English court: scheme of arrangement cannot impose lease surrender

Out-Law Legal Update | 23 Jan 2020 | 2:18 pm | 2 min. read

A scheme of arrangement cannot compel a landlord to accept a surrender of a lease because this would interfere with the landlord's proprietary rights, the High Court in England has ruled.

It said that the proposed lease arrangements would be outside the jurisdiction of Part 26 of the Companies Act 2006. The court also said that there is no material difference between a scheme of arrangement and a Company Voluntary Arrangement (CVA) in this respect.

  • Scheme of arrangement's altering of proprietary rights outside scope of law
  • No material difference between scheme and CVA in this respect
  • Re Instant Cash Loans Ltd [2019] EWHC 2795 (Ch)

Instant Cash Loans Limited, a payday loan company, sought to restructure its debt through a scheme of arrangement with its creditors under Part 26 of the Companies Act.

The High Court assessed whether it should sanction the scheme and the judge raised concern about a provision which would force landlords to surrender leases held by the company. The scheme said that in consideration of the landlord's right to submit a scheme claim, each lease would terminate and the company's rights in respect of the leases would be surrendered to the landlord.

This was a concern because the provision did not appear to be within the scope of a scheme, as it dealt with the relationship between a landlord and tenant, rather than the relationship between a creditor and debtor. The view in Re Lehman Brothers International Europe (In Administration) [2009] EWCA Civ 1161 that a scheme "between a company and its creditors must mean an arrangement which deals with their rights…as debtor and creditor" was supported.

The judge said that a lease creates proprietary rights as well as contractual rights and obligations. The recent decision Discovery (Northampton) Ltd v Debenhams Retail Ltd [2019] EWHC 2441 (Ch) was applied; here the court held that a CVA could not vary a landlord's right to forfeiture, which is also a proprietary interest. The court also supported the view in Re APCOA Parking Holdings GmbH [2014] EWHC 3849 (Ch) that obligations cannot be imposed by a scheme. 

The High Court said that including the surrender of lease provision in the scheme would interfere with the landlords' proprietary rights. It said that this could make landlords responsible for unoccupied business rates, occupiers' liabilities and environmental liabilities.  It said that the provision in the scheme relating to the unilateral surrender of the leases was outside the scope of Part 26 of the Companies Act. It is therefore a landlord's decision if they choose to surrender a lease.

A majority of creditors voted in favour of the scheme of arrangement, so the court sanctioned the rest of the scheme, but not the provision which would have amounted to the surrender of the leases.

The court also ruled that there is no material difference between a scheme of arrangement and a CVA. The Instant Cash Loans decision is therefore likely to impact the structure of landlord CVAs in the future. Further judicial consideration on varying a landlord's proprietary rights by CVA or scheme of arrangement by the Court of Appeal or Supreme Court is likely.