When is a contract not a contract? When it’s a CVA.

A company voluntary arrangement (or CVA) - the procedure under the Insolvency Act through which companies can compromise their liabilities provided enough creditors agree - is often thought of as statutory contract. But, as Wright v Prudential Assurance shows, this does not mean that every contractual principle applies to a CVA.

BHS’ stores were costing it too much. So when it got into financial difficulties in 2016, a key part of the rescue package proposed in its CVA was a reduction in its rental payments. The quid pro quo was that if the rescue failed, these compromises would be reversed, reinstating the landlords’ rights to full rent as though the CVA had never happened.

When BHS later collapsed, its liquidators thought the landlords should be held to the reduced rent and applied to the High Court alleging that the clause reversing the CVA should be struck down as a penalty.

The Court was having none of it:

• First, the rule against penalties requires the court to judge whether a contract was oppressive in the circumstances at the time of contracting. It cannot apply to a hypothetical contract, created by a statutory procedure, as there are no circumstances by which to judge whether a clause is oppressive.
• Secondly, it’s impossible to see how company can propose a CVA for its own benefit and then later seek to avoid its terms by claiming that it is oppressive on the company itself.
• Thirdly, the Insolvency Act provides no grounds for a Company to challenge its own CVA, so there is no scope for one to be introduced through the common law rule on penalties.

This decision is a victory for common sense. The landlords were persuaded to throw BHS a lifeline on the understanding that this would not prejudice them in a liquidation. It would have been unfair if the law on penalties had allowed the company to renege on the deal.

With thanks to Crawford Jamieson for his help on this piece.