There were 38 CVAs approved by creditors in Quarter 1 of 2023. While this number is 52% higher than in Q4 2022, and also than in Q1 2022, CVA numbers remain low compared to historical levels.
The reasons for this are varied but inevitably having an impact are HMRC's secondary preferential status, and the rising popularity of the Restructuring Plan, with its cross class cram down, as an alternative. In contrast, IVAs remain popular, with 20,246 IVAs commenced in Quarter 1 of 2023.
Both types of voluntary arrangement are at risk of challenge by creditors, with two recent decisions of interest.
Moorgate Industries UK Ltd v Mittal and another [2022] EWHC 3009 (Ch)
In Moorgate Industries v Mittal, an IVA was successfully challenged on grounds of material irregularity. The issues for the Court were (i) whether certain debts related to votes in favour of the proposal were proven; and (ii) whether a significant debt was owed to an associate of the debtor within the meaning of s435 of the Insolvency Act 1986 (and thus affecting the voting rights of that creditor).
The IVA was proposed by the debtor after bankruptcy, in circumstances where the level of certain debts in the IVA proposal were significantly larger than the sums indicated to the Official Receiver after the making of the bankruptcy order.
1. Creditor claims
Questions were raised by the challenging creditor about the status of certain listed creditors which were dissolved, and the debtor claimed those debts had been assigned - to individuals affiliated with the debtor, and that the creditors were entitled to compound interest at a rate of 4% per month. The challenging creditor asked for evidence the loans and assignments in questioned were genuine, including for certain metadata, but no evidence was provided.
The material irregularity challenge before the Court centred around the principle that creditors owe each other a duty of good faith, and that if a competing creditor challenges the acceptance of another creditor's proof, the other creditor must substantiate their claim. The issue for the Court to determine is whether the debts under challenge were proven on a balance of probabilities. In this matter, the creditors whose debts were the subject of challenge by Moorgate filed no evidence, ignoring the request for the metadata relating to the loan agreement and assignments. Chief Insolvency & Companies Court Judge Briggs found that it was necessary to consider the other evidence before the Court including evidence from the debtor, although he noted the debtor had a vested interest in the outcome. Therefore, CICC Judge Briggs found considered all the circumstances of the challenged debts, including the debtor's evidence, and found that having regard to all those circumstances, the claims were not made out on the balance of probabilities.
2. Meaning of "associate"
Moorgate asserted that the debtor had control of an overseas trust in a role of "protector" and as such, was able to control the trust's interest in a company claiming to be a creditor.
The judgment discusses the meaning of exercising control within the meaning of s435 of the Insolvency Act 1986, noting that control is linked to a custom of acting in accordance with instructions. As a matter of fact, CICC Judge Briggs found that the debtor did control the trust, and control of the trust amounted to control of its assets, which included the creditor in question, and that the directors of the creditor were accustomed to acting on the instruction of the debtor.
Re Mizen Build Design/Build Ltd (in company voluntary arrangement) Newlon Housing Trust and another v Mizen Design/Build Ltd and others [2023] EWHC 127 (Ch)
In Re Mizen Build Design/Build Ltd (in company voluntary arrangement) Newlon Housing Trust and another v Mizen Design/Build Ltd and others [2023] EWHC 127 (Ch), a CVA was challenged. The proposal was passed on 19 May 2022, with 88.28% of creditors voting in favour.
The terms of the CVA categorised creditors in a number of categories, including critical, guarantee and compromised creditors, treating each class differently. The proposal compromised the rights of guarantee creditors to claim against the company and its parent company.
Newlon's challenge concerned misstated creditor balances as it related to the category of critical creditor, with £4million given in the proposal but £804,337 owed at the relevant date. The Court agreed there had been a failure of disclosure as to the critical creditors, but that this irregularity was not material, because the resolution would have passed if all critical creditor votes had been ignored.
Peabody's challenge concerned what it regarded as insufficient clarity or disclosure in relation to the value of guarantee debts. This element of the challenge concerned the lack of information in the proposal to enable creditors to understand the value of the guaranteed creditor claims, which directly impacted on the potential pence in the pound outcome, which would influence the commercial analysis of the proposal.
Peabody also challenged the treatment of creditors in the guaranteed creditor category, whose rights were removed by the proposal, but whose votes were outweighed by creditors in other categories who were due to receive more favourable treatment. Peabody argued this was unfairly prejudicial. The Company's position was that the compromising of the guarantee creditors' rights was necessary for the success of the arrangement and to avoid an alternative form of insolvency. The Court disagreed, finding that while a compromise may have been necessary, it did not justify the relative impact on the guaranteed creditors.
Practical consequences
In Moorgate v Mittal, the Judge gave a warning that if debts are challenged on an appeal from a nominee, creditors should be joined to the proceedings and take advantage of any order made by the court to permit them to file and serve sworn evidence, and commenting that when creditors fail to do so, it is open to the Court to make adverse inferences. In Mitzen Build, the Judge commented that creditors were entitled to a full explanation as to how certain figures in the proposal were arrived at. Taken together, the decisions emphasise that full and timely information is a matter of substance, both at proposal stage, and in support of claims.
