Schemes of arrangement: Protecting the proprietary interest

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The High Court has considered whether schemes of arrangement should only affect the creditor/debtor relationship or whether they can impact the proprietary interests of any creditor landlord.  Real Estate Finance and Insolvency expert Austin Judson explains Re Instant Cash Loans and its practical implications.

Why is Re Instant Cash Loans of interest?

Economic uncertainty or decline inevitably results in some businesses looking to insolvency options as a means of minimising or avoiding financial liabilities.  Ongoing rental obligations can be a significant commitment, leading some tenants suffering financial difficulties to negotiate schemes of arrangement which compromise their liabilities.

In the current market, with tenant insolvencies on the rise, any clarification from the courts as to how schemes of arrangement should operate will be of interest and assistance to landlords, tenants, managing agents and insolvency practitioners alike.

In the recent case of Re Instant Cash Loans Limited [1], the High Court considered whether schemes of arrangement should only affect the creditor/debtor relationship, or whether they can impact the proprietary interests of any creditor landlord.  The court decided that it should not sanction a scheme which purported to surrender leases, and thereby to terminate the proprietary interests of creditor landlords.

What are the practical implications?

The case provides helpful guidance as to how schemes can be structured to give effect to compromise arrangements agreed between debtor tenants and creditor landlords.

It is important to note that the court raised the issue of the proprietary interests of the creditors itself, despite the fact that the parties had agreed an arrangement.  Debtor tenants, creditor landlords and their respective professional advisers should not, therefore, assume that the court’s approval of any scheme of arrangement will be a rubber-stamping exercise.  Rather, parties should expect the court to take a proactive approach to ensuring both that particular parties’ interests are protected, and that applicable legal principles are upheld.

Re Instant Cash Loans confirms that a creditor (such as a landlord) must have the choice to determine a proprietary interest (such as a lease) separately from the contractual compromises made in a CVA or other scheme of arrangement.  Parties should endeavour to structure any arrangement accordingly, meaning that, even if there is little merit in keeping a lease where there is no financial benefit in doing so, surrenders must be dealt with independently from the scheme of arrangement.

Case and commercial context

Instant Cash Loans Limited, a payday loan company, ceased trading and proposed a scheme of arrangement with its creditors before looking to close down the company.

The proposed scheme included a provision to replace the company’s future rental liability with a right to damages for the creditor landlords. The scheme also included an ancillary provision under which the company’s interest and rights in each premises would be surrendered to and accepted by the relevant landlords.

Despite the majority of creditors voting in favour of the scheme, the court raised the issue of whether the termination of proprietary rights should be sanctioned in a document which otherwise governs the contractual compromises made between the debtor company and its creditors.  That raised the issue of the distinction between contractual and proprietary rights.  The court confirmed that the surrender of a lease should not be considered merely the by-product of the compromised contractual rights detailed in the scheme of arrangement.  Notwithstanding the company’s argument that a lease is first and foremost a contractual document, the court confirmed that a lease creates proprietary rights.  A lease is much more than a contractual right – it is an estate in land which can be bought and sold and which survives changes in ownership of any superior interests in the land.  To require the surrender of leases would directly impact, and fundamentally change, the nature of the proprietary interest, as possession would revert to the landlord.

The court noted that the Court of Appeal had held previously that a scheme of arrangement can only affect the rights of creditors – not proprietary rights they may enjoy in their capacity as landlords [2]. Case law has also established that, whilst proprietary rights may be limited by such a scheme, they cannot be extinguished [3]. The compromise of future rent is therefore acceptable within a scheme of arrangement as it relates to the creditor debtor relationship.  However surrender provisions would not be a necessary component of the scheme and should not be sanctioned.  (The compromise of rental liability in exchange for damages had already been achieved by the parties in their capacities as creditor and debtor.)

The High Court therefore sanctioned the scheme of arrangement subject to the removal of the lease surrender provisions and left it to the landlords to decide, outside of the confines of the arrangement, whether to agree to a surrender of the lease.

[1] [2019] EWHC 2795 (Ch)
[2] Re Lehman Brothers International (Europe) (In Administration) [2009] EWCA Civ 1161
[3] Discovery (Northampton) Ltd v Debenhams Retail Ltd [2019] EWHC 2441