Williams & Anor v Carraway Guildford (Nominee A) Ltd & Ors

On 27^th November 2018, the 1 ^st to 19^th Respondents ("the Landlords") applied for an order revoking or suspending the decision of the creditors of the 20^th Respondent ("the Company") on 26^th October 2018 to approve a company voluntary arrangement ("the CVA") ("the CVA Challenge Application"). The respondents to that application are the Company and the Applicants as supervisors of the CVA ("the Supervisors").

By an application dated 5^th November 2019, the Supervisors apply for an abridgement of time for service and to strike out the CVA Challenge Application against them, or for summary judgment pursuant to CPR Part 24 ("the Application").

For the reasons explained below, the Application has been issued on an urgent basis and requires speedy determination. Accordingly, oral submissions were limited to just over half a day. I am grateful to both counsel for their clear and economical presentation of their respective cases.

The Company operates hair and beauty salons. The Landlords are commercial landlords, all of whom have let properties to the Company and are creditors of it. As a result of financial difficulties, on 8^th October 2018, the directors of the Company issued proposals for the CVA in respect of which the Supervisors were then the Nominees. On 26^fr October 2018, just over 79% of the Company's creditors approved the proposals, the CVA came into force and the Supervisors were appointed.

The Landlords responded by issuing the CVA Challenge Application pursuant to section 6, Insolvency Act 1986 ("IA 1986") alleging that the CVA unfairly prejudiced their interests and/or that there were material irregularities at or in relation to the meeting approving it. Following directions, the Landlords served Points of Claim setting out 14 broad grounds of complaint. A flavour may be gained from the following summary:

In respect of two of the grounds (summarised in (l) and (4) above) it was alleged that the Supervisors were in breach of their duties as Nominees. There was also a catchall allegation that they were in breach of their duties by reporting to creditors that "there is no material unfairness" in the proposed terms of the CVA.

The pleaded claim for relief, which on the face of it was claimed against the Company and the Supervisors, was for revocation or suspension of the CVA or for a ftlrther meeting of creditors pursuant to s.6(4), IA 1986. Ancillary relief was sought in the prayer as follows:

The Company filed detailed Points of Defence denying the claim. So too did the Supervisors: they specifically denied that the CVA was unfairly prejudicial to the Landlords or that there were any material irregularities. They further denied that the Landlords were entitled to the relief claimed in paragraph (3) of the prayer including on the basis that they acted entirely appropriately and consistent with their duties. It is clear that s.6(6) is parasitic on s.6(4) and the Supervisors challenge the entitlement to any relief under s.6(4) as well as consequential relief under s.6(6).

By virtue of an order of HHJ Judge Simon Barker QC on 4^th July 2019, the CVA Challenge Application is listed for a 12-day trial commencing on 2^nd December 2019, probably to be heard by Sir Alistair Norris. Each party has served substantial lay and expert evidence.

However, on 23 ^rd October 2019, Messrs Hardy and Cowlishaw of Deloitte LLP ("the Administrators") were purportedly appointed as adminisüators of the Company by Regis Corp pursuant to a power contained in the Debenture. The Landlords took issue with the validity of the appointnent, but matters were resolved on I ^st November 2019 with an order effectively by consent that (l) the Administrators' purported appointed be terminated (if valid) and (2) they be retrospectively appointed from 23 ^rd October 2019 on an application for an administration order that the Landlords had made on 27^th September 2019.

On 24^th October 2019, solicitors then acting for the Administrators, Shoosmiths LLP, sent an email to the other parties' solicitors stating that "The Administrators have confirmed to us that they will not be seeking to continue to defend the CVA challenge proceedings... ".

In following correspondence the Supervisors' solicitors ("Pinsent"), wrote to the Landlords' solicitors ("Hogan Lovells") suggesting an indefinite stay of the CVA Challenge Application failing which they would apply to strike out the claim as against the Supervisors. Hogan Lovells' response to the suggestion of a stay was in terms that preparation for trial should continue but with extended deadlines.

On 1 ^st November 2019, Pinsent sent Hogan Lovells a draft of the Application. As already noted, it was issued on 5 ^th November 2019 and was supported by a witness statement from Mr Williams dated 1 ^st November 2019. At 5.20pm on Friday 8^th November 2018, Hogan Lovells served evidence in answer from Mr Ditchbum, a solicitor at that firm. The Landlords opposed the Application and, as something of a volte face from their previous position, sought (without issuing or serving an application) an adjournment of the trial on the puta!ive basis that the Administators needed more time to consider their position.

On the same day, new solicitors for the Administrators, Addleshaw Goddard LLP ("Addleshaw") wrote to Pinsent stating that they did not intend to appear on the Application and had not had not been requested to (and had not) granted permission to lift the moratorium in respect of the CVA Challenge Application. There is no evidence that the Administrators' position has changed from that set out by Shoosmiths on 23 ^rd October 2019, or that they would not grant permission if requested. In any event, it is open to the court to grant permission on the application of either the Landlords or the Supervisors if it sees fit.

Although there is not yet a joint report from the experts because the Landlords have "stood down" their expert and have failed to deal with the trial bundle as directed, subject to the moratorium, it was not submitted to me that the trial could not otherwise proceed as listed between the Landlords and the Supervisors. The imminence of the trial and the preparation necessary for it is the reason for the Application being made on an urgent basis.

Pursuant to clause 28.13 of the CVA, the Supervisors have had the benefit of an indemnity from the Company for their legal costs in relation to the CVA Challenge Application. To date their costs are around E500,000, of which they have been paid around by the Company. There is no reason to consider that the Landlords' legal costs are any lower. The parties were not in a position to provide me with an estimate of the future costs through to the end of trial but I very much doubt that they will be less than on each side.

For the reasons given in my oral judgment during the hearing on I I ^th November

It is convenient to set out here the key provisions of s.6, L4 1986, which is headed "Challenge ofdecisions":

In broad terms, the Application is made on the basis that:

The Landlords dispute each of those points and argue that there are important clauses in the CVA that survive termination, but which would not continue to apply in the event that it was revoked and therefore they have a legitimate interest in pursuing matters to trial. The Landlords also argue that, in any event, there remains a significant issue as to which party (if any) should pay the very substantial costs of the CVA Challenge Application and there needs to be a procedure (which might include a trial) to determine the same.

The principles in relation to a strike out application under CPR 3.4(l)(a) and (b) were not in dispute and may be summarised as follows:

To the extent that the application under CPR Part 24 adds anything to the application under CPR 3.4, the principles were summarised by Lewison J in Easyair Limited (Trading As Openair) v Opal Telecom Limited [2009] EWHC 339 (Ch).

Mr Weaver argued that a purposive approach to the construction of s.6(4) led to the conclusion that, once the CVA had terminated, the court had no power to revoke or suspend it, or to direct a further meeting of creditors to consider the proposal or a revised proposal. It is easy to see the difficulties with suspending a CVA that has already terminated or in directing a further meeting of creditors, but the issue in this case is now the existence or otherwise of the power to revoke.

Mr Weaver was not able to find any authority in support of the proposition that there is no longer a power to revoke, but very properly drew my attention to Golstein v Bishop [2016] EWHC 2804 (Ch) in which Warren J concluded that he should revoke an individual voluntary arrangement which had already expired by effluxion of time. Warren J acknowledged that there was no prior authority on the jurisdictional issue, but was sufficiently untroubled by it to address it further in his judgment. The facts of that case are very different from the present, but Mr Weaver's argument would apply to all company voluntary arrangements (and possibly individual voluntary arrangements) as a matter of principle, regardless of their precise terns.

In my judgment, this is not an issue of law that is suitable for strike out or for summary judgment in favour of the Supervisors for at least the following reasons:

Mr Weaver's submission was that s.6(6) is not intended to allow the court to order reimbursement of fees from supervisors and there is no legal basis for the making of such an order. He referred to Fender v IRC [2003] EWHC 3543 (Ch) as an example case where the court was extremely critical of the supervisor, revoked an individual voluntary arrangement and ordered the supervisors to pay costs, but did not order him to reimburse fees under the equivalent provision.

In my judgment, the construction of s.6(6) is open to proper argument at trial and it is not appropriate to summarily determine this point. In particular:

Mr Weaver argued, as a separate point on the facts, that the prospects of the court making such a repayment order were negligible. He supported that argument by submitting that to order the return of fees but to allow creditors (including the Landlords) to retain the sums paid to them under the CVA would not achieve a complete reversal of the CVA and would allow creditors to benefit from the services rendered by the Supervisors without paying for them.

I recognise that there is some force in these submissions, but in my judgment they are insufficient to lead me to strike out this head of claim or to grant summary judgment in favour of the Supervisors. In particular:

The arguments in relation to this ground focused on the practical effect (if any) of the CVA being revoked as opposed to it simply remaining terminated.

I proceed on the basis of Mr Weaver's submission that the question is whether the Landlords continue to have a legitimate interest in the relief sought: Deloitte & Touche A.G. v Johnson [1999] 1 WLR 1605 at 161 ID, per Lord Millet, as applied in Walker Morris (a firm) v Khalastchi [2001] 1 BCLC l. As he put it in his skeleton argument, the court should consider whether the order sought can be said to serve "any meanindul purpose".

Clauses 35.9 and 35.10 of the CVA set out the effect of termination and respectively provide:

Mr Harty argued that there were five relevant provisions that would be (or arguably would be) affected by revocation as opposed to termination as follows.

I have set out clause 35.9 which purports to carve out "variations to the terms of the Leases" from the compromises and releases which are "deemed never to have happened' on termination.

Mr Harty argued that "the Compromised Creditors" therefore remained bound by the variations to the Leases effected by the CVA, but they would not do if the CVA was revoked. I was not taken in detail through the effects of the CVA on the Leases but have seen that the Leases were divided into five categories and there were different impairments (including as to rent reductions and termination rights) depending on categorisation. The definition of "Compromised Creditors" included landlords in categories 2 to 5, but did not include those in category l .

With one caveat to which I shall return below, Mr Weaver sensibly did not seek to argue that the effects of the CVA on the Leases were not significant. His submission was that the Leases were by way of deed and, as the CVA was not itself a deed, it could not affect a binding variation of the Leases post-termination. He argued that in relation to the changes to the terms of the Leases the parties were bound as a matter of contract during the term of the CVA, but not thereafter.

It is correct that a lease longer than three years must be by way of deed (s.52, Law of Property Act 1925). There is not in fact any evidence before me on the Application that the Leases fall into that category, although N,'fr Weaver submitted that such evidence was part of the CVA Challenge Application. Harty, who was parachuted in to deal with the Application, was not able to assist either way on this evidential point. But, even assuming that Mr Weaver's submission is correct as a matter of fact, there are at least six significant reasons why the effect of clause 35.9 on the Compromised Creditors requires fuller argument and consideration at trial:

In my judgment, the Landlords have a properly arguable case that the effect of the CVA being revoked is that any "variations" to the Leases are undone. In those circumstances, it follows that the Landlords continue to have a legitimate interest in the relief sought under s.6(4). Further, in support of that claim for relief, the Landlords make a number of serious allegations against the Supervisors, which they defend. Accordingly, the Landlords have a properly arguable case that an order under s.6(4) would serve a meaningful purpose and the Supervisors are proper parties to the claim in this respect.

Two clauses which are expressed to survive termination are:

It appears that clause 37.1 has been cut off in the CVA and the definition of "Liability" is not without its difficulties, but these are not matters for this hearing.

Mr Harty submitted that, given the serious allegations made against the directors and the Supervisors, the Landlords have a real interest in these clauses falling away and thereby allowing the Company or the Administrators to bring such claims (if any) as they may consider appropriate in the future. Mr Weaver argued that (a) all the pleaded allegations by the Landlords relate to the Supervisors' conduct as Nominees, (b) the Company did not engage the Nominees as individuals but rather it engaged their firm, Grant Thornton, and claims against it are not barred by the CVA and (c) the mere possibility of future claims by the Company against the Supervisors in that capacity is insufficient.

In my judgment, whilst Mr Weaver's point (a) is correct, his point (b) is far from clear. I have not seen the retainer between the Company and Grant Thomton. In any event, as was identified during the course of oral submissions (l) clause 37.1 of the CVA could be read as referring to Grant Thornton ("their firm"), (2) clause 28.11 expressly provides that the references to "the Supervisors" may include Grant Thornton, (3) the definitions of "Supervisors" and "Nominees" are somewhat circular and (4) it is quite possible that the Supervisors could relevantly have acted (i) in their personal capacity as "Supervisors", (ii) in their personal capacity as "Nominees" and/or (iii) as agents for Grant Thornton.

In relation to Mr Weaver's point (c), I cannot sensibly quantify the precise prospects of the Company bringing a claim against the Supervisors in any of the above capacities, but equally I cannot say that there is not a real prospect. At this early stage in the administration, it is unrealistic to expect the Adminis&ators to be in a position to state their intentions one way or the other. Much may turn on what the trial judge determines on the CVA Challenge Application.

A successful claim by the Company against the Supervisors or Grant Thornton may result in sums being paid into the estate. The outcome of the adminis&ation is not yet known and the figures with which I have been provided in the Statement of Affairs ("SoA") annexed to the CVA are historic and do not include potential significant changes that may result from various matters including (1) challenges to antecedent transactions, (2) challenges to the Debenture and the IBL Debt and (3) credit for any sums paid to creditors under the CVA. I accept Mr Harty's point that if the Landlords had had full notice of the Application they might well have put in more evidence as to the likely outcome of the administration for creditors (I should note that it was Mr Ditchbum that put in evidence the CVA to which the SOA was annexed). On limited evidence before me, I conclude that it is a realistic possibility that sums paid into the estate will result in enhanced recoveries for unsecured creditors. The Landlords plainly have a legitimate interest in that and an analogy may be drawn with the rights of creditors to pursue claims under s.212, IA 1986 even though the immediate benefit of a judgment will accrue to the company.

Even if sums paid into the estate were in fact exhausted by the payment of the Administrators' fees and expenses, it is properly arguable that the Landlords would still have a legitimate interest in that taking place. An analogy may be drawn here with the position when a trustee in bankruptcy applies for an income payment order. As Newey J said in Official Receiver v Negus [2011] EWHC 3719 (Ch)•, [2012] 1 WLR 1598 at [10]:

In my judgment, the Landlords have a properly arguable case that the effect of the CVA being revoked is that the exclusions of liability will be removed to meaningful effect. In those circumstances, it follows that the Landlords continue to have a legitimate interest in the relief sought under s.6(4). Further, in support of that claim for relief, the Landlords make a number of serious allegations against the Supervisors, which they defend. The Supervisors are therefore proper parties to the claim in this respect.

It is neither necessary nor desirable for me to go further in this judgment and deal with the less than fully developed arguments as to the effect (if any) of the above provisions in relation to possible claims against directors of the Company.

Clause 28.13 of the CVA provides that:

It is pursuant to this provision that the Supervisors have received around E300,OOO in respect of their legal costs of around E500,OOO as set out above. Mr Harty argued that revocation would (a) engage the power in s.6(6) to require the Supervisors to repay the sums already received from the Company and (b) prevent them from seeking to prove in the adminis&ation (or any subsequent liquidation) for a dividend in respect of the balance that would otherwise be owed by the Company.

Dealing with point (b) first, Mr Weaver's response was that any dividend was likely to be of little or no value and therefore the Landlords had no legitimate interest in pursuing revocation in order to achieve this end. For the reasons already discussed in paragraph 45 above, this cannot safely be assumed. I do not consider it productive here to speculate further on the basis of the figures in the SOA given the limitations of that document as already identified. A claim for is not insignificant and, as Mr Weaver acknowledged in response to questions from the Bench, it is simply not possible to say what level of dividend may end up being paid. In my judgment, the Landlords have a legitimate interest as creditors in reducing other claims in the administration. I conclude in like terms as set out in paragraph 47 above.

I should note that Mr Weaver argued that point (a) was not open to the Landlords because such relief was not, unlike in respect of fees and remuneration, claimed in the prayer to the Landlords' Points of Claim. There is much force in that argument but, given the conclusions that I have reached in relation to other issues above and below, I do not need to resolve the point. Indeed, it is better that I do not and instead leave it for the trial judge to determine as part of his overall decision-making process.

Clause 29.1 of the CVA provides that:

It is pursuant to this provision that the fees of El 5,000 and E30,000 have been drawn. As already noted, the Landlords have pleaded a claim for repayment of these fees under s.6(6). I understand Mr Weaver's submissions to be that, even if I am against the Supervisors on the matters above, I should strike out this element of the claim.

As already held above, as a matter of general principle, the Landlords have a legitimate interest as creditors in increasing recoveries for the estate. However, Mr Weaver argued that the Landlords had no legitimate interest in the claim for because the sum claimed was insignificant compared to the likely effect on the estate.

On the basis of the SOA, the estimated amount for unsecured creditors (by way of the prescribed part) is E69,184 as against claims of Those figures could change significantly but, taken at face value, an additional E45,000 would increase the (prescribed part) amount by only E9,000 (20% of That is not a significant increase and the overall dividend would still be very small (less than Ip/E). But if the Debenture is successfully challenged, the full €45,000 may be available for unsecured creditors. I am not persuaded that the Landlords cannot succeed in obtaining this relief and that, at this late stage in the proceedings, I should strike out the claim under s.6(6). The point I have already made in paragraph 30(4) above applies equally here.

I agree with the majority of the points made by Mr Harty in relation to Ground 3. In my judgment, the Landlords' pleaded claim discloses reasonable grounds for obtaining the relief that they seek and it has a real prospect of success. As a matter of discretion, given the proximity of trial, it would not be appropriate to summarily determine issues that have been live on the statements of case for many months and which have not been fundamentally altered by recent events.

In light of my conclusions above, the argument that a claim solely about is an abuse of process, falls away and I do not need to address it in any detail. In my judgment, notwithstanding recent events, if the claim is successful then there is a real prospect of it having significant financial consequences in relation to at least the following matters:

As already noted, the Supervisors defend the claim under s.6(4) and s.6(6) and have expended significant legal costs in so doing. I am not criticising them for this, but it is clear that there have been wider issues between the parties than just the E45,000. In my judgment there continue to be.

If the claim was solely about the E45,000 then, in my judgment, it would probably be a matter of reducing the length of the trial and limiting the scope of oral evidence and submissions so as arrive at a "proportionate procedure". The submissions on how this might be achieved were inevitably not fully developed and I say nothing more about how such a procedure might be fashioned.

I also do not need to lengthen this judgment by addressing the alternative argument advanced by Mr Harty that, if the only issue was costs, then the correct course of action would not be to strike out the claim but to determine the appropriate form of procedure to resolve which party (if any) should bear the costs of the CVA Challenge Application: Hanspaul v ward [2016] EWHC 1358 (Ch).

Having formed the view that the Landlords have been able fairly to respond to the majority of the points raised by the Application, I make an order abridging time as sought by the Supervisors. But, for the reasons given, I dismiss the Application. I will hear oral submissions from the parties as to costs and any other consequential matters.