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30-09-2020

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Re Rhino Enterprises Properties Ltd [2020] EWHC 2370 (Ch) deals with the nature of company voluntary arrangements, in particular the extent to which they can be said to be contractual, although it does not provide a definitive answer to the question it raises.

Before HHJ Simon Barker QC was an application by contributories for retrospective permission under paragraph 75(6) Schedule B1 Insolvency Act 1986 to bring misfeasance proceedings against former administrators of a company notwithstanding their release under the terms of a CVA. The applicants wanted to challenge the former administrators’  conduct in relation to the bank that had appointed them. (There were already on foot separate proceedings against the solicitors who had advised the administrators about the prospects of success of a swaps claim against the bank.) The applicants were not parties to the CVA in their capacity as contributories. The former administrators argued that the CVA was a contract for the purposes of the Contract (Rights of Third Parties) Act 1999, alternatively that the applicants’ votes in favour of the CVA as creditors bound them as contributories too.

At the heart of the application was the question whether a company voluntary arrangement was a contract for the purposes of the Contract (Rights of Third Parties) Act 1999. The judge found,

“As to the proposition that a CVA is a contract, there is no doubt that as between those intended to be the subject of a CVA, the company and creditors entitled to vote, once passed by the requisite majorities, they are bound as if parties. That is the purpose and effect of s.5 IA 1986.”

But that did not of itself make a CVA a contract. The judge reviewed a range of cases in which the courts had examined both contractual and non-contractual aspects of CVAs: Heis v  Financial Services Compensation Scheme Ltd [2018] EWCA Civ 1327; Davis v Martin-Sklan [1995] BCC 1122;  Johnson v Davies [1999] Ch 117; Re Brelec Installations Ltd [2001] BCC 421;  Prudential Assurance Company Ltd v PRG Powerhouse Ltd [2008]; R A Securities Ltd v Mercantile Credit Co Ltd [1994] 2 BCLC 721; Lloyds Bank PLC Elliott [2003] BPIR 632; and Tanner v Everitt [2004] EWHC 1130. He paid particular attention  to the judgment of Christopher Pymont QC, sitting as a Deputy High Court Judge, in Re SHB Realisations Ltd (formerly BHS Ltd) [2018] EWHC 402 and the deputy judge’s distinction between classification and effect, noting his conclusion that the arrangement under consideration had contractual effect.

But the judge stopped short of finally deciding the issue, it being unnecessary for him to do so to dispose of the permission application. He said,

“Strictly, it is enough to find that  [counsel for the applicants’] argument is realistic and carries sufficient conviction that a reasonable litigant would pursue the point. I have no hesitation in making that finding. I add that I am left wholly unconvinced by [counsel for the administrators’] submissions. […] I fall short of making an outright finding because I am not satisfied that, in the absence of submissions as to and consideration of the interaction between the law of contract and statutes generally, full argument has been deployed, and, therefore, I cannot be satisfied as to the inevitable landing point of the trajectory of the law. I can form a provisional view, and in my provisional view it is at least strongly arguable, and I think probably correct, that, at most, CVAs are a form of quasi-contract, for some purposes seemingly or apparently treated as if contracts, but in fact in all cases not actual contracts”.

On that basis he gave permission to the applicants to proceed with their claim, holding that the release in the CVA was not likely to be available as a defence because the Contract (Rights of Third Parties) Act did not apply to CVAs; and that voting as a creditor did not bind a person who was also a contributory. He also accepted, however, that the former administrators could  argue their points further in the misfeasance proceedings themselves.

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