| INSOLVENCY — Voluntary arrangement — Unfair prejudice to creditor’s interests — Claimant creditors given guarantees by defendant’s parent company before leasing premises to defendant — Defendant company facing financial difficulties — Proposed company voluntary arrangement containing terms releasing guarantees given by parent company — Arrangement approved — Whether arrangement unfairly prejudicial to claimants — Insolvency Act 1986, s 6(1)(a)
Prudential Assurance Co Ltd v PRG Powerhouse Ltd and others; Luctor Ltd v PRG Powerhouse Ltd and others [2007] EWHC 1002 (Ch)
ChD: Etherton J: 1 May 2007
A company voluntary arrangement which contained terms releasing guarantees given by the defendant’s parent company to the claimant creditors, unfairly prejudiced the claimants within the meaning of s 6(1)(a) of the Insolvency Act 1986.
Etherton J so held in the Chancery Division deciding preliminary issues in two sets of proceedings in which the claimant creditors, Prudential Assurance Ltd and Luctor Ltd, challenged the validity of a company voluntary arrangement (‘CVA’) for the defendant company, PRG Powerhouse Ltd (‘Powerhouse’), which had been approved at a meeting of creditors.
Powerhouse’s parent company was PRG Group Ltd. In 2003, Powerhouse acquired a number of leasehold stores with financial support from PRG Group. The claimants in each of the two proceedings were landlords of some of the stores and had taken parent company guarantees or indemnities from PRG Group in respect of Powerhouse’s obligations under the leases. Powerhouse fell into financial difficulties and its directors informed creditors that underperforming stores needed to be closed. The directors proposed a CVA, which included terms designed to release any guarantees or indemnities given by PRG Group to the landlords of closed premises. At a creditors’ meeting, the CVA was approved. The claimants, as closed premises landlords and also landlords with the benefit of guarantees, challenged the CVA. They claimed against Powerhouse, PRG Group and the CVA supervisors, seeking a declaration that the CVA was ineffective and/or invalid. The claimants also issued an ordinary application in the Companies Court for an order that the creditors’ approval be revoked under s 6 of the Insolvency Act 1986 due to unfair prejudice caused to them as creditors. The court ordered a trial of preliminary issues, including, whether the CVA unfairly prejudiced the interests of the claimants as creditors of Powerhouse within the meaning of s 6(1)(a) of the 1986 Act.
ETHERTON J said that there was no single and universal test for judging unfairness under s 6 of the Act. Unfairness was to be assessed by a comparative analysis from a number of different angles. It was a useful starting point to compare a creditor’s position under the CVA with what his position would have been on a winding up. Linked to that was the principle that on an application under s 6 of the Act, it was not for the court to speculate whether the terms of the proposed CVA were the best that could have been obtained. However, a comparison with the position on winding up or bankruptcy was not always conclusive as to unfair prejudice. The fact that a CVA involved differential treatment of creditors was also a relevant factor, but it would not necessarily be sufficient to establish unfair prejudice. Finally, comparison of the CVA with the position if there had been a formal scheme of arrangement under s 425 of the Companies Act 1985 might also be helpful, but caution should be exercised when carrying out that comparative exercise. Having regard to all those principles, there was no doubt that the CVA unfairly prejudiced the claimants as guaranteed landlords. It left them in a worse position than they would be in without the CVA having regard to the present and future possibilities. The guarantees were of value at the time the CVA was approved and the claimants would have had the benefit of the them but for the CVA. Comparison of their treatment with that of other creditors under the CVA supported the conclusion that the claimants had been unfairly prejudiced. An unusual feature of the case was that on a winding up the claimants as guaranteed landlords would still have had the benefit of the guarantees, whereas all other unsecured creditors would have received nothing. The claimants’ interests were unfairly prejudiced within the meaning of s 6(1)(a).
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