formulating the final CVA proposal, and I am invited to infer that the reason for this is that Sixty SpA was not prepared to provide sufficient funds to enable a compensation payment to be made to Muji on the same basis as the payment made to the applicants. 
85.	Here too I consider that the applicants’ case is in substance a sound one.  The position of Muji was not directly comparable with that of the applicants, because Muji was a tenant, not a landlord, of a closed store, and because the landlord did not have the benefit of a third party guarantee for the liabilities of Sixty as tenant. However, the continuing privity of  contract between Muji (as the original tenant) and the landlord meant that the landlord had an alternative target to sue for payment of rent or performance of the tenant’s covenants in case of default by Sixty, and Muji’s position was thus similar, from the landlord’s perspective, to that of a guarantor.  Parity of treatment with the applicants would therefore have required Muji to be released from its contractual liabilities to the landlord, and the landlord to be compensated by a cash payment of equivalent value.  It appears, however, that Sixty SpA was not prepared to make the necessary funds available, so neither of these steps was taken, and the landlord was left with the full benefit of its contractual rights against Muji.  Furthermore, the CVA reinforced the value of those contractual rights to the landlord, because Muji’s right of indemnity against Sixty was unimpaired, and the generality of unsecured creditors (including Muji) were now to be paid in full.  Thus the applicants, who had to give up their guarantees, were prejudiced in comparison with the landlord of the Trafford Centre, whose similar rights were not only preserved but also fortified under the CVA.  I can find no justification for this difference in treatment, and I therefore conclude that it was unfairly prejudicial to the applicants.  My only quibble with the way in which the applicants put their case is that the critical comparison, to my mind, is that between the applicants and the landlord of the Trafford Centre, rather than that between the applicants and Muji.  The true complaint is not that Muji, as a creditor, is treated unfairly well in comparison with the applicants, but rather that the failure to grapple with Muji’s position as a quasi-guarantor led to the Trafford Centre landlord being favourably treated in comparison with the applicants.  
86.	I have now reviewed, and accepted, the arguments that lie at the heart of the applicants’ case.  They had a number of subsidiary arguments, and also relied on a number of the points which I have already discussed as also constituting material irregularities within section 6(1)(b) of the 1986 Act.  However, it is unnecessary for me to prolong this judgment by considering these further arguments.  It is already abundantly clear to me that the CVA is fatally flawed, and that it must be set aside. 
87.	I wish, however, to make a few concluding comments.  This is, in my view, a CVA that should never have seen the light of day. So far as the applicants are concerned, in their capacity as guaranteed landlords of stores which the Sixty group wished to close, the evident purpose of the CVA was to compel them to give up their rights for a fraction of their fair value, and to improve the group’s negotiating position by forcing the applicants either to accept the CVA (which was bound to be passed by the votes of the creditors who stood to be paid in full) or to embark on lengthy and expensive proceedings to set it aside, which would itself buy time and subject the applicants to all the uncertainties of litigation. It is clear from the documents belatedly disclosed by the respondents that cynical calculations of this nature were never far from the minds of the Sixty group.  
88.	I wish to emphasise that it is the duty of administrators or other office holders, in such circumstances, to maintain an independent stance, to act in good faith, and only to propose a CVA if they are satisfied that it will not unfairly prejudice the interests of any creditor, member or contributory of the company.  The need for a responsible and professional attitude is even more pronounced where the CVA is structured in such a way that it is bound to be passed by the votes of creditors whose position is either unaffected or improved, and where another much smaller class of creditors is to be deprived of valuable contractual rights in reliance on the Powerhouse principle. I do not say that it is necessarily impossible to propose a fair CVA of this type, but the greatest care is needed to ensure fairness to the latter class, both in the substance of what is proposed and in the procedure that is adopted.
89.	Unfortunately, the administrators in the present case seem to have lost a proper sense of objectivity, and they allowed themselves to side with the Sixty group against the interests of the guaranteed landlords of the closed stores.  They permitted Sixty SpA to dictate the crucial terms of the CVA, and they misrepresented the true position to the creditors.  It is only thanks to the persistence of the applicants and their legal advisers that this regrettable state of affairs has come to light.  
90.	I am conscious, of course, that I have not heard the administrators’ side of the story, because of their decision not to participate in the trial.  Nevertheless, I am satisfied that there is a prima facie case of misconduct on their part which ought to be considered by the professional bodies to which they are answerable. I therefore propose to direct that copies of my judgment should be sent to the appropriate bodies by which they are licensed to act as insolvency practitioners.