Insolvency – Company voluntary arrangement (CVA) – Validity – Defendant proposing CVA – Some creditors’ claims unimpaired but others compromised in full – Statutory majority in favour of CVA achieved by votes of unimpaired or differently treated creditors – Claimant creditors challenging CVA – Whether CVA unfairly prejudicial to allow creditors with differential treatment to vote with other creditors – Whether claimants unfairly prejudiced – Whether claimants treated less favourably than other unsecured creditors without proper justification – Claim dismissed
The defendant was the principal operating company in a group which operated a retail business which had suffered enormously as a result of the Covid-19 pandemic. During March 2020, the group experienced a decline in like for like sales compared to the prior year of 32%. On 23 March 2020, the start of the first national lockdown, the group’s revenue from its stores fell to nil. The group continued to trade through its e-commerce channels, and began a phased reopening of stores on 1 June 2020. Stores were closed again as a result of the second and third national lockdowns.
At the start of the pandemic, the defendant ceased to pay rent and services charge to its many landlords. Upon the re-opening of its stores, it paid a contribution to the rent payments due on a turnover basis. By August 2020 it was clear that the group could not continue to trade without a major restructuring of its liabilities. The projections were that the company would run out of cash by October 2020 and, in the absence of a restructuring, would be forced into administration,
The defendant entered into a company voluntary arrangement under which its creditors were divided into different categories and a number of landlords, including the claimants, considered that the arrangement was “unfairly prejudicial” under section 6(1) of the Insolvency Act 1986.
The claimants challenged the CVA proposal contending that: (i) it did not constitute a composition or arrangement as required by section 1(1) of the Insolvency Act 1986; (ii) there were material irregularities under the CVA; and (iii) it was inherently unfairly prejudicial for a CVA to compromise the claims of a sub-group of creditors where the requisite statutory majority at the creditors’ meeting was achieved by the votes of other creditors who were unimpaired by the CVA, or who received substantially different treatment.
Held: The claim was dismissed.
(1) A CVA that provided for different treatment of different sub-groups of creditors was not for that reason outside the jurisdictional scope of section 1(1) or necessarily unfairly prejudicial. Moreover, it was not necessarily unfairly prejudicial to a sub-group of compromised creditors that the statutory majority was achieved by the votes of unimpaired creditors or those who received substantially different treatment. However, that would be a highly relevant factor in determining whether, in any given case, there was unfair prejudice.
“Arrangement” in section 1(1) of the 1986 Act was not to be construed as limiting a CVA to an arrangement in which the rights of all creditors were such that they could consult together with a view to their common interest. What fell to be construed was not the word “arrangement” alone, but “a composition in satisfaction of its [the company’s] debts or a scheme of arrangement of its affairs”: section 1(1) of the 1986 Act.
It was common ground that some element of give and take was necessary for a proposal to constitute an “arrangement”. There was sufficient give and take in an arrangement which took from the creditors their contractual rights and gave them a return which was at least as good as that which the company could give in the relevant comparator, eg a liquidation of the company. Accordingly, the CVA did not constitute an interference with the claimants’ proprietary rights. Although the CVA offered relevant landlords the opportunity to agree to a surrender of the lease, it did not require them to do so.
(2) The CVA was an integral part of wider restructuring. The fact that a statutory majority for a CVA was achieved by the votes of unimpaired or differently treated creditors would be an important consideration in determining whether unfair prejudice existed, but would not necessarily mean the CVA was unfairly prejudicial. The mere fact that there was differential treatment did not establish unfair prejudice. The unfairness had to be caused by the terms of the arrangement; unequal or differential treatment of creditors of the same class would not of itself constitute unfairness, but might give cause for inquiry and require an explanation. It was necessary to consider all the circumstances including, as alternatives to the arrangement proposed, not only liquidation but the possibility of a different fairer scheme. Differential treatment might, in some circumstances, be required to ensure fairness and might be justified where necessary to ensure the continuation of the business that underlay the arrangement: Commissioners of Inland Revenue v Wimbledon Football Club Ltd [2004] EWHC 1020 (Ch) and Prudential Assurance Co Ltd v PRG Powerhouse Ltd [2007] 3 EGLR 131 followed.
(3) Taking into account the long-established basic principles of good faith and equality, the fact that a statutory majority for a CVA was achieved by the votes of unimpaired or differently treated creditors did not necessarily lead to a finding that a CVA achieved in those circumstances was unfairly prejudicial. Whether unfair prejudice existed depended on all the circumstances. An important consideration was whether there was a fair allocation of the assets available within the CVA between the compromised creditors and other sub-groups of creditors. That would include considering the source of the assets from which the treatment of the different sub-groups derived, and whether they would or could have been made available to all creditors in the relevant alternative. In considering whether the allocation of assets was fair, the court was necessarily required to consider whether a different allocation would have been possible, so the principle adopted in scheme cases, against considering whether an alternative arrangement would have been fairer, needed to be modified. The nature and extent of the different treatment, the justification for that treatment, and its impact on the outcome of the meeting were also important.
(4) On the facts of the present case, the claimants were not unfairly prejudiced. The court in Discovery (Northampton) Ltd v Debenhams Retail Ltd [2019] EWHC 2441 (Ch); [2019] EGLR 47 established that reductions in rent were not necessarily unfair. The claimants had been offered the choice between terminating their leases or continuing on reduced rent and modified terms. Albeit in different ways, both the claimants and the secured creditors were substantially impaired by the CVA, and there was more to unite than divide them in ensuring that the defendant avoided a formal insolvency process which would have resulted in a significantly worse recovery for the secured creditors and virtually no recovery for the claimants.
Peter Arden QC and Ben Shaw (instructed by Hogan Lovells International LLP) appeared for the claimants; Tom Smith QC and Adam Al-Attar (instructed by Latham & Watkins (London) LLP) appeared for the defendants.
Eileen O’Grady, barrister
