Mourant & Co Trustees Ltd & Anor v Sixty UK Ltd & Ors

Factual and Procedural Background

This opinion concerns 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, which approved a company voluntary arrangement ("CVA") proposed by the administrators of the tenant company, Sixty UK Ltd ("Sixty"). The application was made under section 6(1) of the Insolvency Act 1986, on grounds of unfair prejudice and material irregularity.

The administrators, licensed insolvency practitioners appointed in September 2008, proposed the CVA which was approved in April 2009. The CVA sought to release the ultimate parent company, Sixty SpA, from guarantees of the tenant’s lease liabilities in exchange for a compensation payment of £300,000 to the landlords. This sum purported to represent full compensation based on a notional surrender of the leases, but deprived the landlords of any recourse against the guarantor for the remainder of the leases’ terms.

The CVA also involved closure of two other stores, with their landlords receiving 21% of estimated liabilities without guarantees being released. All other creditors were to be paid in full. The landlords of the Liverpool units challenged the CVA primarily on grounds that the compensation was inadequate and that they were unfairly deprived of their guarantees, especially compared to other creditors who were paid in full or treated differently.

The respondents did not attend the trial, citing forthcoming modifications to the CVA or its likely failure. The court refused an adjournment and proceeded in their absence. Evidence was presented by the applicants’ expert and solicitors.

The background facts include Sixty’s incorporation, ownership by Sixty International SA and ultimate parent Sixty SpA, and the terms of the leases granted in 2006 with parental guarantees. The CVA proposal and the history of negotiations and valuations leading to it were detailed, including expert reports and internal correspondence revealing that the compensation figure was dictated by the parent company rather than based on independent advice.

Legal Issues Presented

1. Whether the CVA unfairly prejudices the interests of the landlords as creditors of the company by depriving them of the benefit of third party guarantees without adequate compensation.
2. Whether there has been any material irregularity in the conduct of the CVA meeting or the proposal process.
3. Whether the differential treatment of the landlords compared to other creditors, including associated companies and a tenant creditor with indemnity rights, is justifiable or unfairly prejudicial.
4. Whether the administrators fulfilled their duties properly in proposing a CVA that is fair to all creditors.

Arguments of the Parties

Appellants' Arguments

• The compensation payment of £300,000 is inadequate and does not fairly reflect the landlords’ loss or the value of the guarantees, which expert evidence values at approximately £1.2 million.
• The landlords are unfairly prejudiced compared to other unsecured creditors who are paid in full and to other landlords whose guarantees or indemnities were not compromised.
• The CVA unjustly forces the landlords to give up valuable guarantees without sufficient justification or independent adjudication of compensation.
• The compensation figure was dictated by the parent company, Sixty SpA, rather than based on independent advice, and the administrators misrepresented the basis of the compensation in the CVA proposal.
• The administrators failed in their duty to propose a fair CVA and appear to have sided with the parent company against the landlords’ interests.
• The CVA lacks enforceable obligations on Sixty SpA to make the compensation payments promised in exchange for release of guarantees.

Respondents' Arguments

The opinion does not contain a detailed account of the respondents' legal arguments, as they chose not to participate in the trial and did not provide evidence supporting their position.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Prudential Assurance Co Ltd v P R G Powerhouse Ltd [2007] EWHC 1002 (Ch), [2007] BCC 500	Establishes that a CVA can lawfully release a creditor from the benefit of third party guarantees, even if the guarantor is not a party to the CVA.	Used as the leading authority to confirm the legal possibility of “guarantee-stripping” in a CVA, but also to guide assessment of unfair prejudice through vertical and horizontal comparisons.
Re T & N Limited [2004] EWHC 2361 (Ch), [2005] 2 BCLC 488	Confirms that a CVA should not leave creditors worse off than in a liquidation, establishing a vertical comparison test for unfair prejudice.	Applied to assess whether the landlords’ position under the CVA was less advantageous than in liquidation.
Re a Debtor (No.101 of 1999) [2001] 1 BCLC 54	Addresses the fairness of differential treatment of creditors under a CVA, requiring justification for any imbalance.	Used to evaluate the CVA’s differential treatment of landlords compared to other creditors and associated companies.
In Re Park Air Services Plc [2000] 2 AC 172	Provides principles for quantifying landlord losses upon lease disclaimers in insolvency.	Applied by expert evidence to calculate the landlords’ losses for valuation purposes.
SISU Capital Fund Limited v Tucker [2005] EWHC 2170 (Ch), [2006] BCC 463	Sets out the duties of insolvency office holders to propose CVAs that are fair to all creditors and not advocate for one group at the expense of others.	Invoked to criticize the administrators’ conduct and failure to maintain independence and fairness in proposing the CVA.

Court's Reasoning and Analysis

The court accepted that a CVA can legally release a creditor from third party guarantees even if the guarantor is not a party to the arrangement, as established in the Powerhouse case. However, the key issue was whether the CVA unfairly prejudiced the landlords, assessed by both vertical and horizontal comparisons.

Vertically, the landlords would be worse off under the CVA than in liquidation because the guarantees would remain enforceable in liquidation, and the parent company was financially capable of meeting those obligations. The compensation offered was not a genuine valuation but a figure dictated by the parent company, misrepresented as based on independent advice. Expert evidence showed the £300,000 figure was significantly undervalued, with a fair figure closer to £1.2 million.

Horizontally, the CVA treated the landlords differently from other creditors, including associated companies owed substantial sums paid in full, and a tenant creditor with indemnity rights who retained full rights and was able to prove for full claims. The court found no sufficient justification for this differential treatment, rendering it unfairly prejudicial.

The administrators failed in their duty to act independently and fairly, allowing the parent company to dictate terms and misrepresenting the basis of compensation. Their conduct raised a prima facie case of misconduct warranting referral to professional bodies.

Holding and Implications

The court ALLOWED the application to revoke the decision approving the CVA.

The CVA was set aside on the grounds that it unfairly prejudiced the landlords by depriving them of valuable guarantees without adequate compensation and by treating them differently from other creditors without justification. The administrators’ conduct was criticized, and the case highlighted the necessity for insolvency practitioners to maintain independence and fairness in proposing CVAs, especially where “guarantee-stripping” is involved.

No new legal precedent was established beyond reaffirming the principles from the Powerhouse case and emphasizing professional duties of office holders. The direct effect of this decision is to restore the landlords’ rights and require reconsideration of any arrangement affecting those rights.