On 29 September 2021 the High Court dismissed a challenge to Caffè Nero’s 2020 CVA brought by one of its landlords, Ronald Young. Young asserted that the CVA was unfairly prejudicial and subject to material irregularities (thereby engaging both grounds of challenge under s.6 of the Insolvency Act 1986), and that the CVA nominees and company directors had breached their duties by failing to adjourn or postpone voting on the CVA upon receipt of a late-in-the-day offer for the Caffè Nero group. Justice Green rejected all grounds of challenge in a judgement containing some notable points for insolvency practitioners and participants in CVAs and distressed situations generally.

Key Takeaways

No breach of duty: The High Court held that the nominees and directors had acted in good faith and what they considered to be the best interests of creditors. The judgement reaffirms that the Court will be slow to criticise decisions of insolvency practitioners and directors, particularly where taken under time pressure and in difficult circumstances.

Certainty and deliverability: In assessing whether to pursue a deliverable transaction that will ensure a return to creditors or an alternative transaction that may result in higher creditor returns but which is subject to contingencies, uncertainty and downside risk, insolvency practitioners will be on solid ground if they pursue the more certain transaction, i.e. “the bird in the hand”. Parties looking to acquire assets or to propose alternative transactions in distressed situations should therefore engage as early as possible with IPs and/or directors and, where possible, minimise the conditionality of their proposals.

Counterfactual: The relevant counterfactual to a CVA is largely one of commercial judgement and the Court will generally defer to the views of the directors and/or insolvency practitioners in this regard. Challenges founded on vague or speculative assertions of alternative transactions will carry little weight. This is a point of wider applicability and equally relevant to determining the comparator or relevant alternative in schemes of arrangement and restructuring plans.

Adjourning / postponing electronic votes: The Insolvency Rules do not allow directors or nominees to adjourn or postpone an electronic voting procedure without a court order. However, it is unclear what relief could be sought from the Court prior to a CVA being approved, so any application would carry risk. In these circumstances, it is reasonable for nominees not to postpone CVA voting, particularly where the counterfactual to the CVA (in this case, administration) would result in significantly lower returns to creditors.

Validity of modification: Where the company consents to a modification to the CVA terms, creditors that have already voted can be deemed to have approved the modification, particularly where the modification is for their benefit.