Healys LLP recently successfully challenged the approval of a Company Voluntary Arrangement (CVA) which was proposed by directors of a cargo freight airline – MK Airlines Limited.
Healys’ insolvency team, lead by Melanie Badain, advised a group of aggrieved creditors on their rights to pursue this remedy under Section 6 of the Insolvency Act 1986 (IA 1986).
The Court ruled in favour of the creditors that a debt lodged by a lessor was overstated by several million pounds and the challenge resulted in the compulsory winding up of the Company. Healys advised on all aspects of the proceedings including a challenge to the appointment of receivers and other technical aspects in the case including issues relating to third party claims and the company’s failure to disclose a number of assets in its Proposals.
This article briefly reviews the practical considerations and implications of CVA challenges in light of the recent outcome of this case.
Who can challenge a CVA?
It is open to a creditor or anyone else who is entitled to vote at the meetings of creditors to challenge the CVA.
Time Limit for Challenge
There is only a very short period of time in which to challenge the CVA. This is 28 days from the date in which the Nominee reports of the meeting to court (it should be noted that the Nominee’s report is now filed at Companies House rather than the court in accordance with the Insolvency (Amendment) Rules 2010).
However, where a creditor had no notice of the CVA, the 28 days can be extended from the time he became aware of the approval.
On What Grounds?
An application to the court may be made on one or both the following grounds: (1) that a CVA unfairly prejudices the interest of a creditor, member or contributory of the company or (2) that there has been some material irregularity at or in relation to either of the meetings.
It is clear that most CVAs will result in a prejudicial outcome for a creditor because the very nature of a compromising its debt will result in some disadvantage to that creditor. The difficulty is in establishing what amounts to an unfair prejudice.
The IA 1986 does not make any attempt to define what amounts to an “unfair prejudice”. The Courts, however, have provided some guidance by laying down two tests. The first test is whether the creditor is being treated differently from other creditors. The second test is whether the creditor would be likely to achieve a much better result if the company went into insolvency liquidation. These tests are commonly referred to as the horizontal and vertical comparisons and have been widely used in recent well publicised cases such as Miss Sixty and Portsmouth FC (Mourant & Co Trustees Ltd v Sixty UK Ltd 2010 and Revenue and Customs Commissioners v Portsmouth City Football Club Ltd (in administration) and others 2010).
In the MK Airlines case, there were litigation claims benefiting the company worth in excess of several million pounds which were not disclosed in the Proposals. Therefore on approval of the CVA those creditors bound by the arrangement (who were only being offered a fixed 2p in the £1) would not have been entitled to any funds recovered through those claims. Healys successfully argued that this was unfairly prejudicial to the unsecured creditors who would have clearly benefited from these assets in an insolvent liquidation (under the vertical test).
The ground of material irregularity can be brought by showing there is an inaccuracy in the Proposals such as non-disclosure of material assets. However to be successful with claims such as this, it is necessary to show that the revelation of the truth would have made a difference to the way in which the creditors would have considered the terms of the CVA.
In the MK Airlines case, the court held that the non-disclosure of valuable assets resulted in a material irregularity on the principle that if the creditors had been given the true picture of the company’s financial position then they may well have taken a different stance to the approval of the CVA.
It was further argued that the act of the Nominee allowing a lessor to vote for the full amount of its future rent claim was contrary to Rule 1.17(3) of the Insolvency Rules 2010 (under well established principles that future rents are unascertained claims and therefore should have been valued at £1.00 only). If the Chairman had valued the claims in this correct way, it would have undoubtedly resulted in the failure of the CVA. It was held that this was not only a material irregularity but it also gave rise to an unfair prejudice as it deprived the other creditors of an alternative outcome.
What is the result of a successful challenge?
The Judge has the discretion to either; revoke the CVA, wind up the company, amend the Proposals or allow a new meeting to take place.
MK Airlines is just one of a number of challenge applications which have been in the spotlight recently (such as Miss Sixty and Portsmouth FC cases). There is a clear underlying message to take from the recent influx of CVA challenges for all parties involved whether approving, proposing or advising on them. The Courts are showing a clear willingness step in to revoke the CVA where it can satisfy itself of those grounds as to material irregularity or unfair prejudice and will even go as far as reporting insolvency practitioners to their representative body as was done in the recent and well known Miss Sixty case.
Further details of the MK Airline case can be found in our earlier article
Healys can offer a full range of advice and assistance on challenges to CVAs and the implications for all parties involved. Should you have any queries regarding the contents of this news item or generally, please do not hesitate to email Melanie or call her on 01273 685888