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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Mizen Design/Build Ltd v Peabody Construction Ltd [2023] EWHC 973 (Ch) (07 April 2023) URL: https://www.bailii.org/ew/cases/EWHC/Ch/2023/973.html Cite as: [2023] EWHC 973 (Ch) |
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CHANCERY DIVISION
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
ON APPEAL FROM DECISION OF ICC JUDGE PRENTIS
24TH JANUARY 2023
Fetter Lane, London, EC4A 1NL |
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B e f o r e :
____________________
Mizen Design/Build Limited |
Appellant |
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- and - |
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Peabody Construction Limited |
Respondent |
____________________
Andrew
Mace
(instructed by Devonshires LLP) for the Respondent
Hearing date: Thursday 6th April 2023
____________________
Crown Copyright ©
Sir Anthony Mann :
Introduction
The statutory provisions
"'Proposal' means a proposal for a CVA"
Rule 2.2 sets out general principles for what a proposal is to contain:
"2.2.—(1) A proposal must—
(a) contain identification details for the company;
(b) explain why the proposer thinks a CVA is desirable;
(c) explain why the creditors are expected to agree to a CVA; and
(d) be authenticated and dated by the proposer."
Rule 2.3 provides for what a proposal must "set out … so far as known to the proposer". It is necessary to refer to only two of those provisions:
"Liabilities - … (f) how the company's liabilities will be met, modified, postponed or otherwise dealt with by means of the CVA …"
And:
"Other matters - (x) any other matters that the proposer considers appropriate to enable members and creditors to reach an informed decision on the proposal."
"6. Challenge of decisions.
(1) Subject to this section, an application to the court may be made, by any of the persons specified below, on one or both of the following grounds, namely—
(a) that a voluntary arrangement which has effect under section 4A unfairly prejudices the interests of a creditor, member or contributory of the company;
(b) that there has been some material irregularity at or in relation to the meeting of the company, or in relation to the relevant qualifying decision procedure."
"(4) Where on such an application the court is satisfied as to either of the grounds mentioned in subsection (1) or, in the case of an application under subsection (2A), as to the ground mentioned in that subsection, it may do any of the following, namely—
(a) revoke or suspend any decision approving the voluntary arrangement which has effect under section 4A or, in a case falling within subsection (1)(b), any decision taken by the meeting of the company, or in the relevant qualifying decision procedure, which has effect under that section;
(b) give a direction to any person for the summoning of a further company meeting to consider any revised proposal the person who made the original proposal may make or, in the case falling within subsection (1)(b), and relating to the company meeting, a further company meeting to reconsider the original proposal;"
Legal principles
"12. The authorities identify two useful heuristics for assessing whether a CVA is "unfairly prejudicial" under section 6(1)(a). The first is commonly called "the vertical comparator". It compares the projected outcome of the CVA with the projected outcome of a realistically available alternative process, and sets a "lower bound" below which a CVA cannot go: see Re T&N Ltd [2005] 2 BCLC 488 at [82] per David Richards J and Prudential Assurance Co v PRG Powerhouse Ltd [2007] BCC 500 at [75]-[81] per Etherton J. The second is commonly called "the horizontal comparator". It compares the treatment of creditors under the CVA inter se. Whilst there is no prohibition on differential treatment, any differential treatment must be justified; see Powerhouse at [88]-[90].
13. These comparators are not to be treated as a statutory test; it is necessary to consider the particular facts of each case when deciding whether a given CVA is unfair: see Powerhouse at [74]-[75]."
"73. Similarly, in my judgment, it is not for the Court to speculate whether the terms of a proposed CVA which were put forward by an officeholder were the best that could have been obtained, or whether it would have been better if it had not contained all of the terms which it did contain. Unless the court is satisfied that better terms or some other compromise would have been on offer, the comparison must be between the proposed compromise and no compromise at all judging matters as of the date of the vote on the CVA. If an administrator or liquidator puts forward a proposal which he considers to be fair then, unless it is established that he acted other than in good faith or that he is partisan to the interests of some only of the creditors, the court should not speculate about what other proposals might have gained acceptance and been capable of implementation (an essential element, since there is not much point in gaining approval unless the resulting arrangement can be implemented). "
"81. Mr Crystal submits that, if the irregularity relates to the information provided to creditors, the correct approach to materiality is to ask the following question, which must be answered objectively: Whether, had the truth been told, it would be likely to have made a material difference to the way in which the creditors would have considered and assessed the terms of the proposed arrangement, adopting the words of Robert Walker LJ in Cadbury Schweppes plc v Somji (supra) at para 25, cited with approval by Lewison J in Re Trident Fashions (No. 2) [2004] 2 BCLC 35 (see at paras 38, 45-6). I accept Mr Crystal's submission and note (only to agree with) what Lewison J says at para 46 after citing the test approved in Cadbury Schweppes plc: "
"I do not consider that is the same as asking: would the meeting have been adjourned? It seems to me the real question is: would the revelation of the truth have made a material difference to the way in which the creditors would have considered the terms of the CVA itself? The word "likely" is used in a variety of different ways. It does not necessarily mean that there is more than a 50% chance. It seems to mean, therefore, that the right test is whether there was a substantial chance that the creditors would not have approved the CVA in the form in which it was presented."
"300. Unsurprisingly, since CVAs and schemes of arrangement share in common the fact that creditors are invited to vote upon a compromise or arrangement affecting their rights, this overarching obligation is materially the same as that which exists in the scheme jurisdiction. In Re Indah Kiat International Finance Co BV [2016] EWHC 246 (Ch), for example, Snowden J said (at [41]):
"It is well-established that the scheme company has a duty to place before members or creditors sufficient information for them to make a reasonable judgment as to whether the scheme is in their commercial interest or not."
The arrangement in this case and the voting
(i) Critical Creditors are creditors whom the directors consider should be paid their full sums due because their services are regarded as essential to the operation of the Company's business going forward. They will be paid in full and will not share in the fund.
(ii) Retained Contract Critical Creditors, who are creditors with current and ongoing contracts with the Company which the Company intends to comply with and provide a full contractual package. One of those creditors is Peabody in relation to a particular contract which is not relevant to this appeal; another is a company known as Paragon, to which I will return.
(iii) Non-critical Creditors are, basically, other trade creditors. These creditors will have their contracts terminated, if otherwise ongoing, and will all have a right to share in the fund which is to be constituted.
(iv) Guarantee Creditors. These are creditors who have the benefit of a guarantee from the Shareholder in respect of their individual contracts. They include Peabody, and it is in that capacity that Peabody objects to the CVA. Under the arrangement these creditors will be obliged to give up their claims under the guarantee, in consideration for which they will have an entitlement to prove in the CVA in respect of an additional amount (that is to say additional to the amount of their contractual debt) which will vary from creditor to creditor according to the amount of their guarantee claims.
(v) Compromised Contingent Creditors. This means any contingent creditor, a contingent liability being very widely defined. These are all to have their liabilities compromised at £1, payable on demand.
A quirk in the arrangement
The findings of the judge below
"That was not a full and open disclosure of the position of the Shareholder's position [sic]"
Although this paragraph seems to start by recording matters relating to matters which were Peabody's concerns, it is a fair reading of the paragraph to assume that the judge agreed with Peabody.
"126. It is important to recognise in this case that the Shareholder's guaranteed liabilities are being compromised not by its own CVA or scheme, but by the Company's. It follows that there are no direct obligations of disclosure on it, and actually its disclosure has been limited to this Estimated Outcome Statement. If it needed it, the lack of disclosure can be proved by considering that the Proposal was one that was put to the Shareholder as well as to the Company's creditors. It is the Company which was providing the information and providing it to the Shareholder in respect of, amongst other things, the guarantee which the Shareholder owed to the various Guarantee Creditors. Whatever, even the Company's obligation was to provide full and frank disclosure of all matters appropriate to enable its Creditors, including the class of Guaranteed Creditors, to reach an informed decision. There is no good reason why, given the release of the Guaranteed Creditors, the disclosure as to the Shareholder ought not to have been the equivalent of a CVA or a scheme had the Shareholder proposed one.
127. Even if that is too stringent a test, it is impossible to think that any Creditor would have renegotiated a position as to the guarantee based upon the Estimated Outcome Statement alone. No reasonable Creditor would do that. It would seek just the sort of information as to the Company's trading history and forecast which has already been described. That disclosure is disclosure which, it seems to me, falls within rule 2.3(1). Specified in that rule is the obligation on the Company making the proposal to confirm its awareness of circumstances which might give rise to claims under sections 238, 239, 244 and 245. There is no equivalent statement from the Shareholder's directors as to whether that would apply to it, notwithstanding that on this hypothesis the Shareholder is entering administration and the administrators would therefore make investigations into just those sorts of matters.
128. What we have then, even by itself, is a transaction which requires an explanation and a transaction which would be dealt with explicitly were this the Shareholder's own arrangement."
" … there may well be other transactions which would have to be considered by way of disclosure under [rule] 2.3 or otherwise just under fair disclosure." (paragraph 129)
"Even stopping there, this was a manifest irregularity as to the disclosure necessary to this arrangement. Further, it was material to the Guaranteed Creditors whose debts were being released because they were not being given full information as to what their position was, because there were indications of prior dealings and therefore the possibility of value and therefore the possibility of their claim being more, and because anyway there would be a generation of enquiries by those who were just to receive pence in the pound in respect of this debt from a different entity and the circumstances in which it was incurred. "
"132. Making the obvious connection between this Schedule 14 and the contingent legal claims in the Shareholder's Estimated Outcome Statement, it follows that no creditor, as Mr.Mace
said, would be in a position to determine the value of the Guaranteed Creditor claims. In fact, that was so anyway. The £11.6 million odd figure is entirely unexplained. Schedule 14 has the grand total of £25, £1 for each of those creditors named within it."
" It seems to me that the class is entitled to a full explanation as to how that figure was arrived at, and who was within it. Again, this by itself constitutes a material irregularity."
" 135. One can see, just from that, the sort of questions that might have been asked by creditors had they been told the make-up. The £4.6 million Paragon debt was the very debt that the Proposal said was going to be renegotiated to put the Company into a positive position on the contract, in other words, it was going to come out. If we deduct the £4.6 million from the Estimated Outcome Statement then the outcome, leaving all the other figures in place, actually comes out at a tad over 7.5p. It follows on its face, and turning now to unfair prejudice, that the vertical comparator of 5.3p is at the least very doubtful."
"139. On the nature and extent of different treatment and impact, the impact of outvoting the Guarantee Creditors and the removal of their rights was obviously severe. As to the different treatment, the Guarantee Creditors were losing their contractual rights in a situation where little disclosure was given as to their value and where even if this were to be a negotiation between reasonable businessmen, that would be on the basis of significantly more information than had been provided. The Guarantee Creditors were instead sharing the Fund with certain creditors of the Company, who had had the benefit of the disclosures in the Proposal as to the Company's position; and from which the costs were to be deducted without, as I say, any assurance that their return would even equal that indicated by the Shareholder Estimated Outcome Statement. That was at a time when Critical Creditors, who themselves were pre-proposal creditors for £800,000, were to be paid in full, utilising the benefit of moneys from the Shareholder to support the Company's trade.
140. The justification point is that it was necessary to compromise the Guaranteed Creditors to prevent the Ricochet Claims, and thereby to prevent the Company from going down. As Mr. Weaver says, I must, and I do, accept that a compromise was necessary, but that does not, without more, justify the relative impact or the lack of votes as a separate class, or the lack of information, or indeed the compromise of the Guaranteed Creditors in this way.
141. Again by way of addition, what is interesting about the Paragon information which has come out, in other words the information that Paragon is within the £11.6 million of creditors in the Shareholder's EOS, is that if provided earlier it could have been related back to the negotiations with Paragon which are adverted to in the Proposal. Therefore, one alternative would have been for the compromise of Guarantee Creditors either to take account of a revised Paragon figure, or to be entered into only after the deal with Paragon, a necessary hypothesis of the CVA to be viable, had been done.
142. As to the approval by others of the same class point, there was one other voter who had a guarantee. Actually, they voted in favour of the proposal. They were Mizen Nether Street Limited. They were therefore a connected creditor and they were owed just £6,564.
143. Finally, this result could not have been approved by a Part 26A plan on this evidence. It does not begin to align with the evidence that one would have on such a claim
144. It follows, in my judgment, that there is clear unfair prejudice to Peabody in the approval of the CVA."
"146. Insolvency of the Shareholder is a necessary hypothesis. But the actuality is that through the compromise of the guarantee claims, the Shareholder was not to enter insolvency. The guarantees were instead to be settled via the third party company. I think the Guarantee Creditors would be interested and entitled to know how the Shareholder would have settled the claims otherwise."
He went on to reject an unfair prejudice claim made by Newlon.
(a) There ought to have been more disclosure of matters relevant to the deemed administration of the Shareholder in the EOS. There ought to have been the same level of disclosure as would be appropriate in a CVA of the Shareholder, which would have required disclosure of the possibility of challenge to antecedent transactions. This was particularly the case in the light of the prior sale of a subsidiary, the consideration for which was not at all apparent from the information that was disclosed.
(b) There ought to have been a full explanation of how the class said to make up the guarantee claims in the EOS of the Shareholder was made up - who was in it, and how the figure was arrived at. That disclosure was missing and that too was a material irregularity.
(a) The vertical comparator claim arising out the Shareholder EOS was doubtful, because a better view of the guarantee liabilities was that they should be lower with the resulting figure being 7.5p, not 5.3p (paragraph 135).
(b) The judge's assessment that the Guarantee Creditors suffered unfairly because they had to share an overall fund within the Company (not the Shareholder) and were losing their guarantee rights on the basis of a different (worse) quality of information (about their original source - the Shareholder) than that which the other creditors had from theirs (the Company), coupled with further detriment from the possibility of excessive Supervisor costs (paragraphs 139 and 140).
(c) If the information about the Paragon contract had been provided earlier, then the Paragon guaranteed debt could have been taken out of the equation. I confess it is not clear to me how this reasoning works or is significant.
(d) The CVA compromise could not have been achieved within a Part 26A plan.
Post-judgment events
The challenge to the material irregularity finding
Conclusions on material irregularity
"The Shareholder Estimated Outcome Scenario which appears at Part 2 of Schedule 3 demonstrates that in the event of the insolvency of the Shareholder, the County Creditors would not receive more than 5.3% ... by way of a dividend on their unsecured claims against the Shareholder."
"The estimated outcome statement in relation to the Shareholder which is set out at Part 2 of Schedule 3 demonstrates that in [the insolvency] scenario, the return to the unsecured creditors of the Shareholder would be 5.3%…"
The EOS was thus presented as being a realistic picture of an administration on which the Guarantee Creditors should rely in giving up their guarantee rights and in assessing their proposed rights in the CVA. If there were decently arguable claims that might swell the assets materially, there ought to have been some disclosure of them because the Guarantee Creditors might well be interested in them if there was a chance of swelling the bottom line dividend figure materially. I would add that if it were known that the particular transaction were a dividend paid in the year in which insolvency discussions were started, and where no dividend had been paid in the previous year, the decision of a given Guarantee Creditor might have been affected by a certain amount of commercial indignation, but that would be rather subjective and is not measurable for present purposes.
"As far as we are aware, no. Have seen nothing in the accounts."
When Mr Tansey (the common director) was asked about this in cross-examination he said:
"My recollection of that meeting – and obviously it was a very important one, very dramatic – is that I think our solicitor present at the meeting answered to that particular question that the shareholder was not in a CVA so that the question was in some respects inappropriate.
Q. You accept the question had been raised?
A. The question was raised and I think the answer was given that it was inappropriate."
(a) Peabody, who had a claim admitted (in round terms) for 1.4m.
(b) NHBC, with a claim for £4m. It abstained in the vote.
(c) Paragon, with a claim for £4.6m. It voted for the arrangement, doubtless because it had an interest in getting a revised contract if the arrangement was approved.
(d) Other creditors with claims of £1.6m.
Additional conclusions on the quirk as to the adequacy of funds
Conclusions on unfair prejudice
(i) His apparent determination that the EOS creditors were over-stated by the inclusion of the Paragon debt (much emphasised by MrMace) seems to me, with respect, to be misplaced. He relied on the fact that under the CVA Paragon would, when its contract was renegotiated, no longer be a Guarantee Creditor (paragraph 135). That is true as a fact, but it does not affect the Shareholder EOS. The Shareholder EOS was intended to show what would happen without a CVA in the company, in which event Paragon would be a Guarantee Creditor. It was therefore appropriately included.
(ii) His somewhat condensed reasoning in paragraph 137 takes a little unpacking, but it seems to be that the Shareholder EOS would have provided 5.3p in the pound, and the thesis of the arrangement is that that is replaced by a similar claim in the CVA. However, that sum had to be found out of the Fund, and the Fund was subject to potential additional deductions for Supervisor's costs and disbursements if they exceeded the predicted level, so the amount intended to compensate for the loss of a right to have 5.3p in the £ was potentially eroded for the benefit of all the proving creditors in the CVA. Unfortunately this point overlooks the terms of the Arrangement and guarantee of the Shareholder. Clause 27 of the arrangement deals with payments to be made by the Company. Clause 27.2 promises the payment of the £396,000. Clause 27.4 provides that, in addition, the Company will pay the Supervisors' costs and expenses. The guarantee to be given by the Shareholder guarantees this additional sum. So the fund is not to be subject to the depradations of CVA costs, unless the Company and the Shareholder both default on their obligations in this respect. That rather undermines the unfair prejudice finding.
(iii) It is not clear what interesting information about the Paragon arrangements the judge is referring to in paragraph 141. It was always known that the Paragon contract was to be re-negotiated if the CVA was to work, and thus that it would be taken out of the Guarantee Creditor class in that event. The fact that its debt appeared in the Shareholder EOS is a correct approach in that context.
(iv) It is not relevant that the result would not have been approved in a Part 26A plan.
However, none of this matters in the light of my determination on material irregularity.
Conclusions
Sir Anthony Mann