In common with other recent CVA challenges, this application was on the grounds that the CVA unfairly prejudiced creditors and that there had been “material irregularity” regarding its approval. The challenge focused on events in a very short period leading up to the creditors' vote.
The challenging landlord argued that Caffé Nero's nominees (the insolvency practitioners appointed to oversee the CVA) and its directors should have postponed the vote to enable creditors to consider a last minute offer to purchase Caffé Nero’s parent company. The offer, by EG Group Limited (EG), proposed that EG would pay all of the arrears owed to Caffé Nero’s 640 landlords in full, as opposed to the proposal in the CVA under which the majority of arrears were compromised to 30p in every £1.
EG’s offer was made very late in the process; indeed, on the day before the creditors’ vote concluded. It was rejected the following day and an announcement was posted to a specially designated website describing some (but not all) of its terms. Only four hours before the close of voting, Caffé Nero proposed a modified CVA to the effect that Caffé Nero would use its “best endeavours” to procure that compromised landlords would receive their entire allowed claim under the CVA if the EG offer was accepted in the following 6 months.
By the time the announcement was posted, some 67% of creditors had already voted for the original proposal and the CVA nominees treated those votes as having been cast for the modified proposal. The landlord argued that the decision to approve the CVA should have been postponed by the nominees and directors of Caffé Nero, to enable the EG offer to be considered. By failing to do so, the CVA had not been approved by the requisite 75% of creditors (by value), as the CVA for which they had voted was not the same CVA towards which creditors’ votes had been counted.
The Decision
The court rejected the claim that not postponing the vote or modifying the proposal gave rise to a material irregularity. Instead, the court concluded that the directors and nominees had not breached their duties, having made "a reasonable, and possibly the only reasonable decision in the circumstances, not to postpone".
The court considered each of the alleged irregularities but throughout it placed consistent emphasis on the timing of EG’s last minute offer, which one of Caffé Nero’s witnesses described as “like throwing a grenade into a crowded room”. The court found that the EG offer was designed to place the directors of Caffé Nero and the CVA nominees in a difficult position and its timing alone was a “strong and rational reason” for not postponing.
Critically, there was a “great risk” that, if the decision was postponed, the CVA could fail, potentially leading to a significantly worse outcome for creditors.
To further complicate matters, because an electronic decision making process was being used, the only way to adjourn would have been to make an urgent court application. This added to the uncertainty which the nominees and directors were facing in what was a very short time frame.
Next steps
This decision was reached on the specific facts of the case. Whereas other recent retail CVA challenges have focused on the terms of the relevant CVA, this decision almost exclusively considered the circumstances leading up to its approval and the duties of directors and nominees where material events occur during the approval process. It is easy to imagine that the court may have decided that an adjournment was appropriate where, for example, there was a physical creditors meeting or where the offer had been made earlier in the process.
Case: Young v Nero Holdings Ltd & Ors. [2021] EWHC (Ch)
Authored by Mathew Ditchburn and Joseph Armstrong.
