The High Court has clarified the grounds for challenging a CVA for guarantee creditors.
Mizen Design/Build Ltd's (Mizen) directors proposed a CVA stating that this would lead to a better result for unsecured creditors than the likely alternative, administration. The CVA compromised guarantee creditors' ability both to bring a claim against Mizen and to call upon their performance guarantees against Mizen's parent company (the Parent Guarantor). Peabody Construction Ltd (Peabody), a guarantee creditor, successfully challenged the CVA on the grounds of material irregularity and unfair prejudice.
The Court held that:
- Despite the lack of direct disclosure obligations on the Parent Guarantor in Mizen's CVA, insufficient information to guarantee creditors regarding their position in relation to the guarantor, and the absence of a full explanation as to how the guarantee creditor's claim figure was reached, constituted material irregularity.
- Peabody was unfairly prejudiced as a guarantee creditor on the basis that the class of guarantee creditors' votes had been swamped by the votes of creditors who would be paid in full. The justification that it was necessary to compromise the guarantee creditors to prevent ricochet claims against Mizen did not justify the compromise of the guarantee creditors in this way.
- Companies must ensure that CVA proposals seeking to compromise guarantee liabilities contain sufficient information regarding the guarantors to enable guarantee creditors to reach an informed decision.
- Where a CVA is approved by the votes of unimpaired creditors, the court will consider all the circumstances and may find a CVA to be unfairly prejudicial even if the proposal can be justified and offers a better return than the likely alternative.
Re Mizen Design/Build Ltd  EWHC 127 (Ch)
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