Condition precedent drives a coach and horses through MF Global CVA

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There has been a huge amount of recent press attention on the increasing use by struggling retailers and casual dining operators of company voluntary arrangements (CVAs). Several household names, including the likes of House of Fraser, Jamie’s Italian, Mothercare and Byron, have resorted to these formal compromises in relation to sums owed to their creditors, typically to reduce or reschedule their unsecured debts. The common target with these recent arrangements has been landlords – many of whom have been asked to accept a reduction in rents as businesses struggle to overcome the challenges presented by rising costs, higher wages and a fall in consumer high street spending. But for every successful CVA there seems to be a failure, with much of the commentary noting that businesses which flirt with this procedure fail to address the wider issues affecting their business. Too often it seems the CVA simply delays the inevitable end.

The recent case of Heis v FSCS [2018] EWCA Civ 1327 also concerned the use of a CVA, albeit this was not a retail high street casualty. What sets it apart is that it concerned a CVA which failed almost immediately after being approved because one of the conditions for its implementation was not satisfied. Here Tim Carter and Matthew Padian take a look at this case which will be of interest to both banking and insolvency practitioners alike.

The facts

The case concerned a rather innovative CVA for a UK subsidiary in the MF Global investment group, which was approved in December 2017. The subsidiary had been in administration for some years, with almost all creditors (whose claims had been admitted) receiving dividends of 90p in the £ on their claims. The CVA was designed to enable a small number of participating creditors to buy out the majority for £64m, allowing the exiting creditors to walk away from the insolvency proceedings with a further dividend and the purchasing creditors to remain in the insolvency proceedings and to participate in the future recoveries (if any).

The CVA was approved in December 2017. The CVA documentation noted the risk of further claims against the insolvent estate emerging after the CVA was approved but before the final bar date on new claims. After the CVA was approved, but three days before the bar date on new claims, Deutsche Bank submitted a contingent claim for €126.7 million which was unanticipated. The CVA included a number of conditions precedent that had to be satisfied or waived by the supervisors before it could be implemented, one of which included the end of the expiry of the challenge period without any existing challenge having been made to the CVA and a condition (Clause 3.1(e)) that  “…if there are Disputed Claims after the Challenge Period has ended, the Administrators have confirmed that this should not preclude the CVA from becoming effective”.

The participating creditors argued that the new disputed claim submitted by Deutsche Bank meant that the relevant condition precedent was not satisfied and accordingly the CVA could not become effective. The exiting creditors argued that there was always a risk of new claims emerging and the existence of this new claim did not fundamentally upset the commercial compromise represented by the CVA. The administrators sought directions on the interpretation of Clause 3.1(e) and how they should exercise their discretion pursuant to this clause.

Court of Appeal’s decision

Initially, the High Court decided that Clause 3.1(e) could not be interpreted as giving the Administrators discretion to terminate the CVA. On appeal to the Court of Appeal, the Appeal Court overturned the High Court’s decision. It determined that the relevant condition precedent conferred a clear discretion on the Administrators to elect not to proceed with the CVA if any disputed claims emerged which materially changed the commercial position.

In reaching its decision, the Court of Appeal considered that the appropriate starting point was to read the words in the CVA as strict contractual terms and in plain English and not to speculate as to why a clause was not drafted in a different way and adopt a non-literal reading (as the High Court judge did). Based on the drafting alone, the Appeal Court concluded that a reasonable person would be left in little doubt that its intention was to give the Administrators discretion not to implement the CVA if disputed claims emerged which materially upended the bargain reached by the creditors. The emergence of the Deutsche Bank claim was sufficiently large so as to impact the participating creditors disproportionately. The fairest judgment was therefore to give direction to the Administrators that they could confirm that the CVA should not proceed.

Conclusions

The Court of Appeal’s decision seems right commercially in that the participating creditors had chosen to participate in the CVA in the expectation that no new claims would emerge in the period between its approval date and the subsequent final bar date, which would have a material impact on their decision to continue to participate in the CVA. Whilst the CVA made no promises as to the recoveries participating creditors would realise, it had been precise about the assumed liabilities and the participating creditors had elected to participate on the basis of those expectations.

The case also illustrates the importance of conditions precedent to the success or failure of any transaction. Many a banking lawyer will be familiar with the lengthy list of conditions which often appear as a schedule to a loan agreement and which need to be satisfied before a loan transaction can be properly implemented. Conferring upon one party to a transaction a discretion which enables them to halt the deal if a particular condition is not fulfilled can expose the other parties to real transaction risk. Borrowers seeking loans or companies launching CVAs which are subject to the satisfaction of conditions precedent should always review the conditions precedent carefully before signing up to any transaction or arrangement, rather than after the event. Wherever possible, the conditions should be limited to those which can be relatively easily controlled or influenced, and to remove the opportunity for other parties or stakeholders to exercise a discretion which might prevent a transaction from going ahead altogether. Of course, often this is easier said than done.

Finally the case provides a salutary tale to those launching CVAs that they are not always a slam dunk, even after they have been approved. As ever, the devil is always in the detail. It is not uncommon for creditors to be asked to vote on a CVA on the basis of an assumed state of affairs, or for the implementation of a CVA to be subject to the satisfaction of certain conditions. Limiting the conditions and ensuring that the terms of the CVA work are vital. There are many challenges for a distressed company to comply with the terms of the approved CVA, continue trading and come out the other end unscathed; such challenges are evidenced by the large number of failures (including high profile CVAs such as Toys R Us). Therefore a company considering a CVA and before investing the significant time and money required, should with its professional advisers, carefully consider the conditions and terms and avoid jumping in head-first and suffer the fallout later. 

Contact our experts for further advice

View profile for Tim CarterTim Carter, View profile for Matthew PadianMatthew Padian

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