A group of landlords has filed a petition in the Scottish Courts, challenging House of Fraser’s company voluntary arrangement (CVA).
The landlords, who are advised by Begbies Traynor and JLL, officially filed a petition in the Scottish courts. They are challenging the CVA proposals on the grounds of alleged “unfair prejudice against certain creditors, as well as material irregularities in the implementation of the CVA”.
The challenge is the first against a CVA in Scotland, say the advisers, adding that it has been filed to ensure landlords’ shareholders are not unfairly treated. The group had until the close of business on Monday to file a challenge.
Mark Fry, partner at Begbies Traynor, and Charlotte Coates, director at JLL, who have been working together to advise House of Fraser landlords throughout the CVA process, said: “Our group believes that certain landlords have been unfairly prejudiced during this process and that there have been alleged material irregularities in the implementation of House of Fraser’s CVA.
“Our clients have therefore taken the decision to formally file a legal challenge to the CVA today, ahead of the 24 July deadline, to protect their interests and seek to ensure that landlords are not unfairly treated in the same way in future CVAs.
“We strongly believe it to be unjust for the existing shareholders in House of Fraser to receive £70m of value, the details of which were not communicated initially, while certain landlord creditors are shouldering the financial impact of the process. It is our view, and that of our legal counsel, that landlords have been disproportionately affected during this CVA process – not only compared with other creditors, but also in how they could have been treated if alternative routes to rescuing the business were fully explored.
“As a group, landlords experienced a complete lack of meaningful engagement and transparency from the outset of the House of Fraser CVA process, despite repeated requests for details on how the company is expected to trade over the next seven months under the CVA. To date, no information has been provided to our landlord group, with no guarantees that the business will continue, leaving landlords unable to reasonably assess the likelihood of success or otherwise of the company’s future rescue plan.
“CVAs were designed as a means to rescue a business, not simply a tool to shed undesirable leases for the benefit of equity shareholders. They should set out a clear plan for the sustainable future of that business and the proposals should not be disproportionately detrimental to or prejudiced towards a targeted group of creditors. Our landlord group believes that House of Fraser and its advisers have failed on both counts.
“It is our collective view that the retail CVA process in the UK has become fundamentally flawed and needs correcting. Applying a 75% arbitrary discount to the value of landlords’ claims has no basis in law and impacts the likely outcome of the vote, given that those landlords who will lose out have their voting rights and ability to object or negotiate severely curtailed. The application of the discount clearly means that dissenting voices are more easily silenced.
“As commercial landlords in the retail sector are often pension funds, representing the retirement income of the man on the street, we believe it is important that the recent approach to CVAs is tested in the courts rather than be allowed to further prejudice landlords, while undermining the value and attractiveness of UK real estate as an asset class.”
House of Fraser issued a statement saying: “We note the statement made by Begbies Traynor and JLL on behalf of a group of landlords but at this stage we have not received anything formally.
“On the assumption that a challenge is filed in court, while we are disappointed, we look forward to robustly defending our position and we are confident that this will not affect our commercial plans.”