December 1, 2021

Volume XI, Number 335

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Nero CVA challenge – part two: the rejection of the challenge

In our earlier blog, we considered the application to strike out the challenge against the Caffè Nero company voluntary arrangement (“CVA”(Nero Holdings Ltd v Young) and the rejection of Caffè Nero’s strike-out action by the Court.

In particular, the Nero case focuses on electronic voting (which is increasingly popular in the current climate) and the impact of last-minute offers and modifications particularly where creditors may have already voted before the modification is proposed. The hearing has now taken place and the creditors’ CVA challenge was rejected.

This case provides useful clarification of electronic voting procedures and how to consider existing votes in light of proposed modifications.

The key takeaways

  • Electronic voting is a normal method used for creditor voting in a CVA, despite its inflexibilities.

  • Electronic voting cannot be postponed without a court order and, even then, there is no certainty that such an order could be made, nor what that order would entail.

  • Modifications to a CVA that occur before the voting period ends, can be effective if the company agrees to it and it is beneficial to the creditors.

  • If votes have already been received in favour of the CVA, prior to the modification, these votes can be counted as in favour of the CVA (with the modification).

Background:

  • EG Group Ltd (“EG”), made an “11th hour” offer to buy the shares of the Nero Group Limited (“NGL”). NGL is the parent company of Nero Holdings Limited (“NHL”) (the CVA company).

  • Part of EG’s offer was to pay the landlords of NHL in full, conditional upon the CVA being approved. However, EG requested that the CVA proposal be postponed. The nominees rejected the offer outright.

  • The nominees then noted on the CVA website that an offer had been received for the shares in NGL which did involve the payment of rent arrears to landlords of NGL, but that it had been rejected and the CVA timetable would continue.

  • The CVA was modified to include wording that the nominees would use their “best endeavours” to procure additional payments to the creditors, if there was a sale to EG within six months.

  • The modification took place less than two hours before the deadline for creditors to submit their votes electronically and, by this time, the CVA had already received enough votes to be approved.

  • A landlord, funded by EG, challenged the CVA on the grounds of unfair prejudice and material irregularities; the challenge was mainly focused on the latter.

Challenge 1: The nominees had breached their duties by failing to postpone the creditors’ electronic voting procedure (material irregularity)

The Court held that the nominees were not in breach of their duties. If the vote had been postponed and a deal could not then be reached with EG in time, there was the possibility that NHL could have entered into administration.

Whilst EG’s offer had its advantages, such as the landlords receiving their rent arrears in full (rather than 30 pence in the pound under the CVA), the certainty of the CVA and its returns was preferable to an uncertain offer which could lead to the Company’s administration and consequently a worse result for creditors.

NGL had agreed waivers with its lenders in connection with defaults arising in the run-up to the CVA proposal. These waivers included a longstop date for the CVA to become effective. If the nominees had postponed the vote, the waivers would have lapsed and new documents would need to be renegotiated, with no certainty that the lenders would agree to enter into another waiver.

Another key consideration was that NHL did not wish to sell the shares and had already rejected an offer from EG.

Finally, there is currently no express provision within the relevant insolvency legislation to allow for a postponement of an electronic voting procedure. Whilst the Court did consider whether it may have the power to make an order allowing for such postponement, applying for an order would have been unique and a risky decision for the nominees to take, especially when there was a CVA about to be passed.

Challenge 2: The modification to the CVA was ineffective as the creditors had not voted on it (material irregularity)

The Court held that the modification was effective. Modifications to a CVA can be effective without a further vote being held, as long as the company in question consents to it. If the modification is beneficial to the creditors then there is even less argument for a modification not to take effect without a further vote.

The Court’s approach here is consistent with the Insolvency Rules 2016 (the “Rules”) which state that once an electronic vote is cast, it cannot be changed. Whilst the Rules are silent about modifications to a CVA during the voting process, if additional voting was required for such modifications, it would be contradictory to the Court’s finding that electronic voting cannot be postponed.

If a modification were to occur to another CVA in similar circumstances, and a creditor did not agree with the modification, the aggrieved creditor could still attempt to challenge the modification for material irregularity or unfair prejudice. Therefore, there is no real detriment to creditors by allowing modifications without a further vote – particularly if the modification is beneficial to creditors, as was the case here.

© Copyright 2021 Squire Patton Boggs (US) LLPNational Law Review, Volume XI, Number 274
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About this Author

Associate

Laura Will is an associate in the firm’s Restructuring & Insolvency team, based in our Birmingham office.

+44 121 222 3707
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