The first meeting in any Company Voluntary Arrangement (“CVA”) represents the creditors’ opportunity to improve their lot, or at least to test the proposal that is to be put to the vote. In relation to any contentious proposal, the question always boils down to the balance of voting power, and that throws the spotlight on the Chairman of the meeting and the advice that he or she may have received.
Inevitably, there will be a group of creditors who do not have the benefit of a court judgment in their favour. For the purposes of voting, judgment is a creditor’s Holy Grail, as that provides a “liquidated” debt. Generally, this settles the question of the creditor’s right to vote and the amount for which the creditor can vote. Without a judgment, there is an argument to be had as to the quantification for voting purposes of what is said to be an “unliquidated” debt. Settling whether a creditor’s claim is liquidated or unliquidated is fraught with difficulty1 and a claim that a creditor believes to be valid and quantifiable may still appear unliquidated to the Chairman, and then specific voting rules apply.
This question comes before the Court periodically2 in challenges brought by creditors who have been bound into a CVA but, much to their disappointment, only after having been given less voting power than the creditor might consider to be the full value of the debt. Such unliquidated creditors are often left wondering how it is that they were not allowed to vote the full amount of their claim; why was their voting power diluted? The rules by which a creditor is entitled to vote contain3 the following provision:
“A creditor may vote in respect of a debt for an unliquidated amount or any debt whose value is not ascertained and for the purposes of voting (but not otherwise), his debt shall be valued at £1 unless the Chairman agrees to put a higher value on it.”
It has to be recognised that, despite a period of meticulous planning and the receipt of expensive advice, the Chairman of a creditors’ meeting makes decisions in real time and often under intense pressure. The rule is designed to protect the Chairman of the meeting, by providing a mandatory requirement to admit an unliquidated claim to vote for £1 unless the Chairman “agrees” to put a higher value on that claim.4 Questions then arise as to whether and, if so, how the Chairman should or must enter into discussions in relation to a higher value for the creditor’s claim.5
In the present instance, there are landlord creditors with claims against their tenant, Austin Reed Ltd or Country Casuals Ltd, the sum of which depends upon the loss that might be suffered as a result of the breach of the covenant to pay rent and other charges under the lease. The CVA proposal establishes different classes of landlord and, depending upon whether the landlord falls into a class where the store is to be kept open or not, the loss to each landlord in that class varies when compared to what might have been expected had the lease run its course. The CVA proposals set out a detailed valuation exercise for each landlord to complete before arriving at a figure that will be the landlord’s claim in the CVA. That valuation process involves thirteen variables and six separate steps but is analogous to the accepted valuation process used in establishing loss on the liquidation of a debtor tenant.6 The routine justification for calculating landlord claims on the liquidation basis is that it provides a realistic measure of how long a property might have to stand empty, and that it factors in reductions in rent, rent free periods, dilapidations claims, and any lesser rent for which the property might then be let.
This detailed valuation exercise set out in the CVA proposal seems to speak to the Insolvency Rule3 by which the Chairman of the meeting “agrees” to place a higher value than £1 on a landlord’s unliquidated claim. However, in what landlords might consider to be a further dilution of their voting power, the CVA proposal in the present instance then applies a further discount by which each landlord’s claim figure is discounted to 25% of the claim figure for the purposes of voting. A landlord might be excused for pondering the justification for the Chairman’s decision to require detailed steps for valuation and then simply to apply a discount to 25%, just for voting. In short, why to 25%?
In addition to the sting in the tail on voting rights, individual landlords will no doubt receive advice that a successful challenge to any voting, or the valuation exercise itself, will depend not simply on the decision on quantum being an “irregularity” but, also, that the sum of the claim would have been “material” to the outcome of the meeting.7 In other words, would the basis of calculation have made any difference to the outcome of the meeting? Would the Chairman have had the vote in the bag on any other basis, whether that would have been the claim value or any other figure between the claim value and the voting value?
It remains to be seen whether the Chairman will be pushed to consider or explain this seemingly arbitrary discount of a landlord’s claim to 25% of the claim figure, and whether there is any justification for the discount other than that the same provision has appeared in other recent high profile retail CVAs. Given that the Austin Reed and Country Casuals CVAs were overwhelmingly approved by every class of creditor, it is extremely unlikely that the question will come before the court in this instance. No doubt the Chairman of the meeting will have taken robust legal advice on the rationale for the discount, and that it is a little more certain than that the step was copied over from other proposals but, for the moment, the question remains live in more marginal CVAs where creditor groups might be more evenly balanced, and the prospect of a successful outcome less certain.
1 Hope v Premierpace (Europe) Limited  BPIR 695
2 As in: Leighton Contracting v Simms and Others  BPIR 1395
3 Insolvency Rules 1986: Rule 1.17(3)
4 Cancol Ltd. Re  1 All ER 37
5 Chittenden v Pepper  EWHC 1511
6 In re Park Air Services Plc  2 AC 172
7 S6 Insolvency Act 1986
If you aren’t receiving our legal updates directly to your mailbox, please sign up now
Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.
Edwin Coe LLP is a Limited Liability Partnership, registered in England & Wales (No.OC326366). The Firm is authorised and regulated by the Solicitors Regulation Authority. A list of members of the LLP is available for inspection at our registered office address: 2 Stone Buildings, Lincoln’s Inn, London, WC2A 3TH. “Partner” denotes a member of the LLP or an employee or consultant with the equivalent standing.