Guarantee-stripping - the compromise of a landlord's claim against the guarantor of a tenant debtor - also known as the Powerhouse principle, has been endorsed by the High Court as a valid legal mechanism within a CVA, as long as the compromise is not unfairly prejudicial.

In a judgement that was highly critical of Peter Hollis and Nick O'Reilly, then of Vantis PLC, who proposed a CVA as administrators of Sixty UK Limited, the "Miss Sixty" retailer, Henderson J found that a landlord could have been crammed down in this way, but was in fact unfairly prejudiced (Mourant & Co Limited Trustees and another v Sixty UK Limited (in administration) and others). The CVA was set aside.

The judgement concludes:

I am conscious, of course, that I have not heard the administrators' side of the story, because of their decision not to participate in the trial. Nevertheless, I am satisfied that there is a prima facie case of misconduct on their part which ought to be considered by the professional bodies to which they are answerable. I therefore propose to direct that copies of my judgment should be sent to the appropriate bodies by which they are licensed to act as insolvency practitioners.

Such judicial criticism of IPs occurs rarely and is sad to see, not least because of its effect on the whole profession. Speedy, clear and fair action by the regulators concerned will no doubt ensue.

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"CVAs allow troubled companies to escape their full obligations", say landlords and other critics, according to Accountancy Age.

Such a perspective ought not to be surprising because the whole point of a CVA is to relieve the company of obligations it cannot meet - on fair terms.

The principles are that a company and its creditors are free to agree whatever they like in a CVA, provided, broadly, that 75% of those creditors who vote do in fact support the proposals and that no creditors are unfairly prejudiced.

Landlords in particular should recognise that accepting a compromise on future income and/or outstanding debt can be preferable to the loss of value to creditors on liquidation, with the consequential absence of future income (voids) and outstanding debt (unpaid rent).

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Not only is rent an administration expense, but it is payable on the terms of the lease. Having the company occupy only part of the premises on a quarter day will in most cases trigger an administration expense liability for the whole of the next quarter's rent, payable immediately.

This results from the decision in Goldacre (Offices) Ltd v Nortel Networks UK Ltd [2009] EWHC 3389 (Ch) (07 December 2009), where HHJ Purle QC applied the Lundy Granite or liquidation expense principle to administrations in light of the similarlity of wording between Insolvency Rules 4.218 and 2.67.

In February 2009 we postulated, following Innovate Logistics Ltd v Sunberry Properties Ltd [2008] EWCA Civ 1321 (18 November 2008), that the administrator and the landlord would have to consider the balancing exercise that the court would undertake between the financial loss to the landlord and the financial loss to the creditors generally. The pendulum has now swung firmly in favour of landlords.

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A landlord has no automatic right to be paid rent as an administration expense and, as regards rent falling due after the date of the administration order, the landlord is an unsecured creditor of the tenant company.

In case there had been any doubt after the Trident Fashions case, where business rates were found to be an administration expense and some commentators suggested, by analogy, that rent would be treated similarly, Innovate Logistics Ltd v Sunberry Properties Ltd [2008] EWCA Civ 1321 (18 November 2008) clarifies the position.

It does not mean that a company can occupy premises rent free after administration, but the court will exercise its discretion in considering whether to allow the landlord to override the statutory administration moratorium according to the guidance in Re Atlantic Computer Systems plc.

That guidance illustrates that significant financial loss to the landlord in the event of the landlord not being able to enforce his proprietory rights could be outweighed by loss to the creditors in the event that occupation of the premises came to an end.

Accordingly, in practice, the administrator and the landlord will need to consider the balancing exercise the court would undertake, and some payment - perhaps even the full amount of the rent due - may have to be made, effectively as a ransom payment in respect of the landlord's unsecured claim.

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