The English High Court has rejected a challenge to the CVA proposed by Caffè Nero in a decision that provides guidance on the use of the electronic voting procedure for votes on CVAs, the effectiveness of modifications made to a CVA during the process and the duties of the directors and nominees when considering last minute offers for a business in a restructuring scenario. Mr Justice Green rejected all grounds of challenge brought by Mr Ronald Young, a landlord to Nero Holdings Limited ("NHL").
The decision follows the judgments in New Look and Regis earlier in the year in rejecting the challenges brought by dissenting creditors and demonstrating the high bar to a successful challenge.
Key lessons
- The Courts will be hesitant to override the decisions made by insolvency practitioners where they have acted in accordance with their duties, and particularly under significant time pressure – the "certainty" provided by the CVA in this case compared to a high level offer to purchase the business received exceedingly late in the process was of significant importance in this decision;
- The electronic voting procedure is an acceptable decision procedure for allowing creditors to vote on a CVA, despite the inflexibilities highlighted by this case, although the judge left the door ajar for the Courts to play a role in addressing some of these inflexibilities in the future; and
- Directors and CVA nominees can propose modifications during an electronic voting procedure and if the modification is for the benefit of creditors, but made after a number of creditors have already voted, those votes will be counted as having been cast for the proposal as modified.
Background
Similar to many businesses in the hospitality sector, Caffè Nero experienced significant financial difficulties as a consequence of the Covid-19 pandemic, and in the seven months to September 2020 the group's revenue was £109.2m less than it had been in the equivalent period during 2019. The group had two levels of secured debt: a senior facility and a mezzanine facility that had approximately £155.5m and £210.9m drawn respectively as at 30 September 2020. The group appointed KPMG in August 2020 to advise on its restructuring options, which resulted in the decision to propose a CVA to NHL's unsecured creditors. Waivers were negotiated with the group's lenders to permit the CVA to go ahead which were conditional on the CVA being approved by 15 December 2020.
NHL circulated the CVA proposal to creditors on 12 November 2020 and elected to utilise the electronic voting procedure introduced by the amendments to the Insolvency Rules in 2016. The CVA was approved by more than 90% of those voting and came into effect just before midnight on Monday 30 November 2020.
The relevant challenge was brought by Mr Ronald Young, one of the landlords of Nero Holdings Limited, and the last of a group of landlords that had brought challenges to the CVA, the others of which had subsequently settled. Mr Young was a Category B landlord under the CVA which meant that his lease would move to a monthly turnover rent model for three years and arrears of rent would be compromised at 30p/£.
Mr Young's complaints centred around a late bid for the shares of an indirect parent company of NHL by EG Group Limited ("EG") which had been submitted at around 9pm on Sunday 29 November 2020, the day prior to the CVA coming into effect. EG had recently acquired the retail and restaurant businesses, Asda and Leon and were reportedly keen to continue developing their own brand with the acquisition of the Caffè Nero business.
EG had offered to purchase the entire issued share capital of Nero Group Limited ("NGL") and to pay the arrears of NHL's landlords in full, conditional upon approval of the CVA, and EG had suggested that NHL postpone the vote of the creditors on the CVA to put the information to them. However, the effect of using the electronic voting procedure, rather than votes being cast at a physical (or virtual) meeting, was that the thresholds for approving the CVA had been met on Friday 27 November, two days before the EG offer had been received.
The shareholders rejected the EG offer on Monday 30 November 2020, and the directors and nominees from KPMG (now Interpath) subsequently decided not to postpone the vote. NHL and the nominees issued a joint announcement at around 2.30pm on 30 November 2020 informing creditors of the offer and the decision not to postpone the vote. The directors of NHL also put forward a modification to the CVA that would preserve the benefit to landlords of the EG offer to pay their arrears in full if the sale was concluded after the CVA was approved.
Caffè Nero had been unsuccessful in an earlier attempt to have the challenge struck out when it had emerged that Mr Young was being funded by EG which had also paid him £100,000 in return for an agreement not to accept a settlement with NHL.
Grounds of Challenge
Mr Young brought his challenge on both grounds available to a creditor challenging a CVA under section 6(1) of the Insolvency Act 1986: (i) that there was a material irregularity in relation to either the meeting of the company or the qualifying decision procedure, and (ii) that a CVA unfairly prejudices a creditor.
Material Irregularity
Mr Young alleged a number of material irregularities that he argued were sufficient for the Court to set aside the CVA. The key points of general interest were the allegations that material irregularities arose from:
- The failure to adjourn or postpone the creditors' voting procedure following receipt of the offer from EG; and
- The terms of the modification and the effect of the creditors' votes already cast by the time the modification was proposed.
Unfair Prejudice
This ground was not particularly well developed by Mr Young in the proceedings, but he argued that, while the CVA had been presented on the basis that the alternative scenario was an administration of NHL that would yield a return of 0.3p/£ to the compromised creditors, the real alternative was the offer from EG that would see landlords paid their arrears in full.
Judgment
In an 82 page judgment following a 6 day hearing in late July 2021 Mr Justice Green rejected each ground of challenge.
Failure to adjourn or postpone
Green J first looked at whether it was legally possible for a vote conducted using the electronic voting procedure to be postponed, concluding that the Insolvency Rules 2016 were unhelpfully inflexible in that they did not provide an express power to postpone, similar to that provided for with respect to a physical meeting. He did however consider that it would have been possible to make an application to Court for postponement, notwithstanding that such an application would take time and was inherently uncertain. Further, it was not clear what relief could be granted, particularly where the Insolvency Rules are clear that a creditor which has voted in the electronic voting procedure cannot change their vote, and the requisite majorities had already been met on the preceding Friday, so it was difficult to see what order the Court could make to remedy the situation.
The judge considered that both the directors and the nominees would have standing to make an application and so both could be considered to have made the decision not to postpone the CVA process. He held that the nominees had acted in good faith in accordance with their professional duties to reach a "perfectly reasonable decision" not to postpone the CVA. In doing so he considered a number of relevant factors including:
- Timing – the offer was received very late in the process and barely more than 24 hours before the deadline for voting on the CVA. The judge put significant weight on the nominees' evidence that the offer did not provide sufficient certainty of avoiding administration to take the time to explore it and conclude a deal while also complying with the deadline for the CVA to be approved which was imposed by the timing of the launch of the proposal (28 days). In particular, the offer did not state a purchase price (even indicatively) and was subject to due diligence, including the review of basic information such as financial statements. Notably, the judge considered that the offer may have been sufficient grounds to adjourn a physical meeting of creditors to give further time to consider it, but the electronic voting procedure was not flexible enough to take the same decision.
- Shareholders' rejection of the offer – the shareholders of NGL had decided to reject the offer meaning there wasn't a transaction that the nominees or the directors of NHL could deliver (notwithstanding that the directors of NHL were also shareholders). Delaying the CVA in those circumstances would therefore only imperil it and would not benefit NHL's creditors.
- Certainty of Outcome - the judge was persuaded by the nominees' evidence that certainty of the CVA proposal (which had already received sufficient votes from creditors) was in the interest of NHL's creditors compared to an uncertain offer from a third party, despite the potential advantages of that offer, given that it increased the of an administration.
- Lender support – after lengthy and complex negotiations the lenders had agreed to provide a series of waivers to allow the CVA to proceed, and had required a longstop date for the CVA to be completed of 15 December 2020. The judge held that it was reasonable for the nominees to have concluded that attempting to renegotiate those waivers, which would likely have been necessary to explore the EG offer, would have materially increased the risk of NHL going into administration.
- Mechanics of postponing – having considered the inflexibility of the electronic voting procedure and the uncertainty as to the process for postponing the process via an application to court, Green J considered that it was reasonable for the nominees to have concluded that such an approach would have been unworkable.
He also held that the directors had made a reasonable decision not to postpone the CVA, particularly as the nominees had come to the same decision - their position as shareholders did not impact that decision which had been made properly, taking into account relevant and reasonable factors as regards protecting the interests of NHL's creditors.
Modifications
The directors had proposed the modification to the CVA, in an attempt to preserve the benefits of the EG offer for landlords, late in the day on 30 November before the deadline for voting, and Mr Young argued that it was ineffective because it had not been voted on by the creditors that had already voted.
Green J considered the law applicable to CVAs and the close analogy to individual voluntary arrangements in which modifications had been considered. He concluded that it was a key feature of the statutory scheme that the directors proposing a CVA should be able to propose modifications, that it was in the interests of a company's creditors that the company may propose modifications solely in their favour, and that creditors have recourse under section 6 of the Insolvency Act 1986 to challenge the CVA if they are dissatisfied with the modifications.
This issue was of particular significance in this case because the nominees case had elected to use an electronic voting procedure. It is typical in votes of creditors at physical meetings to focus on the wording included in proxy voting forms and whether the proxy (often the chairman of the meeting) has the authority to cast the vote in favour of a proposal that has been modified. However, in this case, votes had been cast by creditors directly on a proposal that had subsequently been modified, without the ability to withdraw or change their vote, and with limited scope for the nominees to postpone the voting deadline. The Insolvency Rules are also silent on this issue. Mr Justice Green held that where the modification is for the benefit of creditors, then those creditors who voted before the modification was proposed can be counted for the purposes of approving the CVA proposal as so modified.
Unfair prejudice and the relevant alternative
While the issue was only "half-heartedly pursued" by Mr Young, Mr Justice Green addressed the question of whether the offer by EG had changed the counterfactual against which the nominees and directors should be comparing the returns to creditors in the CVA. Mr Young argued that the relevant alternative (adopting the language from Part 26A restructuring plans) was in fact a scenario where the EG offer was implemented and the landlords' arrears paid in full, rather than a 'free fall' administration.
Green J dismissed this ground of challenge, finding that it was contrary to EG's commercial interests in the event of the CVA failing for them to acquire the entire business of NHL and pay rent arrears in full, where it would be much more attractive for them to acquire the parts of the business that remained viable out of an administration at a reduced price. That scenario was therefore not an appropriate comparator.
Conclusion
This case gives helpful guidance for insolvency practitioners on the use of the electronic decision procedure in seeking approval for a CVA, with application to other creditor decisions in insolvency processes. It also provides helpful confirmation of the process for proposing modifications to CVAs.
Perhaps most importantly it outlines the approach that the Court will take and the types of factors it will consider when reviewing the decisions of insolvency practitioners and directors where last minute offers are received for a business going through a CVA, and by analogy a scheme of arrangement or restructuring plan.
