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Insolvency & Business Tenancies: Landlord’s challenge to company voluntary arrangement (CVA)

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The Insolvency & Companies Court considered a landlord’s challenge to the CVA of Nero Holdings Ltd, the operator behind Caffe Nero. The CVA had otherwise been supported by creditors.

The background

The night before the approved CVA was due to take effect at 23.59 on 30th November 2020, Euro Garages (“EG”) proposed a share purchase, together with payment of all rent arrears in full and conditional on approval of the CVA. Meanwhile, the proposal also requested postponement of the CVA. EG’s proposal was submitted on the basis that a physical meeting would take place for the creditor vote to be held, but the Insolvency Rules allowed for an electronic voting procedure which could not be postponed.

The EG proposal was rejected on 30th November, and later that day creditors were notified of EG’s offer. That evening, the CVA had already passed its voting threshold but creditors were then notified that the CVA had been modified for their benefit, to the effect that further payments were to be made to creditors by the company if a sale to EG was completed within 6 months.

EG agreed to fund an unhappy landlord’s challenge to the CVA on the grounds of material irregularity and unfair prejudice. Two points in consideration included:

  • Whether nominees breached their duties through failure to postpone the creditors electronic voting procedure; and
  • Whether the modification to the CVA could take effect when it had not received the vote of creditors.

The decision

The High Court found that the nominees had acted in good faith. The decision not to postpone the CVA had been reasonable, and nominees had satisfied the relevant disclosure requirements in respect of notifying creditors of EG’s proposal.

The modification to the CVA was effective. The court found that, where the company consented, it was possible for modifications to the CVA to be made without requiring a further vote, particularly where the modification would benefit the creditors as in this case. It was held by the court that creditors would not have changed their vote had they received any earlier notification, and so no material irregularity was presented.

Issues considered in the case included:

  1. Whether postponement of the CVA’s vote and implementation was possible under legislation;

The High Court found that the Insolvency Rules did not expressly contain any mechanism for the postponement of an electronic voting procedure, and that any order made by the court to do so would carry risk. With a lack of certainty over the eventual outcome of any postponement, the nominees acted reasonably in not seeking an application to postpone the vote.

  1. Whether the CVA had support of lenders;

Lenders had agreed waivers, subject to nominees reaching a CVA by a specific longstop date. Had the CVA been postponed and the EG offer considered, further waivers would have been required and renegotiated which presented a risk. Nominees acted reasonably in wishing to avoid such a renegotiation.

  1. The late offer from EG, prepared without full knowledge of liabilities and without making a purchase price offer, and the uncertainty of the EG proposal; and

The proposal from EG was submitted 27 hours before the close of voting on the CVA, and had not fully assessed the arrears it proposed to settle, nor stated a purchase price other than a valuation on the business. The nominees progressed the CVA on the basis that there posed a risk of the company entering into administration if a deal with EG could not be concluded within the 6-month timescale, which was a possibility given the uncertainty around the proposal at the time it was made. The court found this to be reasonable.

  1. Whether shareholders were willing to sell to EG.

Shareholders did not wish to sell and had already rejected an offer from EG to acquire the business. If the company could not deliver a sale due to lack of shareholder consent, postponing the CVA carried no value.

Advice and action for landlords

This decision is relevant to landlords of commercial properties, particularly given the challenges facing high street retail over the last 18 months.

The court in this case chose not to interfere with the nominees’ progression of the CVA, finding that EG’s last minute offer was not sufficient to justify seeking a postponement of the electronic vote given the risks such a postponement presented. Even where an offer potentially presented a better deal for creditors, including the landlord who brought the claim, the risk of administration in this case was enough to allow the CVA to progress.

Landlords should be aware of this decision and the possibility that, where a last minute offer is made which improves a deal under a CVA, if the offer is not sufficiently thorough and presents difficulties or complications elsewhere which put the business at risk of administration, a court is prepared to agree with the continuation of the CVA.

The High Court found that the nominees had acted in good faith. The decision not to postpone the CVA had been reasonable, and nominees had satisfied the relevant disclosure requirements in respect of notifying creditors of EG’s proposal.

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