In Re Mizen Design/Build Ltd1, the High Court considered two separate challenges to a CVA2, one of which was successful. The successful creditor applicant had the benefit of guarantees from the Shareholder of the CVA Company, which guarantees were released by the CVA in order to prevent future "ricochet claims" by the Company against the Shareholder.
The Court held that, whilst there were no direct disclosure obligations on the Shareholder (as it was the Company's CVA), the failure to disclose sufficient information regarding the Shareholder amounted to a material irregularity.
There was clear unfair prejudice to the applicant. It was part of a "class" of "Guarantee Creditors" whose votes at the CVA meeting had been swamped by votes of unimpaired creditors. In the circumstances, it was not sufficient that the differential treatment of the Guarantee Creditors (compared with other unsecured creditors whose claims were not compromised by the CVA) could be objectively justified.
Implications for creditors, companies proposing a CVA and their nominees
CVAs often provide for the compromise of guarantee liabilities in order to prevent ricochet claims. In such a CVA, the nominees and CVA company will need to ensure that the information regarding the guarantor contained in the proposal is sufficient having regard to the Court's expectations in this case. Creditors may be minded to request additional information where they believe that the proposal is insufficient.
More generally, where a CVA provides for differential treatment of different creditor classes (for instance, the payment of critical creditors in full), this case is a useful reminder that the CVA may be unfairly prejudicial even if that differential treatment can be objectively justified.
The Court's decision
A number of the applicants' arguments on material irregularity and unfair prejudice were rejected. Key findings on the successful arguments included:
- The Court could see "no good reason why" the disclosure in the Company's CVA proposal in relation to the Shareholder ought not to be the equivalent of a CVA/scheme, had the Shareholder proposed one; or, if this was too strict a test, on the facts, it was impossible to think that any creditor would have renegotiated the guarantees based on the information provided alone.
- The CVA was proposed on the hypothesis that, if the Company became insolvent, so too would the Shareholder. Despite that, there was no statement in the proposal as to whether, if the Shareholder did go into liquidation/administration, there were any circumstances which might give rise to claims in respect of antecedent transactions3.
- Whether unfair prejudice exists depends upon the circumstances4. The votes of the Guarantee Creditors were swamped by the votes of unimpaired creditors. Whilst the differential treatment of the Guarantee Creditors was objectively justified (in order to prevent ricochet claims), the CVA was unfairly prejudicial to the applicant as: the allocation of assets was unfair; and, without more, the relative impact, the lack of votes as a separate class, the lack of information or the compromise of the Guarantee Creditors in the way proposed was not justified.