CVA storm in a coffee cup

Louise Clark analyses the unsuccessful challenge to the Caffè Nero company voluntary arrangement. Key points The electronic voting procedure prescribed in the Insolvency Rules 2016 does not cater for major developments which occur late in the process A court will only interfere with a nominees’ decision if they have acted as no reasonable nominee would have done A court will be unlikely to interfere with a directors’ decision involving issues of commercial judgment made in the best interest of creditors In Young v Nero Holdings Ltd and others [2021] EWHC 2600 (Ch), the challenge to the company voluntary arrangement of Nero Holdings – the principal operating company in the Caffè Nero Group – was not to the unfairness of the CVA proposals (as in Lazari Properties 2 Ltd and others v New Look Retailers Ltd and others [2021] EWHC 1209 (Ch); [2021] PLSCS 96) but that they unfairly prejudiced the applicant as a creditor of the company and that there had been some material irregularity at or in relation to the meeting of the company or in relation to the relevant qualifying decision procedure under section 6 of the Insolvency Act 1986. The applicant was the landlord of premises let to Nero Holdings who, under the CVA, would be paid 30p in the pound in respect of rent arrears owed. Shortly before the deadline for voting on the CVA – 11.59pm on 30 November 2020 – EG Group Ltd made an offer for the shares in the company, including an offer to pay in full all rent arrears owed to the company’s landlords. EG wanted the CVA to proceed on these terms but for the CVA vote to be postponed to allow its offer to be explored. However, the EG offer was rejected by the nominees of the proposed CVA – the second and third respondents – and the CVA was approved. The challenges The appellant’s primary challenge was to the decision not to postpone the CVA vote. There were also objections to an announcement to creditors of the EG offer, which was alleged to be misleading, and to a late modification to the CVA proposal put forward by the company directors, the timing of which, it was argued, rendered the voting on the CVA irregular and invalid. Material irregularity A CVA proposal must contain sufficient information to enable creditors to reach an informed decision on the proposal. If it fails to provide sufficient disclosure it will only be a material irregularity if, objectively, it would have made a material difference to the way in which the creditors would have considered and assessed the terms of the proposal. Failure to postpone or adjourn The nominees and directors both considered that it was in the best interests of creditors to continue with the CVA process. The court reviewed the principal reasons for their decision: Timing – the CVA decision procedure had to be completed by 10 December 2020, within 28 days of the filing of the nominees’ report. The requested 10-business-day delay to consider the EG offer would have taken matters beyond that deadline. This was a strong and rational reason for not postponing the CVA. Lender waivers signed on 12 November 2020 were conditional on the CVA being approved by 15 December 2020. It was reasonable to consider that renegotiating lender waivers would not be straightforward and that failure would put the company into administration.                         The shareholders’ rejection of the offer was undoubtedly a relevant factor to take into account and a credible reason.                                                        There was a convincing explanation that the certainty of the CVA proposal, with its advantages for creditors and a high degree of confidence that it would be approved, was preferable to the uncertainty of the EG offer, in which there was little confidence that it could be delivered in the required timescale. The electronic voting procedure prescribed in the Insolvency Rules 2016 does not allow creditors to change their vote or for the adjournment or postponement of a vote. The nominees’ conclusion that a novel court application with no certainty of timing or outcome was unworkable was entirely reasonable.                                    The court was satisfied that the nominees had acted in good faith in accordance with their professional duties and reached a perfectly reasonable decision that it was not in the best interests of creditors to postpone the CVA process. The directors had reached their own decision independently. There were no irregularities, let alone material irregularities, in relation to those decisions.  Failures in relation to the announcement and modification The court decided that the announcement made was not misleading by omission or inaccuracy and was fair and reasonable disclosure to creditors on the EG offer and the decision not to postpone the CVA process. The applicant’s criticisms were not material in the sense that the CVA vote would have been different had the alleged omissions or inaccuracies not been made. The modification could not have affected the way creditors voted because 99% had already voted by the time it was notified to them and the requisite majority to approve the CVA had already been reached. In any event, by committing to use best endeavours to procure that landlords would receive additional payments if a sale to EG proceeded, the modification objectively improved the terms of the CVA proposal for creditors.    Unfair prejudice The applicant argued that the relevant alternative to the CVA had changed following the EG offer, from administration to a negotiated arrangement with EG which would be more beneficial to landlord creditors. However, the court considered the applicant’s case to be based on EG acting irrationally to honour the terms of the EG offer rather than pursuing its commercial best interests by taking advantage of the company’s administration and picking up the parts of the Nero Group that it wanted at the lowest possible cost. The nominees’ evidence was that the relevant alternative remained administration – under which the applicant would receive 0.3p in the pound. There was no unfair prejudice to the applicant. Louise Clark is a property law consultant and mediator Photo by Jeff Blackler/Shutterstock