Issue 1 – January 2008

Prudential Assurance Company Limited v PRG Powerhouse Limited

At the time that this case was decided back in April there was considerable concern about the precariousness of the protection offered to a Landlord by a lease guarantor if confronted with a company voluntary arrangement (CVA).

Although the message may have been lost in the far bigger stories that took centre stage during 2007, 2008 might well see it gaining greater notoriety.

For those of you who have forgotten, this was a case where the High Court ruled that the particular CVA proposed by the directors of Powerhouse as its preferred route out of insolvency was unfairly prejudicial to the Landlords of the electrical retail outlets where Powerhouse had ceased trading who were to suffer the loss of the parent company guarantees underpinning the Tenant’s covenant. For the Landlords, this was a pyrrhic victory only.

For, although the Landlords won on the particular facts of the case, the Court made it clear that, as a matter of law, it is possible for a CVA effectively to require creditors, including Landlords, to release a parent company guarantee. Had the CVA been expressed in slightly more favourable terms to the Landlords (and the debate will focus on how much more favourable), then Powerhouse would have won and relieved its parent of all its freely negotiated obligations. Another general point made by the Court was that creditors will always be prejudiced by a CVA and that “unfair prejudice”, which is what must be proved to defeat it, requires something more.

Even now, the Tenant is appealing against the Court’s decision and the appeal will be heard early in 2008. Landlords will wait for the outcome with some trepidation, especially given the likely retrenchment of consumer confidence for the immediately foreseeable future and the inevitable increase in insolvencies in the retail sector as a result.

For further information contact daniel.levy@mishcon.com