A Question of Policy
Although fascinating for those involved in those areas of law, property and insolvency cases do not as a rule quicken the blood of most lawyers, let alone the general public.
^ TOPJudgement awaited
An insolvency/property case recently heard, where judgment is awaited, could get many pulses racing as regards its consequences. There are suggestions that the outcome could have a huge impact upon the commercial property market, its values, and many of the pension funds which hold property in it.
The issue concerns the properties rented by Powerhouse, subsidiary of PRG. PRG guaranteed the rental obligations. Landlords include Legal & General and Prudential. Powerhouse has entered into a company voluntary arrangement. The terms of the CVA do not only reduce payments to landlords, but include a term to terminate the liability. If upheld this would mean that PRG did not have to make payments as regards rental shortfalls. Plainly since the value of commercial property is linked to the certainty of the rents, and the strength of the covenant to pay rental is often measured by the quality of the guarantee, this could have a much wider impact than in respect of the leases involved.
^ TOPGuarantee stripping
The likely legal position as regards "guarantee stripping" clauses or the like was set out in Johnson v Davies [1998] 3 WLR 1299 at 1317B per Chadwick LJ, (dealing with individual voluntary arrangements): "In my view, by choosing to enact Part VIII - and, in particular, section 260(2) - of that Act in the form that it did, the legislature must be taken to have preferred the latter approach. The general law is to have effect. It is up to the debtor to propose, and for the creditors to accept or reject, proposals which either do or do not have the effect of releasing co-debtors or sureties. A creditor who is prejudiced by the decision of the majority to approve proposals which have the effect of releasing a co-debtor against whom he would otherwise have recourse can apply to the court, under section 262 of the Act of 1986, for the approval of the meeting to be revoked."
^ TOPParent companies
This of course might be viewed differently as a policy issue when applied to individuals as opposed to company subsidiaries. There seems no discernible policy reason why a parent company which guarantees a subsidiary should not be held to its bargain regardless. Particular when others will have entered into lease terms on the assumption that the parent will be.
^ TOPNo winners
Ironically, quite apart from the impact on property values, and those whose interests are affected by such investments (i.e. that much battered group of late, people who have taken out pension funds) the effect of an adverse judgment for the landlords will not do much for parent companies in future either. Either they will have to provide security, on the basis that secured creditors interests cannot be prejudiced without their concurrence, or cash deposits. Either are likely to be less advantageous than merely giving guarantees.
^ TOPIncreased interest
It is to be hoped that the decision will be in favour of the landlords. However if it is not, then it will at least achieve one thing. As a host of lawyers who regard property and insolvency and boring calculate the impact on any commercial property or pension holdings of their own, they may find unexpectedly that insolvency and property cases can get the adrenaline pumping.