Discovery (Northampton) Ltd & Ors v Debenhams Retail Ltd & Ors

Factual and Procedural Background

The Applicants, landlords who participated in a sale-and-leaseback transaction in 2010 granting leases with long terms and escalating rents, challenged a company voluntary arrangement ("CVA") entered into by the First Respondent, Company A, a major UK retailer. The Second and Third Respondents act as joint supervisors of the CVA, and the Fourth Respondent is a security trustee for certain financial creditors who have owned the Company since April 2019. Sports Direct, initially a co-applicant, was removed after being paid in full under the CVA but agreed to indemnify the Applicants' costs. The Applicants sought to set aside the CVA under section 6(1) of the Insolvency Act 1986, alleging jurisdictional and fairness issues relating to the treatment of future rent obligations and other matters.

Legal Issues Presented

1. Whether "future rent" under existing leases can be included within the scope of a CVA as a debt or pecuniary liability binding landlords as creditors under section 1 of the Insolvency Act 1986.
2. Whether a CVA can lawfully reduce rent payable under leases without being unfairly prejudicial or exceeding the CVA’s jurisdiction.
3. Whether the CVA can alter or restrict landlords' proprietary right of forfeiture or re-entry under their leases.
4. Whether differential treatment of landlords compared to other unsecured creditors in the CVA is justified and fair.
5. Whether the CVA complied with the content requirements under Insolvency Rules 2016, specifically regarding disclosure of potential claims under sections 239 and 245 of the Insolvency Act 1986.

Arguments of the Parties

Applicants' Arguments

• Ground 1: Future rent is not a debt but an unearned future payment under executory contracts; thus landlords are not creditors for future rent under section 1 of the Act and cannot be bound by the CVA.
• Ground 2: The CVA’s reduction of rent is automatically unfairly prejudicial ("Basic Fairness Argument") or exceeds jurisdiction because it imposes new obligations ("New Obligations Argument").
• Ground 3: The CVA unlawfully abrogates landlords’ proprietary rights of forfeiture, which cannot be altered by a CVA.
• Ground 4: The Applicants are treated less favourably than other unsecured creditors without proper justification, breaching fairness requirements.
• Ground 5: The CVA fails to comply with the content requirements of the Insolvency Rules by not adequately disclosing potential claims under sections 239 and 245, constituting a material irregularity.

Company A's Arguments

• Future rent constitutes a contingent debt or liability and thus landlords are creditors entitled to notice and bound by the CVA.
• Reduction of rent during the concession period is lawful and fair, especially where the "vertical comparator" test is satisfied and landlords have termination rights.
• The CVA varies existing obligations but does not impose new obligations, which is within the scope of the Act.
• The CVA cannot vary landlords’ proprietary right of forfeiture but can modify the covenants upon which forfeiture depends.
• Differential treatment of creditors, including landlords, is justified by commercial necessity to preserve business continuity and is fair.
• The CVA’s disclosure of potential claims under sections 239 and 245 was adequate and did not mislead creditors.
• The Applicants lack a legitimate interest to disrupt the CVA as they are financially better off under it and are funded by a third party with commercial interests.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Inland Revenue Commissioners v The Wimbledon Football Club Limited [2004] EWCA Civ 655	Flexibility of CVA regime and inclusion of third-party monies or assets in proposals.	Confirmed CVAs are flexible tools allowing varied proposals binding creditors including contingent claims.
Re T&N Ltd [2005] 2 BCLC 488	Vertical comparator test for assessing fairness of CVA.	Used to assess whether CVA outcome is better than realistic alternative.
Prudential Assurance Co v PRG Powerhouse Ltd [2007] BCC 500	Horizontal comparator and justification for differential treatment of creditors.	Applied to evaluate fairness of creditor treatment within CVA.
Re Haytor Granite Company (1865-66) LR 1 Ch App 77	Recognition of future rent claims as contingent debts in winding-up.	Supported view that future rent claims may be entered but limited to liabilities under lease.
Re London and Colonial Company (Horsey's Claim) (1867-68) LR 5 Eq 561	Landlord’s remedies and claims for future rent in winding-up.	Held no present claim for future rent due to landlord’s right of re-entry and uncertainty.
Lord Elphinstone v Monkland Iron and Coal Co (1886) 11 App Cas 332	Obligation of liquidators to set aside assets for future lease liabilities.	Confirmed that future lease liabilities must be provided for in liquidation.
Hardy v Fothergill (1883) App Cas 351	Definition of liabilities and proof of contingent claims in bankruptcy.	Confirmed that obligations under leases constitute liabilities capable of proof.
Midland Coal, Coke and Iron Co (Craig's Claim) [1895] 1 Ch 267	Contingent creditor status for future rent claims in liquidation.	Confirmed landlords as creditors with pecuniary claims bound by schemes.
New Oriental Bank Corporation [1895] 1 Ch 753	Requirement to enter claims for future rent and breaches in liquidation.	Reinforced practice of landlords proving for future rent breaches as claims.
Metropolis Estates v Wilde [1940] 2 KB 536	Proof of rent claims in bankruptcy.	Confirmed landlords could only prove for accrued arrears, not future rent.
Burford Midland Properties Ltd v Marley Extrusions Ltd [1994] BCC 604	Interpretation of debts or liabilities including future rent in CVAs.	Held that future rent is not a debt but an executory contract right; CVA binding depends on definitions.
Re Park Air Services plc [2000] 2 AC 172	Quantification of landlord claims post-disclaimer and proof of future rent claims.	Confirmed landlord claims for future rent compensation are due but not subject to statutory discount.
Re T & N Ltd [2006] 1 WLR 1728	Contingent claims as creditors for CVA purposes.	Confirmed holders of contingent claims are creditors for CVA proposals.
Re Nortel [2014] AC 209	Definition of obligations and liabilities for inclusion in insolvency processes.	Supported view that future rent is a contingent liability fitting within the definition of debt.
Jervis v Pillar Denton Ltd [2015] Ch 87	Limitations on apportionment of rent in administration.	Held future rent is a contingent liability but proof is restricted to accrued instalments.
Doorbar v Alltime Securities Ltd (No.1) [1994] BCC 994	Inclusion of future rent claims in voluntary arrangements.	Held future rent liabilities can be included within voluntary arrangements.
Thomas v Ken Thomas Ltd [2007] Bus LR 429	Relationship between voluntary arrangements and forfeiture rights.	Held landlords do not lose forfeiture rights but CVA may modify obligations giving rise to forfeiture.
Re Naeem [1990] 1 WLR 48	Effect of individual voluntary arrangements on landlords’ forfeiture rights.	Held IVAs bind creditors only in their capacity as creditors, not proprietary rights.
Khan v Permayer [2001] BPIR 95	Relationship between voluntary arrangements and forfeiture rights.	Supported that voluntary arrangements do not affect landlords’ proprietary forfeiture rights.
Re Lehman Brothers International [2010] Bus LR 489	Limits of schemes of arrangement to affect proprietary rights.	Held schemes cannot bind rights of creditors over their own property distinct from debts.
Deloitte & Touche A.G. v Johnson [1999] 1 WLR 1605	Requirement of legitimate interest to seek court relief under statutory powers.	Applied to assess Applicants’ standing to challenge the CVA.
Walker Morris (a firm) v Khalastchi [2001] 1 BCLC	Proper purpose and interest in applications by creditors.	Confirmed that applicants must promote their interest as creditors to be proper applicants.
Re Trident Fashions (No.2) [2004] 2 BCLC 35	Materiality of irregularities under section 6(1)(b).	Used to assess whether irregularities would materially affect creditor decisions.
SISU Capital Fund v Tucker [2006]	Material irregularity and its impact on creditor voting.	Applied to evaluate materiality of alleged irregularities in CVA.

Court's Reasoning and Analysis

The court undertook a detailed legal and factual analysis of the issues raised. It first addressed the jurisdictional question of whether "future rent" under leases constitutes a debt or pecuniary liability binding landlords as creditors under the Insolvency Act 1986. Drawing on extensive precedent, the court concluded that although future rent may not be a provable debt, it is a contingent pecuniary liability and thus landlords are creditors for CVA purposes. The court rejected the Applicants' argument that future rent, as an unearned payment under an executory contract, falls outside the CVA's scope.

On the fairness and jurisdictional challenge to the rent reductions, the court held that a CVA can vary existing obligations, including rent, and that such variation is not automatically unfair. The court emphasized that fairness is assessed holistically and noted that the CVA provided landlords with termination rights, mitigating unfairness. The presence of a satisfied vertical comparator did not alone guarantee fairness but was a relevant factor.

The court then considered the proprietary right of forfeiture or re-entry. It held that this right is a legal interest in land, annexed to the landlord’s reversion, and not a security interest. Precedent established that CVAs cannot vary such proprietary rights, only the underlying obligations. The CVA’s provisions seeking to waive forfeiture rights triggered by CVA events exceeded the court’s jurisdiction and were invalid.

Regarding differential treatment of landlords compared to other unsecured creditors, the court accepted that such treatment is permissible if justified by commercial necessity and fairness. Evidence of the company’s financial position and the need to preserve business continuity supported the differentiation. The court found no unfair prejudice to landlords, who were not compelled to accept rents below market value.

On compliance with the Insolvency Rules 2016, the court found the CVA’s disclosure of potential claims under sections 239 and 245 of the Insolvency Act was adequate. The court applied established tests for material irregularity and concluded any alleged nondisclosure would not have materially affected creditor voting or assessment of the CVA.

Finally, the court addressed the Applicants’ standing and motivation. While recognizing that the Applicants were funded by a third party with commercial interests, the court found that the Applicants had a legitimate interest in raising jurisdictional challenges.

The court declared the forfeiture restraint provisions of the CVA invalid and ordered their deletion but upheld the remainder of the CVA as valid and enforceable.

Holding and Implications

The court’s final decision was to declare invalid and delete the provisions of the CVA that sought to restrain landlords’ rights of forfeiture or re-entry arising from the CVA or related events. The court upheld the remainder of the CVA as valid and enforceable, including the inclusion of future rent within the CVA and the rent reductions imposed during the concession period.

The direct effect of this decision is to modify the CVA by removing unlawful forfeiture restraint provisions, preserving landlords’ proprietary rights while maintaining the CVA’s overall structure and binding effect. No new precedent was set beyond affirming existing principles on CVA jurisdiction, landlord rights, and insolvency law fairness assessments. The judgment facilitates the continued use of CVAs to vary lease obligations, subject to respecting landlords’ fundamental property rights.