Case law update

Private examinations and witness immunity

Joanna Smith J’s judgment in Mitchell & Anor v Al Jaber & Ors [2021] EWHC 912 (Ch) looks at first like another routine spat about re-re-amending points of claim, and so it is on one level; but the proposed amendments gave rise to the exploration of a novel question. In the judge’s own words:

“At the heart of this Amendment Application lies a question as to whether an examination conducted pursuant to section 236 of the IA1986 in a compulsory liquidation attracts the protection of absolute immunity (whether core immunity because it involves the giving of evidence by a witness in judicial proceedings, or extended immunity because it is a preparatory, investigative step).”

The issue hinged on whether an examination was a “judicial proceeding” which attracted the protection of the witness immunity rule or whether its purpose was simply to gather information, differentiating it from other judicial proceedings so that it did not attract the protection.

The argument for immunity rested on the similarities between an examination and other judicial proceedings: like other proceedings, an examination is conducted before and subject to the control of the court; the examinee attends court and gives evidence under oath. He or she may be arrested for failure to attend and may be committed for contempt for refusing to answer questions. Furthermore, an examination under s. 236 does not necessarily stand alone but often takes place “under the umbrella of the existing insolvency proceedings” (in this case a BVI liquidation recognised under the Cross-Border Insolvency Regulations). The liquidators argued the contrary, highlighting the ways in which an examination differed from other proceedings: it did not usually involve cross-examination; it was conducted in private; and it did not involve the court in deciding an issue between the parties.

The judge’s starting point was to look at the purpose of the statutory provisions:

“The law governing liquidation in England and Wales is to be found in the IA1986. Sections 235-237 are directed at enabling the court to help a liquidator, as officeholder…, to carry out his statutory function of discovering the truth about the affairs of the company in order that he may be able, as effectively as possible, to trace and then secure the assets of the company for the benefit of the creditors.”

After a detailed study of the statutory framework and the insolvency case law, she undertook the same exercise on the law governing immunity before coming down on the side of the liquidators’ arguments. Although she accepted that a private examination had some of the characteristics of judicial proceedings she emphasised important differences, among them the following:

The scope of a private examination was more restricted than that of judicial proceedings generally, so although it was conducted before a judge, “the function of the court is extremely limited, and indeed is more limited than was the function of any of the tribunals dealt with in [the relevant] authorities.”
The use of words such as “evidence” and “witness” was not determinative of the nature of an examination having regard to its nature and purpose.
There were significant procedural differences: although an examination was conducted with “considerable procedural formality and…the court has the power to compel attendance and to make orders for enforcement,” the procedure adopted differs from the usual procedure at a civil trial. The court has a discretion to refuse to allow an examination on the ground that it would be oppressive; it is conducted in private; there is no privilege from self-incrimination; and no examination in chief followed by cross-examination and re-examination.
It would not be in the interests of justice to encourage a “perverse incentive” not to cooperate voluntarily with an office-holder in accordance with a statutory obligation to provide information but instead wait for an order to be made under s. 236 so as to enable a person with information to avoid civil liability for the provision of false information.

The judge’s closely reasoned judgment on a point that has not previously been the subject of judicial consideration will be welcomed by insolvency professionals, but permission to appeal has been given, so this judgment is not the end of the matter.

CVAs and unfair prejudice

The density and complexity of Zacaroli J’s 330 paragraph judgment in Lazari Properties 2 Ltd & Ors v New Look Retailers Ltd and Ors [2021] EWHC 1209 (Ch) mean that it does not lend itself to a quick and easy summary.

The basic facts are widely known. As a result of the pandemic, New Look Retailers Limited, the principal operating company in a retail group which operated from over 400 stores in the UK and employed over 10,000 people, found that it was unable to pay rent and service charges to its landlords. It became clear that it could not continue to trade. It embarked on a major restructuring exercise. Part of that exercise involved the proposal of a CVA. The terms of the CVA provided for different categories of landlord to be treated in different ways: broadly speaking, the leases of some landlords of premises critical to the continued trading of the company were to be subject to minor adjustments; others were asked to write off arrears and accept rent on turnover terms for a limited period; yet others, where stores had been closed, were treated less favourably but given a right to terminate the leases. The proposal was approved by 81.6% of creditors.

Dissenting landlord creditors mounted a challenge to the approval on three grounds:

the proposal, or aspects of it, did not constitute a composition or arrangement within the meaning of s. 1(1) IA 1986 (the “jurisdiction challenge”);
there were material irregularities (the “material irregularity challenge”);
the applicants were unfairly prejudiced (the “unfair prejudice challenge”).

In support of the jurisdiction challenge, the applicants relied, among other thing, on the different treatment on fundamentally different terms of different groups of creditors; the inadequacy of the “give and take” as between the company and various creditor groups; and the impropriety of interfering with the landlords’ property rights. The calculation of the landlords’ claims lay at the heart of the material irregularity challenge, although the applicants also relied on what they claimed were omissions and inaccuracies in the proposal. The unfair prejudice was said to take the form of the differential treatment of creditors, including the fact that the requisite majorities at the creditors meeting were secured with the benefit of votes from creditors whose claims were unimpaired by the CVA, and certain modifications to the terms of leases were similarly said to be unfair.

All three challenges failed. The judge held that the fact that a CVA may provide for different treatment of different groups of creditors did not put it outside the jurisdictional scope of s 1(1) IA 1986, nor, he found, was it necessarily unfairly prejudicial. Importantly, he did not accept that the word “arrangement” in the section was to be construed in the same way as in section 895(1) CA 2006. He rejected the argument that it was necessarily unfairly prejudicial that the statutory majority was achieved using the votes of unimpaired creditors or of creditors who received substantially different treatment, although it was a relevant factor “in determining whether, in any given case, there is unfair prejudice.” He found no material irregularity.

Part 26A restructuring plan sanctioned in the face of opposition

Dissenting landlord creditors did not fare well again when the Virgin Active restructuring plan was sanctioned by Snowden J (Re Virgin Active Holdings Ltd & Ors [2021] EWHC 1246 (Ch)).

The Virgin Active group operates health clubs. Its membership subscriptions understandably declined as a result of the Covid pandemic, forcing it to restructure in the face of mounting rent arrears. The restructuring embarked on took in part the form of a Companies Act Part 26A restructuring plan which was thought to be likely to produce a better result than the alternative, administration.

Three companies in the group proposed plans that involved the differential treatment of creditors: secured creditors (whose debts were broadly left unaffected), so called general property creditors (who would receive a return) and then various categories of landlord creditors (classes A-C) whose leases would be treated according to the profitability of the premises to which they related and the need for those premises for the future survival of the companies.

Plan meetings were duly convened (see Snowden J’s earlier convening judgment, [2021] EWHC 814 (Ch)) at which each plan was approved by the secured creditors and the class A landlords, but other class meeting votes did not reach the required statutory majority. Overall, however, the plans were approved by between 72% and 77% of creditor votes in value.

Snowden J sanctioned the plans, each of which he found to be “a compromise or arrangement between the relevant Plan Company and certain of its creditors, the purpose of which is to eliminate, reduce or prevent, or mitigate the effect of, [the companies’] financial difficulties.” He accepted that the only real alternative to the plans would be administration and that the indications were that the result thereof would be likely to be less satisfactory. That being the case, he had to consider whether it was appropriate to force the plans on the dissenters.

Snowden J noted the broad similarities between the power to sanction a Part 26 scheme of arrangement and those applicable to a plan under s. 901F Companies Act where classes voted in favour by the requisite majority. He then turned to s. 901G, which deals with the power to sanction a compromise or arrangement where one or more classes dissent and the voting fails to reach the 75% threshold, provided the court is satisfied that, were the plan to be sanctioned, none of the members of the dissenting class would be any worse off than they would be under a “relevant alternative” and at least one class of creditor who would receive a payment or had a genuine economic interest in the company in the event of the “relevant alternative” voted in favour of the plan by the requisite statutory majority. He identified three questions that fell to be considered by the court where s. 901G was relied on:

“i) Condition A: If the restructuring plan is sanctioned, would any members of the dissenting class be any worse off than they would be in the event of the relevant alternative? This is often described as the “no worse off” test.

ii) Condition B: Has the restructuring plan been approved by 75% of those voting in any class that would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative?

iii) General Discretion: In all the circumstances, should the Court exercise its discretion to sanction the restructuring plan?”

The judge found on the evidence that if the plans were not sanctioned, the companies would have no alternative but to go into administration, and went on to say, “I am also satisfied that none of the members of any of the dissenting classes would be any worse off under the Plans than in [the likely] relevant alternative.” Thus, condition A was satisfied. The parties accepted that condition B was satisfied. He analysed the approach to the exercise of discretion undertaken by Trower J in Re DeepOcean 1 UK Limited [2020] EWHC 3549 (Ch) and concluded that, in all the circumstances of the case, it was appropriate to exercise it to sanction the plans.

It might be tempting from this, and Zacaroli J’s, judgment to think that the tide has turned against landlords since the days of Prudential Assurance Co Ltd v PRG Powerhouse Ltd [2008] 1 BCLC 289 and Mourant & Co Trustees Ltd v Sixty UK Limited [2011] 1 BCLC 383, but this would be a mistake. Both cases turned on their facts and the nature of the CVA or plan under consideration. In the Miss Sixty case, Henderson J, as he then was, pointed out that there was no single and universal test for judging unfairness, and the question depended on all the circumstances of the case. Zacaroli J was similarly circumspect, saying, “Whether unfair prejudice exists depends on all the circumstances, including those that would be taken into account in exercising the discretion to sanction a Scheme…and in exercising the discretion to cram-down a class in a part 26A plan.” Snowden J’s decision was similarly fact specific. Both cases involve the exercise of discretion.

Judgment is awaited in the Regis UK Limited case which Zacaroli J has promised will follow shortly.

Two procedural cases of note

Two recent cases are of passing interest to practitioners.

In Blackpool Football Club (Properties) Ltd v Cooper & Anor [2021] EWHC 910 (Ch) Snowden J held that prior authority did not establish that permission was required to commence proceedings against a receiver who had been appointed in aid of equitable execution but was no longer in office. In Lemos v Church Bay Trust Company Ltd and Ors [2021] EWHC 1173 (Ch) ICC Judge Barber allowed an application by joint trustees in bankruptcy to be joined as co-claimants to proceedings brought under s. 423 IA 1986 by the sister of the bankrupt who was a creditor and who supported the application. The judge undertook a review of the threshold applicable to an application under CPR 19.2(2)(a) and held that it had been met, having regard to the facts of the case.

Content courtesy of IPA corporate partner Manolete Partners PLC.

Case law update

Other articles (Insolvency Practitioner, June 2021):

Private examinations and witness immunity

CVAs and unfair prejudice

Part 26A restructuring plan sanctioned in the face of opposition

Two procedural cases of note

Become a Member

Practitioner’s Handbook