Neutral Citation Number: [2007] EWHC 1002 Ch
Case No: 1170 of 2006 and 1886 of 2006
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 1st May 2007 

Before :

MR JUSTICE ETHERTON
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Between :

	Prudential Assurance Company Ltd and others Luctor Limited and others	Applicants	
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	PRG Powerhouse Limited and others
Anthony Murphy and others	Respondents	

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Mr Gabriel Moss Q.C. and Mr Daniel Bayfield (instructed by Lovells) for the Prudential Applicants
Mr Richard Sheldon Q.C. and Ms Blair Leahy (instructed by Addleshaw Goddard) for the Luctor Applicants
Mr Paul Morgan Q.C.  and Ms Marcia Shekerdemian (instructed by Charles Russell) for the Respondent

Hearing dates: 21-23 March 2007
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Judgment

Introduction
1.	This is the trial of preliminary issues (“the Preliminary Issues”) in two sets of proceedings in which creditors of PRG Powerhouse Limited (“Powerhouse”) have challenged the validity of a company voluntary arrangement for Powerhouse which was approved at a meeting of Powerhouse’s creditors on 17th February 2006 (“the CVA”).  
2.	The issue at the heart of the proceedings, and of the Preliminary Issues, is whether the CVA was effective to release Powerhouse’s parent company, PRG Group Limited (“PRG”), from liability in respect of guarantees provided by it to landlords of premises let to Powerhouse (“the Guarantees”).
3.	That issue is of general importance to the commercial property market.
The Proceedings
4.	By a CPR Part 8 Claim Form dated 15 March 2006 Luctor Limited and others (“the Luctor Applicants”) claimed against Powerhouse, PRG and the CVA supervisors, Anthony Murphy, Robert Horton and Roger Tulloch (“the Supervisors”), a declaration that the CVA is ineffective and/or invalid in so far as it purports to affect the rights of the Luctor Applicants against persons other than Powerhouse, or alternatively in so far as the CVA purports to constitute an express release by the Luctor Applicants of their rights against persons other than Powerhouse (“the Luctor Proceedings”).
5.	By an ordinary application in the Companies Court also dated 15 March 2006 the Luctor Applicants claimed an order that the creditors’ approval of the CVA be revoked pursuant to s.6 of the Insolvency Act 1986 (“IA”) because the CVA is unfairly prejudicial to the Luctor Applicants as creditors of Powerhouse, and/or there was some material irregularity at or in relation to the meeting of Powerhouse’s creditors on 17 February 2006. 
6.	By a CPR Part 8 Claim Form issued on 16 March 2006 Prudential Assurance Company Limited and others (“the Prudential Applicants”) claimed against Powerhouse and the Supervisors identical relief to that claimed by the Luctor Applicants (“the Prudential Proceedings”).
7.	The Prudential Applicants issued an ordinary application in similar terms to that issued by the Luctor Applicants.
8.	During the course of the hearing before me I ordered that PRG be joined as a defendant to the Prudential Proceedings and as a respondent to the ordinary application issued by the Prudential Applicants.
9.	On applications by the Luctor Applicants and the Prudential Applicants (together “the Claimants”) Blackburne J ordered on 1 March 2007 the trial of the Preliminary Issues in the Luctor Proceedings and in the Prudential Proceedings.

The Preliminary Issues
10.	The Preliminary Issues are as follows:
“(1) (a) Whether or not on the correct interpretation of section 5(2) of the Insolvency Act 1986 (“the Act”), and on the true construction of Powerhouse’s Company Voluntary Arrangement (“the CVA”) and of the guarantees or indemnities given by PRG to the Claimants in respect of Powerhouse’s obligations, as tenant, to the Claimants (“the Guarantees/Indemnities”), any of the Guarantees/Indemnities has been released or ought to be treated as having been released by reason of the CVA; 
(b) If the answer to (a) above is yes, which Guarantee/Indemnity is, or which Guarantees/Indemnities are, so released or so affected by reason of the CVA;
(c) If the answer to (a) above is no, are any of the Claimants otherwise precluded from enforcing any of their Guarantees/Indemnities against PRG by reason of the CVA;
(d) If the answer to (c) above is yes, which of the Guarantees/Indemnities are the Claimants precluded from enforcing against PRG by reason of the CVA.
(2) If the answer to 1)(a) or (c) above is yes, on the basis of the facts set out in the Agreed Facts document attached hereto, does the CVA unfairly prejudice the interests of the Claimants as creditors of Powerhouse within the meaning of section 6(1)(a) of the Act.”

The Statement of Agreed Facts
11.	On 6 March 2007 Blackburne J ordered that the second of the Preliminary Issues be tried against the following Statement of Agreed Facts:
 “1. PRG Powerhouse Limited (“Powerhouse”) is a subsidiary of PRG Group Limited (“PRG”), registered in New Zealand. On the date Powerhouse's company voluntary arrangement (“the CVA”) was approved, PRG was listed on the New Zealand Stock Exchange.   
2. In about September 2003, Powerhouse acquired, with financial support from PRG, the assets of the Powerhouse business for £17.4 million, including 24 high street stores and 110 superstores.  A number of the landlords of these stores, including Prudential and Luctor (a British Land Plc company), took parent company guarantees or indemnities from PRG in respect of Powerhouse's obligations under the leases.  
3. Powerhouse got into financial difficulties and its directors informed its creditors that it needed to close 35 underperforming stores (the "Closed Premises") and to retain 53 stores which they hoped would enable it to trade profitably.  
4. The directors of Powerhouse proposed the CVA, which had the following terms, amongst others.  
5. The rights and obligations of all creditors other than the Scheme Fund Creditors were to be unaffected by the CVA.  
6. The Scheme Fund Creditors consisted of employees, landlords, local authorities and others who were creditors in respect of Powerhouse's Closed Premises.  For these creditors, PRG agreed to provide a fund equal to the lesser of £1.5 million and the sum required to pay a dividend to Scheme Fund Creditors of 28 pence in the pound on their respective claims as valued pursuant to the CVA's Valuation Mechanism.  The CVA contained provisions designed to release all the Scheme Fund Creditors' claims against Powerhouse related to Closed Premises. It also included terms designed to release any guarantees or indemnities given by PRG to the Closed Premises Landlords. PRG was willing to make the Scheme Fund available for the benefit of the Scheme Fund Creditors in consideration for the releases and compromises of the liabilities of Powerhouse and PRG.
7. All of the rents and rates payable to the Applicants (as defined in the Order of Blackburne J. dated 1 March 2007) pursuant to the leases of the Applicants’ Closed Premises had been paid by Powerhouse up to the March 2006 quarter day.  The Respondents maintain that: (a) all of the rents and rates payable to the other Closed Premises landlords pursuant to the leases of their Closed Premises had been paid by Powerhouse up to the March 2006 quarter day; (b) all employees of the Closed Premises were paid all arrears of wages, commission and accrued holiday pay up to 1 February 2006 (the date from which the Closed Premises ceased to trade), together with a payment equivalent to the sum they would be entitled to by way of statutory redundancy payment; and (c) all suppliers (including all Landlords in relation to the supply of accommodation) were paid for all supplies provided and invoiced for up to the date of the CVA, to the extent that such invoices had fallen due for payment by that date.  The Luctor Applicants (as defined in the Order of Blackburne J. dated 1 March 2007) maintain (but the Respondents deny) that a sum of approximately £2,000 in respect of service charges and insurance payable by Powerhouse to the Sixth Luctor Applicant: (a) fell due for payment prior to the date of the CVA; and (b) remains unpaid.
8. The directors represented to the creditors that in the CVA the likely dividend to Scheme Fund Creditors was to be 28 pence in the pound; other creditors were not affected by the CVA and, it was said, would see their debts paid through the ongoing trading of Powerhouse. The directors represented to the creditors that in a liquidation of Powerhouse, the dividend to all unsecured creditors would be nil.  The directors represented to the creditors that Powerhouse’s future viability depended upon an arrangement of Powerhouse’s affairs involving the compromise and release of liabilities inter alia of PRG on the terms set out in the CVA.  The directors also represented that they considered that such an arrangement was “desirable in the interests of all creditors”.  
9. Powerhouse declared that the Scheme Fund was to be held by the CVA Supervisors on trust but that if the CVA failed, the Scheme Fund would be held on trust for PRG, enabling PRG to demand the return of the funds.  
10. At a meeting of all the creditors of Powerhouse, including the creditors whose rights and obligations are not affected by the terms of the CVA, the CVA obtained the requisite statutory majority.  
11. Scheme Fund Creditors other than Closed Premises Landlords were, according to the representations of the directors, expected to receive 28p in the pound from the CVA as opposed to nil in a liquidation. Closed Premises Landlords were expected to receive 28p in the pound from Powerhouse in the CVA, and nothing from PRG under any guarantees or indemnities which had been provided in relation to the Closed Premises. In a liquidation, Closed Premises Landlords were expected to receive nothing from Powerhouse.    
12. Two groups of Closed Premises Landlords have challenged the CVA.
13. Powerhouse has subsequently gone into administration and ceased carrying on business.”
12.	Although administrators were appointed to Powerhouse on 1 August 2006 the CVA has not been terminated.
13.	At the date the CVA was approved by creditors each of the Luctor Applicants and the Prudential Applicants was a landlord of Closed Premises, and all but two of them had the benefit of Guarantees.
14.	In the CVA Powerhouse was described as “the UK’s 3rd largest electrical retailer”. 
The CVA
15.	In his report to the court pursuant to IA s.2(2), and in his letter dated 1 February 2006 to the creditors of Powerhouse, Mr Anthony Murphy of Smith & Williamson, the nominee under IA s.1(2), summarised the proposal of the directors of Powerhouse for the CVA (“the Proposal”).  He said, among other things, that the CVA would enable Powerhouse to continue to trade under the control of its directors, with enhanced profitability and long-term viability. Loss making stores, that is to say the Closed Premises, had been closed immediately, and trading would continue from Powerhouse’s other stores.  PRG would make available funds of £1.5 million as a Scheme Fund to be applied in full and final settlement of the claims of the Scheme Fund Creditors, that is to say the landlords of Closed Premises (“the Closed Premises Landlords”) and other creditors with claims relating to the Closed Premises.  The claims of the Closed Premises Landords would be valued on the following basis: rent arrears at the date the CVA became effective; plus, for leases with a minimum remaining period of 5-8 years, 8 months rent, and, for leases with a minimum period in excess of 8 years, 12 months rent. It was anticipated that the return to Scheme Fund Creditors would be in the order of 28p in the £.  Employees in the Closed Premises would be paid all outstanding wages, salaries and holiday pay, and would receive notice and redundancy pay.  All remaining creditors would continue to be paid in full under normal terms and conditions.  Mr Murphy said that the reconstructed business would enjoy full parental support.  He said that the proposal would provide for a release of all guarantees and sureties given in relation to the Closed Premises. 
16.	That brief summary of Mr Murphy’s description of the Proposal, together with the Statement of Agreed Facts, are sufficient to show that in reality and substance the CVA was intended to affect future rather than accrued rights, and primarily the future rights of Closed Premises Landlords.  Under the terms of the Proposal, the Closed Premises Landlords would lose the benefit of the Guarantees and would have their rights to future rent under leases of the Closed Premises compromised by receipt of a dividend of approximately 28p in the £ on the basis of a valuation of their claims which took account of the outstanding length of the leases but not the existence of any relevant Guarantee.
17.	I was referred by counsel to many provisions in the Proposal.  It would lengthen this judgment considerably to set them out.  In view of the summaries of the CVA in the Statement of Agreed Facts and in Mr Murphy’s report to the court and in his letter to creditors of 1 February 2006 to which I have referred earlier, I do not consider it is necessary to do so.  I shall refer in detail to a few of the provisions later in this judgment.  Those provisions which I subsequently consider and analyse in detail contain many defined expressions, but their meaning is sufficiently obvious to avoid the need to set out the many definitions in the Proposal.
18.	The only other provisions of the CVA which it is convenient to mention here are those which stated that, in addition to payment of the £1.5 m for the Scheme Fund, PRG would pay or put Powerhouse in funds to pay Mr Murphy’s fee for acting as nominee plus his expenses and VAT, and also the fees of Smith & Williamson plus their expenses and VAT in connection with the preparation of the Proposal, and the fees of the Supervisors and their expenses and VAT.
19.	At Appendix 4 to the Proposal was an estimated comparative statement of affairs as at 31 January 2006 showing the financial position of Powerhouse at that date, and providing a comparison between the financial consequences of the CVA and an insolvent liquidation.  It showed, in brief, that on an insolvent liquidation there would be a deficiency of just over £11.7m as regards secured creditors and that unsecured creditors would receive nothing, whereas under the CVA some £1.5m would be available for Scheme Creditors.
The Guarantees
20.	It is not disputed that all the Guarantees given by PRG to those of the Claimants who have the benefit of them contain provisions which, if all references to PRG in clauses 3.12 – 3.15 of the Proposal were ignored, would prevent the discharge of the Guarantees by virtue of the compromise of the Claimants’ claims against Powerhouse by the CVA.  
21.	In all but one of those Guarantees PRG covenanted as principal debtor.
22.	In some of those Guarantees, it was provided that:
“… any variation in the terms of the Lease… or any other act, omission, matter or thing whatever whereby (but for this proviso) the Guarantor would be exonerated either in whole or in part from its obligations under this guarantee (other than a deed of release given by the Landlord) shall not release or in any way lessen or affect the liability of the Guarantor hereunder.”
23.	In others of the Guarantees, it is provided as follows:
“The guarantee and covenant contained in paragraph 1 shall impose upon the Guarantor the same liability as if the Guarantor were itself the principal debtor in respect of the Secured Obligations and such liability shall continue notwithstanding (and shall not be discharged in whole or in part or otherwise be affected by):
…
(g)	any increase or reduction in the Premises or in the rent payable under the Lease or any other variation to the Lease whether or not the Guarantor is a party to such variation:
(h)	any change in the constitution structure or powers of the Guarantor the Assignee or the Landlord or the administration liquidation or bankruptcy of the Assignee or the Guarantor;
(i)	any other act omission of the Landlord or … any other circumstances (other than a deed of release by the Landlord) which but for this paragraph 1.4 would discharge the Guarantor;
and for the purpose of this paragraph 1 the Assignee shall be deemed to be liable to continue to pay and discharge the Secured Obligations notwithstanding any of the above matters and any money expressed to be payable by the Assignee which may not be recoverable from the Assignee shall be recoverable by the Landlord from the Guarantor as principal debtor.”
24.	The other Guarantees contained provisions to similar effect.
The Statutory Provisions
25.	The company voluntary arrangement procedure (“cva”) and the corresponding voluntary arrangement procedure for individuals (“iva”) were recommended by the Cork Committee (“the Committee”)  in their report on Insolvency Law and Practice presented to Parliament in June 1982 (Cmnd. 8558) (“the Cork Report”).  The cva and iva procedures were introduced by IA.
26.	For the purposes of this judgment it is not necessary to describe in detail the legislative framework for a cva. It is sufficient to refer to the following provisions:
27.	IA s.1(1) provides:
 “The directors of a company (other than one which is in administration or being wound up) may make a proposal under this Part to the company and to its creditors for a composition in satisfaction of its debts or a scheme of arrangement of its affairs (from here on referred to, in either case, as a “voluntary arrangement”).”
28.	IA s.1(2) provides for an insolvency practitioner, “the nominee”, to supervise the implementation of the voluntary arrangement.  Where, as in the present case, the nominee is neither a liquidator nor an administrator, IA s.2(2) requires the nominee to submit a report to the court stating whether, in his opinion, the proposed voluntary arrangement has a reasonable prospect of being approved and implemented, and whether, in his opinion, meetings of the company and of its creditors should be summoned to consider the proposal, and, if in his opinion such meetings should be summoned, the date on which, and the time and place at which, he proposes the meetings should be held.
29.	IA s.3 provides for the nominee to summon meetings of the Company’s creditors and of its members to consider the proposal.
30.	IA ss.4(3) and (4) protect the position of secured and preferential creditors respectively.
31.	The effect of approval of a cva is set out in IA s. 5(2) as follows.
“5(2)  The voluntary arrangement –
(a)	takes effect as if made by the company at the creditors’ meeting, and
(b) 	binds every person who in accordance with the rules –
(i) was entitled to vote at that meeting (whether or not he was present or represented at it), or 
(ii) would have been so entitled if he had had notice of it, 
as if he were a party to the voluntary arrangement.”
32.	IA s.6 provides a right to challenge either the cva itself or the manner by which its approval was obtained.  It is necessary to cite here only s.6(1) and (4), which are as follows.
“6(1) Subject to this section, an application to the court may be made … on one or both of the following grounds, namely –
(a)	that a voluntary arrangement … unfairly prejudices the interest of a creditor, member or contributory of the company;
(b)	that there has been some material irregularity at or in relation to either of the meetings.
….
6(4) Where on such an application the court is satisfied as to either of the grounds mentioned in subsection (1) … it may do one or both of the following, namely –
(a)	revoke or suspend any decision approving the voluntary arrangement … or, in a case falling within subsection (1)(b), any decision taken by the meeting in question …;
(b)	give a direction to any person for the summoning of further meetings to consider any revised proposal the person who made the original proposal may make or, in a case falling within subsection (1)(b), a further company or (as the case may be) creditors’ meeting to reconsider the original proposal.”
33.	By IA s.7(2) the persons carrying out the supervision of the implementation of the cva by virtue of the approval of the meetings summoned under IA s.3 are known as the supervisors.  
34.	The statutory provisions are supplemented by Part 1 of the Insolvency Rules 1986 (“IR”).  
35.	The effect of IR, so far as relevant, is that all the company’s preferential and unsecured creditors are entitled to be sent notice of the creditors’ meeting for approval of the proposal and to vote at the meeting.  The votes are calculated according to the amount of the creditor’s debt as at the date of the meeting.  There must be a majority in excess of three-quarters in value of the creditors present in person or by proxy and voting on the resolution in order to carry it.
Representation
36.	Mr Richard Sheldon Q.C, leading Ms Blair Leahy, appeared for the Luctor Applicants.  Mr Gabriel Moss Q.C, leading Mr Daniel Bayfield, appeared for the Prudential Applicants.  Mr Sheldon addressed me primarily in relation to Preliminary Issue (1), and Mr Moss addressed me primarily in relation to Preliminary Issue (2), but they formally adopted each other’s submissions.
37.	Mr Paul Morgan Q.C, leading Ms Marcia Shekerdemian, appeared for the Respondents.
38.	Powerhouse’s administrators did not appear, and were not represented, before me.  I have been informed that they have agreed that they will be bound by my decisions on the Preliminary Issues.
Preliminary Issue (1)
39.	The first Preliminary Issue turns on the proper meaning and legal effect of clauses 3.12 to 3.15 of the CVA. 
40.	The relevant parts of clauses 3.12 to 3.15 of the CVA are as follows.
“3.12	The Arrangement is a proposal for a compromise of the Company’s affairs under which the Scheme Fund Creditors agree to accept the Dividend payable in relation to a claim against the Scheme Fund calculated in accordance with the Valuation Mechanism and the Proposal Document in satisfaction of all debts, liabilities or obligations due from or owed by the Company and/or PRG howsoever arising (including but not limited to all obligations and liabilities of the Company and/or PRG that have been guaranteed or indemnified by PRG and any other rights against PRG howsoever arising in relation to the Closed Premises) or any such claims or rights that they might have against the Company and/or PRG (whether present, prospective, contingent or otherwise) and the delivery of the dividend calculated in accordance with this Arrangement to any Scheme Fund Creditor will operate in full and final settlement of that Scheme Fund Creditor’s debts, claims and rights to the intent and effect that it shall release all debts, liabilities and obligations whosoever and howsoever owed by the Company and/or PRG to such Scheme Fund Creditor and all claims against the Company and/or PRG under any guarantee or surety or contract or lease or licence of any kind given in respect thereof.

3.13	Consequently, in the event that any Closed Premises Landlord … is not paid in full and any such Closed Premises Landlord … pursues any remedy against any Closed Premises Guarantor, … then that Closed Premises Guarantor… shall have no right or recourse against the Company … such right of recourse having been compromised and released by this Clause and/or by the Arrangement and furthermore Closed Premises Landlords … agree to account for any funds received from the Scheme Fund in reduction or set-off against any claim they may have against any Closed Premises Guarantors ….

3.14	Further, and for the avoidance of doubt, any guarantee or surety of any kind given by the Company or PRG for the debts, liabilities and obligations or any one or more of them shall, insofar as it relates to any debt, liability or obligation owing to a Closed Premises Landlord … be treated as having been released.
	
3.15	Upon and following the Effective Date, no proceedings can be commenced or continued against … PRG by a Scheme Fund Creditor in respect of any debt, obligation or liability compromised or released in the Arrangement….”

41.	As a preliminary observation, it is to be noted that the present case is not one  in which it is alleged that payment of a dividend to a creditor pursuant to a cva has automatically, as a matter of law, discharged the liability of a third party co-debtor or surety.  That situation was considered by the Court of Appeal in Johnson v Davies [1999] Ch. 117.  In that case Chadwick LJ, with whom the two other Judges of the Court agreed, expressed the view that the general law, by which a composition or arrangement between a debtor and his creditors releases sureties, applies to an iva.  The general rule is ousted by express provision in the guarantee retaining the liability of the surety notwithstanding dealings between the creditor and the principal debtor. It is common ground in the present case that all the Guarantees contain provisions negativing the general rule: comp. Lombard Natwest Factors Limited v Koutrouzas [2002] EWHC 1084 (QB), [2003] BPIR 444 (surety not released by iva of a co-surety when guarantee expressly provided that the guarantee would not be affected by indulgence granted to a co-surety).
Clause 3.12
42.	This clause provides that payment of the dividend to any Scheme Fund Creditor will immediately and automatically operate to release all liability of PRG under the Guarantees.  The clause, therefore, purports to have a direct binding effect on the substantive rights and obligations of the Guaranteed Landlords and PRG respectively under the Guarantees.
43.	Mr Morgan submitted that the words “arrangement of its affairs” in IA s.1(1), in combination with IA s.5, are wide enough to give legal effect to clause 3.12.
44.	In my judgment, broad and facilitative as the statutory language may be, it does not enable clause 3.12 to operate directly to release PRG’s liability under the Guarantees.
45.	In Johnson v Davies at pp. 129H-130A Chadwick LJ described the statutory effect of an iva under IA s.260(2), which is for all material purposes the same as IA s.5(2), as creating a “statutory hypothesis … that the person who has notice of and was entitled to vote at the meeting is party to an arrangement to which he has given his consent”: see also Welsby v Brelec Installations Limited [2002] 2 BCLC 576 at 579g (Blackburne J). 
46.	The hypothetical agreement is a bilateral agreement between each creditor and the company.  IA s.1(1) refers to the intention to make a proposal “to the company and its creditors for a composition in satisfaction of its debts or a scheme of arrangement of its affairs”.  IR r.1.1(1) contains a similar formulation.  As Mr Sheldon also observed, IR r.1.3(2)(c) requires the directors of the company to state in their proposal the nature and amount of the company’s liabilities, and how they are to be dealt with by the arrangement.  
47.	In the short, each creditor is a party to the arrangement by virtue of being, and in the capacity of, a creditor of the company.  It is the company, and not any third party, which has the benefit of and can enforce, the rights and obligations conferred by the cva.  This interpretation of the statutory provisions is supported by the case law.
48.	In Re Primlaks (UK) Ltd (No. 2) [1990] BCLC 234 the Bank of Credit and Commerce International SA, which was a creditor of the debtor company and also held personal guarantees from two individuals as security for the company’s liability to the bank, applied under IA s.6 for an order setting aside a voluntary arrangement under which the guarantees would no longer be enforceable by the bank.  Harman J, at an interlocutory stage of proceedings (which, in the event, never came to trial), expressed the view at p. 236c that:
“It is obviously well arguable that the attempt to deal with matters wholly outside the company, and to bind persons who are not the company in respect of their rights against third parties, might be outside the scope of [IA s.1]”.
49.	In Welsby v Brelec Installations Limited Blackburne J said at p.579g, in relation to a cva:
“… the effect of the creditors’ approval of the debtors’ proposal is, as is well-established, to give rise to a species of statutory contract between the creditors bound by the arrangement on the one hand and the debtor on the other.”
50.	In Re Glendale Land Development Limited (in liquidation) (1982) 7 ACLR 171 at p.173 McLelland J in the Supreme Court of New South Wales said of an arrangement between a company and its creditors under s.315 of the Companies (NSW) Code that:
“… the contractual status of any outsider vis a vis the company or any creditor or member must have some other basis than the court’s approval of the arrangement between the company and its relevant creditors or members”.
51.	The hypothetical agreement resulting from approval of a cva is not, therefore, one between creditors as to rights and obligations between themselves in a capacity other than as creditors of the company.  In relation to the Guarantees PRG’s obligations are those of a debtor arising out of a contract made by itself as principal on its own behalf.  There is nothing in IA or IR which makes the CVA binding and enforceable as between PRG and the Guaranteed Landlords in respect of such obligations.
52.	Mr Morgan submitted that Shaw v Royce Limited  [1911] Ch. 138 is authority supporting the conclusion that a cva may directly affect and alter the rights and obligations between creditors of the company and third parties.  I do not agree.  In that case the plaintiff held debentures issued by the defendant company.  Those debentures were part of an issue secured by a trust deed which provided that the debentures should be guaranteed by the Law Guarantee Trust and Accident Society Limited, which was to be the trustee for the debenture-holders.  A general meeting of the debenture-holders was to have power by extraordinary resolution to assent to any arrangement or compromise proposed between the company and the debenture-holders, provided that it was one which the court would have jurisdiction to sanction under the Joint Stock Companies Arrangement Act 1870 (“the 1870 Act”) (the predecessor of the Companies Act 1985 (“CA”) s. 425) if the company were being wound up and the requisite majority at a meeting of the debenture-holders had assented to it.  Resolutions were passed for the voluntary winding up of the Society.  At duly convened meetings resolutions were passed by the requisite majority of the debenture-holders of the company releasing the Society from its guarantee.  A draft supplemental trust deed was prepared which provided that each debenture-holder should surrender his debentures immediately to the company and accept new debentures carrying a higher rate of interest but no guarantee by the Society.  The plaintiff, who neither attended the meetings nor assented to the resolutions, declined to surrender his debentures or give up the guarantee.  He brought the action against the company, the Society, and the new trustees for a declaration that the resolutions were not binding on him, and for an injunction to restrain the defendants from acting on them.  Warrington J held that the resolutions were binding on the plaintiff, and that any deed executed or to be executed in pursuance of the resolutions would be binding on him.
53.	It is important to note the actual resolution which Warrington J held was binding.  The resolution was that a particular draft supplemental trust deed be approved and carried into effect.  That draft deed contained a provision requiring each holder to surrender his debenture, and to take in place of it a debenture not carrying any guarantee by the Society.  Accordingly, the effect of the resolution was that the guarantee would necessarily be gone because that guarantee was in respect of the payment of money due under the debentures which were to be replaced by debentures without the guarantee.  The real question in issue was whether that arrangement between the company and its creditors was invalidated because it stipulated for something which would affect an outsider.  Warrington J concluded that it would not, and that it was an agreement which the court would have jurisdiction to sanction under the 1870 Act.                   
54.	The proper analysis of Shaw v Royce, in my judgment, is that an arrangement will not cease to be an arrangement between a company and its relevant creditors or members (within the relevant provisions of IA) merely because the scheme is part of a wider scheme involving outsiders.  That was precisely the interpretation of McLelland J in Re Glendale Land Development Ltd at p.173, where he said:
“Nevertheless, as is demonstrated by the decision in that case (and in many other cases – see Shaw v Royce [1911] 12 Ch 138: Re Guardian Assurance Co [1917] 1 Ch 431; Re National Bank [1966] 1 WLR 819; Re A & C Constructions  [1970] SASR 565; Singer Manufacturing Co v Robinson [1971] SC 11; Re Bank of Adelaide (1979) 22 SSASR 481 and Re Savoy Hotel [1981] Ch 351), an arrangement between a company and its relevant creditors or members is not outside the scope of such a provision as s.315 merely because it is part of a wider scheme involving outsiders, or an outsider is a necessary party to its implementation.  This is in any event made abundantly clear by the provisions of s.317.”
55.	In the present case, the analogy with Shaw v Royce would have been a provision for Guaranteed Landlords to accept surrenders of the leases.  The CVA would not have ceased to be a “scheme of arrangement of [the company’s] affairs” within IA s.1(1) merely because the indirect effect of the surrender would have been to remove future liability under the Guarantees.
56.	This analysis is supported by the approach of Jacob J in RA Securities Ltd v Mercantile Credit Co Ltd [1995] 3 All E R 581, which concerned the liability of an original tenant (“T1”) to a landlord after the lease had been assigned and the assignee had entered into a cva.  Jacob J said at p.585:
“Turning back to [IA] s.5, does ‘binds every person’ have any effect outside the voluntary arrangement?  I think not.  The effect of the binding is solely as between the parties bound, those entitled to vote, whether they did or not.  An outsider, such as T1, can get no assistance from the terms of the voluntary arrangement as such.  Of course if something is actually done as a result of the arrangement (eg property transferred, or as might have but did not happen here, surrender of a lease) then an outsider can rely upon that.  But his right to rely upon it must result from an actual act done, not the arrangement”.
57.	Mr Morgan submitted that clause 3.12 should, alternatively, be treated as an agreement by each Guaranteed Landlord with Powerhouse to obtain a discharge of the relevant Guarantee.  I do not agree.  No authority was cited to me to support the legitimacy of such an interpretation.  It is not what clause 3.12 actually says.  Nor, in my judgment, can such a term be implied.  Such a term is neither obvious nor necessary.  In the first place, the CVA includes in clauses 3.14 and 3.15 express provisions intended to prevent enforcement of the Guarantees.  Second, it would not be right to imply any such term in the present case since, for all the reasons I give below, such a provision would be unfairly prejudicial to the Guaranteed Landlords. 
Clause 3.14
58.	This clause provides that the Guarantees “shall… be treated as having been released”.
59.	The Claimants contend that clause 3.14 is of no more validity and effect than clause 3.12 since it either purports to have the same immediate and direct impact  on the guarantee obligations of PRG as clause 3.12 or it attempts indirectly to affect those obligations.  I do not accept that submission.
60.	The Claimants accept that it is legally possible for a cva to provide that a creditor cannot take steps to enforce an obligation of a third party to the creditor which would give rise to a right of recourse by the third party against the debtor company, such as payment by a guarantor who can then claim repayment from the debtor.  That concession is plainly right.  Such a provision falls within the broad term “scheme of arrangement of its affairs” in IA s.1(1).  It is consistent with Shaw v Royce and Re Glendale Land Development Ltd.  The validity of such a prohibition on action by the creditor against a third party was expressly recognised by HH Judge Roger Cooke, sitting as a High Court Judge, in Burford Midland Properties Ltd v Marley Extrusions Ltd [1994] BCC 604 at p.613-614, and Chadwick LJ in Johnson v Davies  at p.128G – H and p. 130B.
61.	In terms of what legitimately may be encompassed within a cva, there is no difference in substance between an obligation of a creditor not to enforce a contract with a third party, on the one hand, and an obligation of the creditor to deal with the third party as if the creditor’s contract with the third party did not exist, on the other hand.  If the former is enforceable by the debtor company against the creditor, there is no legitimate policy reason, nor anything in the relevant legislation, for holding the latter to be unenforceable by the debtor company.
62.	Accordingly, clause 3.14 is in principle enforceable by Powerhouse as an obligation of the Guaranteed Landlords not to claim against PRG under the Guarantees.
63.	The Claimants contend that, if the CVA, on its proper interpretation, prohibits the Guaranteed Landlords from enforcing the Guarantees, that prohibition is not enforceable by Powerhouse.  The essential building block of that contention is the Claimants’ argument that clause 3.13 of the CVA prevents PRG from having any recourse against Powerhouse even if PRG was itself successfully sued on the Guarantees.  The Claimants contend that Powerhouse therefore has no interest which it needs to protect by preventing the Guaranteed Landlords suing on the Guarantees, and it can suffer no loss or damage even if the Guarantees are enforced.  The parties boxed and coxed on this issue, and I was referred in the course of submissions to Chitty on Contracts (29th ed.) Vol 1 paras 18-066 and 18-067, Snelling v John G. Snelling Ltd [1973] 1 QB 87, Deepak Fertilisers and Petrochemicals Corporation v ICI Chemicals & Polymers Ltd at first instance ([1998] 2 Lloyd’s Rep 139) and on appeal ([1999] 1 Lloyd’s Rep 387), and the Contracts (Rights of Third Parties) Act 1999.  
64.	Mr Morgan’s starting point on this issue was that the underlying sub-stratum of the Claimants’ approach is misconceived if, as I have indeed found, clause 3.12 is incapable of having the direct effect of releasing the Guarantees on payment of the dividend.  He emphasised the introductory word in clause 3.13 – “Consequently”- which, he argued, shows that clause 3.13 is intended to operate only if, and to the extent that, clause 3.12 operates according to its terms.  This is a short question of interpretation.
65.	In my judgment, Mr Morgan’s submission is correct.  In accordance with usual principles, the CVA must be interpreted in the light of the arrangement as a whole.  The overall commercial package embodied in the CVA is clear enough: PRG was to pay £1.5m to fund the dividend to be paid to the Scheme Fund Creditors, including, in particular, the Guaranteed Landlords, who would, on receipt of the dividend, be precluded from enforcing the Guarantees; and, for that reason, PRG did not need, and was willing to give up, its rights of recourse as surety against Powerhouse. That the agreement of PRG to give up its rights of recourse was consequential, in the way I have described, is both commercially obvious and, more importantly, made plain by the introductory word “Consequently” in clause 3.13.  That word must be given separate and distinct weight, and so provides a deliberate linkage between clause 3.12 and clause 3.13.  The word “Consequently” is to be interpreted, in its context, as meaning “And on that basis”.  To the extent that the assumed basis is not correct, clause 3.13 does not preclude PRG’s right of recourse against Powerhouse.
66.	It follows that, in my judgment, there is nothing to preclude Powerhouse enforcing clause 3.14 against the Guaranteed Landlords, including the Claimants.  
Clause 3.15
67.	The Respondents also rely upon the obligation of the Scheme Fund Creditors in clause 3.15 not to sue PRG.
68.	The prohibition in clause 3.15 applies “in respect of any debt, obligation or liability compromised or released” in the CVA.  For the reasons I have given as to the meaning and effect of clause 3.12, the obligations of PRG under the Guarantees have not been “compromised or released”.  Accordingly, the express provisions of clause 3.15 have no application.  
69.	On the other hand, the obligation in clause 3.14 to treat the Guarantees as having been released carries with it, in my judgment, the necessary and obvious implication that the Guaranteed Landlords will not sue PRG on the Guarantees.  In Johnson v Davies at p.128G – p.129A Chadwick LJ said that it was not necessary to imply into the iva in that case that the creditors should not take any steps to enforce their debts not only against the debtor but against any co-debtors.   There was no equivalent, in that case, however, of the express provisions of clause 3.14 of the CVA.
Conclusion on Preliminary Issue (1)
70.	For all those reasons I hold, on the first Preliminary Issue that, on the true construction of the CVA and of the Guarantees, the Claimants are obliged to Powerhouse (by clause 3.14 of the CVA) to treat the Guarantees as having been released, and (subject to the second Preliminary Issue) there is nothing to preclude Powerhouse from enforcing that obligation.
Preliminary Issue (2)
The Legal Principles
71.	It is common ground that the issue whether a cva unfairly prejudices the interests of a creditor under IA s.6 is to be judged on the information available at the time the cva was approved.
72.	There is no conceptual difficulty and probably little practical difficulty in showing the presence or absence of “prejudice” for the purposes of IA s.6.  Any cva which leaves the creditor in a less advantageous position than before the cva – looking at both the present and the future – will be prejudicial.  
73.	It is the additional need to show that the prejudice is “unfair” which raises difficulty.  All the principal cases on the subject were reviewed by Warren J in his valuable judgment in  SISU Capital Fund Ltd v Tucker [2005] EWHC 2170 (Ch), [2006] BCC 463.  It is not necessary, for the purposes of this judgment, to repeat everything he said or to re-state all the important principles.  It is sufficient to concentrate on, and to emphasise, the following particular points.
74.	It is common ground that there is no single and universal test for judging unfairness in this context.  The cases show that it is necessary to consider all the circumstances, including, in particular, the alternatives available and the practical consequences of a decision to confirm or reject the arrangement: Re a debtor (No. 101 of 1999) [2001] 1 BCLC 54 at p.63d (Ferris J), SISU Fund Ltd v Tucker at para [71].
75.	In broad terms, the cases show that unfairness may be assessed by a comparative analysis from a number of different angles.  They include what I would describe as vertical and horizontal comparisons. Vertical comparison is with the position on winding up (or, in the case of individuals, bankruptcy).  Horizontal comparison is with other creditors or classes of creditors. In that context, another helpful guide, in the case of a cva, is comparison with the position if, instead of a cva, there had been a formal scheme of arrangement under CA s.425 (compromise or arrangement between a company and its creditors or members), on which the different classes of creditors would have been required to meet and vote separately.
76.	I shall now consider these comparative analyses in more detail.
77.	It will often be a useful starting point, and will always be highly material, to compare the creditor’s position under the cva with what the creditor’s position would have been on a winding up (or, in the case of an individual,  bankruptcy).  
78.	This pointer was made in the Cork Report itself.  The Committee said as follows in para 364(4):
“Unless it can be shown that the treatment of the general body of creditors under the voluntary arrangement is likely to be at least as advantageous as that obtainable by Court proceedings, then a dissatisfied creditor will have reasonable grounds for complaint and will normally be entitled to have the debtor’s affairs administered by the Court: otherwise he would be bound by the wishes of the majority voting in favour of the voluntary arrangement”.
79.	The Committee further said, in para 378 of the Cork Report: 
“We believe that the loss by a dissentient creditor of what at present is virtually an absolute right to a receiving order against the debtor, is justified, but only if the voluntary arrangement proposed by the debtor confers upon the creditor at least the same advantages as Court proceedings would provide”.
80.	Those comments were made in the section of the Cork Report dealing with the Committee’s proposals for ivas.  It is clear, however, from paras. 428 to 429 of the Cork Report that the Committee envisaged that the same principle would apply to their proposals for cvas. 
81.	The same point was emphasised in Re T & N Ltd [2004] EWHC 2361 (Ch), [2005] 2 BCLC 488.  In that case David Richards J delivered a valuable and instructive judgment on several aspects of UK insolvency law, including the relationship between cvas and schemes of arrangement, an area of the law on which his experience and pre-eminence merit special respect.  He said, at para. [82] of his judgment: 
“While I am wary of laying down in advance of a hearing on the merits of any scheme or CVA any particular rule, there is one element which can be mentioned at this stage.  I find it very difficult to envisage a case where the court would sanction a scheme of arrangement, or not interfere with a CVA, which was an alternative to a winding up but which was likely to result in creditors, or some of them, receiving less than they would in a winding up of a the company, assuming that the return in a winding up would in reality be achieved and within an acceptable time-scale: see Re English, Scottish and Australian Chartered Bank [1893] 3 Ch 385.”
82.	A linked principle is that, on an application under IA s.6, it is not for the Court to speculate whether the terms of the proposed cva were the best that could have been obtained, or whether it would have been better if it had not contained all the terms it did contain.  As Warren J said in SISU Capital Fund Ltd at para [73]:
“Unless the court is satisfied that better terms or some other compromise would have been on offer, the comparison must be between the proposed compromise and no compromise at all judging matters as of the date of the vote on the CVA.  If an administrator or liquidator puts forward a proposal which he considers to be fair then, unless it is established that he acted other than in good faith or that he is partisan to the interests of some only of the creditors, the court should not speculate about what other proposals might have gained acceptance and been capable of implementation (an essential element, since there is not much point in gaining approval unless the resulting arrangement can be implemented).”

See also Chadwick LJ in Re Greenhaven Motors Ltd [1999] BCC 463 at p. 469 C-E.

83.	It is clear, however, that comparison with the position on bankruptcy or winding up is not always conclusive as to unfair prejudice.  In Re a debtor (No. 101 of 1999) Ferris J considered an iva in which the Inland Revenue and Customs & Excise (together “the Revenue”) were to be paid a dividend in satisfaction of their debts, whereas other debts would not be extinguished.  The Revenue applied to the court under IA s.262 for the creditors’ approval to the proposed voluntary arrangement to be revoked on the ground of unfair prejudice.  At first instance the Judge rejected the Revenue’s application on the ground that the Revenue would be better off under the iva than on bankruptcy.  On the appeal, it was accepted by the Revenue that, if that was the right comparison to be made, there was no challenge to the Judge’s conclusion that they would receive more money at an earlier date under the arrangement than they would receive under a bankruptcy and, on that basis, the arrangement, far from unfairly prejudicing them, was to their advantage.
84.	Ferris J considered, however, that was too narrow a view.  He said at p. 63d that, in considering whether the interests of a creditor are unfairly prejudiced,  the Court has to consider all the circumstances.  He accepted the argument of the Revenue’s counsel that, in addition to considering whether what the Revenue were to receive under the arrangements was unfair by comparison with what they would have been likely to receive under a bankruptcy, it was necessary to take a wider view of the impact of the iva.  In particular, he observed that in the absence of the iva the Revenue, like other creditors, would retain all their rights, including the right to seek a bankruptcy order, the right to obtain and seek to enforce a judgment, and the ability to press for a  more satisfactory arrangement in which there would be no differential treatment of creditors.
85.	Ferris J further noted that the Judge had failed to take into account the effect of the arrangement on the other creditors and, in particular, the fact that they had exercised their majority vote in a way which, if it was allowed to stand, would force the Revenue to accept a reduced payment in satisfaction of their debts while leaving the position of other creditors unchanged or even improved (by the elimination of competing debt).  Ferris J concluded that, in comparing the position of the Revenue under the arrangement only with their likely entitlement on bankruptcy, the court below took too narrow a view, and that, in all the circumstances, the arrangement unfairly prejudiced the Revenue.
86.	It is convenient, at this point, to consider more closely the significance, on an application under IA s.6, of differential treatment of different creditors or classes of creditors under a cva.  As appears from Ferris J’s judgment in Re a debtor (No. 101 of 1999), the fact that a cva involves differential treatment of creditors is a relevant factor.
87.	Knox J in Doorbar v Alltime Securities Ltd (No. 2) [1995] BCLC 513 at p. 518 said:
“Unfair prejudice … is a reference to the degree of prejudice to one creditor or class of creditors as compared with other creditors or class of creditors.  It involves an assessment of any imbalance between possible prejudices to one or the other…  The concept of unfair prejudice is aimed at disproportionate prejudice on one side or the other”.
88.	On the other hand, the fact that a cva involves differential treatment of creditors will not necessarily be sufficient to establish unfair prejudice.  In Re a debtor (No. 101 of 1999)  Ferris J rejected the submission of counsel for the Revenue that the very existence of differential treatment is enough to support a finding that a dissentient creditor has been unfairly prejudiced.  He said at p. 63e of the judgment that differential treatment, which is not assented to by a creditor who considers that he has been less favourably treated, may well give cause for an enquiry, but it does not necessarily prove unfair prejudice.
89.	Indeed, depending on the circumstances, differential treatment may be necessary to ensure fairness :  see, for example, Sea Voyager Maritime Inc v Bielecki [1999] 1 BCLC 133 (a creditor alleging the right to recover under the Third Party (Rights Against Insurers Act) 1930 was held to be unfairly prejudiced by an iva which precluded him, like all the other unsecured creditors, from suing the debtor for the full amount of his claim) at 149b-e cited by Lightman J in IRC v Wimbledon Football Club Ltd [2004] EWHC 1020 (Ch), [2005] 1 BCLC 66 at para [18], itself quoted by  Warren J in SISU Capital Fund Ltd at para [69]. 
90.	Differential treatment may also be necessary to secure the continuation of the company’s business which underlies the voluntary arrangement, for example where it is necessary to pay suppliers in full in order to ensure that the company can continue to trade: SEA Assets Limited v Perusahaan Perseroan (Persero) PT Perusahaan Penerbangan Garuda Indonesia [2001] EWCA Civ 1696 (“the Garuda case”) at paras [45] and [46]; IRC v Wimbledon Football Club Ltd at para [18]; SISU Capital Fund Ltd at para [69].
91.	Comparison of the cva with the position if there had been a formal scheme of arrangement under CA s.425 may be helpful on the issue of unfair prejudice.  In Re T & N Ltd David Richards J drew attention to the similarity of the underlying test of fairness for both cvas and schemes of arrangement.  He said at para [81]:
“81. There is no statutory guidance on the criteria for judging fairness either for a scheme of arrangement under s.425 of the Companies Act 1985 or for the CVA under s.6 of the 1986 Act.  There is a difference in the onus.  Under s.425, it is for the proponents to satisfy the court that it should be sanctioned, whereas under s.6 it is the objector who must establish unfair prejudice.  I do not, however, consider that there is any difference in the substance of the underlying test of fairness which must be applied.  It is deliberately a broad test to be applied on a case by case basis, and courts have struggled to do better than the approach adopted by the Court of Appeal in Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] Ch 213 and summarised in the often cited passage from a leading textbook, Buckley on the Companies Acts (14th edn.) vol 1, pp 473-474:
“In exercising its power of sanction the court will see, first, that the provisions of the statute have been complied with, second, that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.  The court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting, but, at the same time, the court will be slow to differ from the meeting, unless either the class has not been properly consulted or the meeting has not considered the matter with a view to the interests of the class which it is empowered to bind or some blot is found in the scheme”
That paragraph is directed to schemes of arrangement.  The crucial difference with a CVA is that there is just one meeting of creditors, so that necessarily means that there may be sub-groups who would constitute separate classes for a scheme.  In considering unfair prejudice, the court will have regard to the different position of different groups of creditor.  This, too, will be the case with a scheme of arrangement where groups of creditors with different interests or even rights none the less have been included in the same class for the purpose of considering and voting on the scheme.”
92.	It seems reasonably clear from the Cork Report that the Committee did not envisage that its proposals would enable a cva to be imposed in circumstances in which a formal scheme could have been successfully challenged on the ground of unfair prejudice. They said in para. 430 of the Cork Report that in their view a cva would only be likely to be used where the scheme is a simple one involving a composition or moratorium or both for the general body of creditors which can be formulated and presented speedily, and that the facility to promote such arrangements without the obligation to go to the court would prove of value to small companies urgently seeking a straightforward composition or moratorium.
93.	Comparing cvas with schemes of arrangement under CA s.425, Warren J in  SISU Capital Fund Ltd, having quoted para. [81] of the judgment of David Richards J in T & N, said at para [76]:
“76. The citation of the passage from Buckley on the Companies Acts of decision of the Court of Appeal of Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] Ch 213 shows the reasonable and honest man to be a welcome guest also at the home of the CVA.  Ultimately, if I judge that this reasonable and honest man in the same position as the applicants might reasonably have approved the CVAs which are challenged, the applicants fail.”

94.	Notwithstanding those judicial observations Mr Morgan submitted that it is open to question whether the case law on CA s.425 can be of any real assistance, let alone binding, in the very different statutory context of a cva: a difference noted by Peter Gibson LJ in Raja v Rubin [2000] Ch. 274 at pp.286H - 287A.
95.	In my judgment, depending on the circumstances, a comparison with what the position would have been on a scheme of arrangement under CA s. 425 may be of assistance on the issue of unfair prejudice in a cva.  I agree with Mr Morgan, nevertheless, that caution must be exercised in carrying out that comparative exercise.  The fact that a particular class of creditors could and might have blocked a scheme under CA s. 425, while relevant and potentially important, does not necessarily mean that they have been unfairly prejudiced within IA s. 6.  The point was aptly put by Warren J in SISU Capital Fund Ltd at para. [134] as follows:
“134. There is, in any case, a material difference between the two processes.  In relation to a scheme of arrangement, there needs to be approval from each voting class.  Accordingly, a separate class can block a scheme of which it does not approve even though the overall scheme may fall within the range of reasonable proposals which that class could adopt without unfairness to any particular member of that class.  In contrast, a CVA is determined by a single vote of all creditors.  A group of creditors forming a separate class who would be able to block a scheme of arrangement may well not have sufficient voting power to block a CVA.  Their only remedy, if they do not like the result of the vote, is to challenge it on the grounds of unfair prejudice under s.6.  The mere fact that they would be able to block it as a separate class were the matter proceeding by way of a scheme of arrangement does not entail that they are necessarily unfairly prejudiced when the vote of the CVA goes against them.”

96.	So, while I agree with Warren J that, if a reasonable and honest man in the same position as the Claimants might reasonably have approved the CVA, that would be a powerful, and probably conclusive, factor against the Claimants on the issue of unfair prejudice, I also agree with Mr Morgan that the fact that no reasonable and honest man in the same position as the Claimants would have approved the CVA is not necessarily conclusive in favour of the Claimants.
Analysis
97.	Having regard to all those principles and all the relevant circumstances, I am in no doubt that the CVA in the present case is unfairly prejudicial to the Claimants, as Guaranteed Landlords, within IA s.6.
98.	The CVA leaves the Guaranteed Landlords in a worse position than without the CVA, having regard both to the present and also future possibilities.  The Guaranteed Landlords would have the benefit of the Guarantees, but for the CVA.  Those Guarantees were of value, and would have been enforceable both now and in the future.
99.	Mr Morgan contended that the Court is not entitled to assume that there was any real value in the Guarantees at the time the CVA was approved.  In the course of his oral submissions he invited me to consider what had taken place before Blackburne J, and to hold that the Claimants are restricted to the sole argument that they have been unfairly prejudiced because the Landlords of Closed Premises will only receive 28p in the £ under the CVA. In my judgment, the Claimants are not precluded from contending that the Guarantees were of value at the time the CVA was approved.  
100.	It is clear from the Claimants’ skeleton argument in reply dated 20 March 2007 that they would be contending on the hearing of the Preliminary Issues that the Guarantees had real value.  There was no appeal from the order of Blackburne J and no application to vary that order.  The Preliminary Issues are before me, and so are the Statement of Agreed Facts and all the CVA material.  There is nothing to preclude the Claimants relying on all that documentation. That evidence clearly shows that the Guarantees had value at the time the CVA was approved.  In the first place, it is common ground that, at that time, PRG was listed on the New Zealand stock exchange, and was solvent.  Second, PRG was to provide £1.5m to fund the CVA.  Third, PRG was to fund the remuneration of the nominee and of the Supervisors and the costs of preparation of the Proposal. Fourth, the CVA material shows that Powerhouse was substantially insolvent at the time of the approval of the CVA and could only survive with the support of PRG, its parent company.  Mr Murphy’s report to the court pursuant to IA s.2(2) and his letter of 1 February 2006 to creditors stated expressly that the reconstructed business would enjoy “full parental support”.  Fifth, there is nothing in the CVA material to suggest that PRG was or would be unable to meet its obligations under the Guarantees.  Even if, as Mr Morgan put it in oral submissions, no assumption could be made that every last p would be paid by PRG under the Guarantees until the expiry of the leases, it would be right and reasonable to assume that PRG would be able to discharge its obligations under the Guarantees for the present and the foreseeable future.
101.	In any event, as Mr Moss pointed out, the removal of the right of the Guaranteed Landlords to enforce the Guarantees deprived the Guaranteed Landlords of any negotiating position to persuade PRG to pay something for the loss of that right.  
102.	Mr Morgan submitted that the court cannot draw the inference that the Guaranteed Landlords are worse off by receiving the dividend of 28p in the £ under the CVA than if there was no CVA because it is necessary to take account of opportunities arising to the Guaranteed Landlords from obtaining early possession of the Closed Premises.  He suggested that such opportunities  include the possibility of re-letting at higher rents and, doubtless, other improved terms of letting, depending on the state of the market.  There is, however, no evidence before the court as to any such possibilities.
103.	Comparison of the treatment of Guaranteed Landlords with that of other creditors under the CVA supports the conclusion that the Guaranteed Landlords have been unfairly prejudiced.  The Closed Premises Landlords are all to receive 28p in the £, whether or not they have the benefit of the Guarantees.  The Guaranteed Landlords are to receive nothing extra for the loss of the benefit of the Guarantees, which, for the reasons I have given, had both real value in themselves and as potential lever in negotiations with PRG.
104.	Mr Morgan indicated at one stage in his submissions that the better view is that the Closed Premises Landlords who do not have the benefit of the Guarantees are to be regarded as receiving too much under the CVA, rather than that the Guaranteed Landlords are receiving too little.  There is no basis for such a commercially improbable inference.  Nor is it borne out by the terms of the CVA itself, clause 6 of which stipulates a valuation formula for all Closed Premises Landlords based only on the outstanding duration of the terms of the leases, and which appears to be directed primarily to an estimated time for achieving a re-letting.  The dividend of 28p in the £ was plainly calculated without any reference to the Guarantees and, in particular, without placing any value on them.
105.	Further, all the creditors, other than the Scheme Fund Creditors, are to be paid in full under the CVA.  In substance, the present, future and contingent claims of the Closed Premises Landlords are to be discharged at a fraction of their value in order that other creditors can be paid in full.  
106.	As I have said earlier in this judgment, the authorities clearly show that there may be circumstances in which a cva may properly provide for one set of creditors to be paid in full, while others receive only a fraction of the company’s liability to them: as in the Garuda Case, where it was necessary to pay suppliers in full in order to ensure that the company could continue to trade.  The unusual feature of the present case, however, is that on a winding up the Guaranteed Landlords would still have had the benefit of the valuable Guarantees, whereas all the other unsecured creditors (of this apparently substantially insolvent company) would receive nothing.  
107.	In summary, the Guaranteed Landlords are the class or group of unsecured creditors that would suffer least, if at all, on an insolvent liquidation of Powerhouse, but they are the class or group that is most prejudiced by the CVA, under which their claims against Powerhouse and PRG, as surety, are to be compromised by payment of a dividend that places no value on the very rights (i.e. the Guarantees) which improved their position over all other unsecured creditors and which were intended to and would benefit the Guaranteed Landlords on the insolvent liquidation of Powerhouse.
108.	Such an illogical and seemingly unfair result could not have been achieved if there had been a formal scheme of arrangement under CA s.425.  It is common ground that, under such a scheme, the Guaranteed Landlords would have been in a class of their own, separate from other unsecured creditors.  Moreover, the scheme would not have needed to include, and would not have included, creditors who were to be paid in full.  Accordingly, as was accepted by Mr Morgan, the Guaranteed Landlords could and would have vetoed any such scheme.  The only reason a different result has been achievable with the CVA is that all creditors form a single class for the purposes of a cva, and that class includes every creditor entitled to a notice of the meeting to approve the cva, including creditors who would be paid in full.  In effect, the votes of those unsecured creditors who stood to lose nothing from the CVA, and everything to gain from it, inevitably swamped those of the Guaranteed Landlords who were significantly disadvantaged by it.  
109.	It is obvious from the terms of the Cork Report that such a result was wholly outside the contemplation and intention of the Committee.
110.	Finally, I should mention the position of PRG, as a creditor.  PRG was a contingent creditor of Powerhouse by virtue of the Guarantees.  It made a contribution to the CVA of £1.5m.  That contribution was, however, not in its capacity as a creditor.  Moreover, the £1.5m provided the financial means for removal of all liability under the leases of the Closed Premises and the Guarantees by payment of only 28p in the £ as a result of valuing the financial claims of the Closed Premises Landlords in a manner which attributed no separate value to the Guarantees.  The removal of liability of PRG under the Guarantees was achieved by those means even though, under the terms of the Guarantees, PRG assumed the risk of Powerhouse’s insolvency. 
Conclusion on Preliminary Issue (2)
111.	For all those reasons I hold, in relation to the second Preliminary Issue, that the CVA unfairly prejudices the interest of the Claimants as creditors of Powerhouse within the meaning of IA s.6(1)(a).