The UK court: CVAs should bind as many creditors as possible

Including officeholders who were not in office at the date of the approval

Background

In Re North Point Global Ltd, the liquidators of a subsidiary submitted a proof in the CVA of the parent company based upon a claim that certain payments made by the parent to the subsidiary were unlawful preferences. Notably, when the parent's CVA came into effect, the liquidators of the subsidiary had not been appointed.

The main issue that the court considered was whether the liquidators would have been entitled to vote to approve the CVA if the liquidators had had notice of the approval procedure. The supervisor of the parent's CVA argued that no-one would have been entitled to vote in relation to the unlawful preferences because, at the date of the approval of the CVA, the liquidators of the subsidiary had not been appointed. The court rejected this argument and held that:

• The question was not whether the liquidators were entitled to vote at the time of the approval procedure
• The focus was whether the preference claim would have been bound.
• The liquidators should be bound because they would have been entitled to vote had they been in office at the time of the approval procedure.
• It was in the interest of the workability of CVAs that as many creditors as possible were bound by the CVAs to encourage arrangements with creditors.

Practical takeaways

Despite the peculiar legal position of a preference claim (i.e. the right to bring a preference claim is vested in the officeholder but not in the company), the court recognised the policy consideration that an insolvency process should include as many creditors as possible.