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Status as contingent creditor pushed to the boundary: Re North Point Global Limited  EWHC 1648 (ch)22nd July 2020 Restructuring & Insolvency
The joint liquidators of Baltic House Developments Limited (‘BHD’) successfully appealed a CVA Supervisor’s decision to reject their claim in the CVA of BHD’s parent company on the grounds that the joint liquidators would not have been entitled to vote for or against the approval of the CVA, had they had notice of it at the time of the decision approving the CVA.
The Company and BHD were part of a Group of which the Company was parent and its subsidiaries (including BHD) operated as special purpose vehicles for various developments.
The Company proposed a CVA to its creditors and on 7 September 2017 the CVA was approved by creditors, including BHD which voted based on its claim of £1m in respect of loans made to the Company.
On 17 May 2018 BHD was wound up by the court, and the joint liquidators appointed shortly thereafter.
In August 2018 the joint liquidators asked the Supervisor about BHD’s claim in the CVA. By then it seems that BHD’s status as a creditor was being questioned by the Company following receipt of tax advice, the crux of which was that funds paid by BHD to the Company should be treated as management charges rather than loans and so therefore BHD was no longer considered a creditor of the Company. The Supervisor in his progress report to September 2018 stated that ‘SPVs creditors will be removed from the company voluntary arrangement’.
Between November and December 2019 the Company proposed and had approved 3 variations pursuant to which (i) BHD (and other connected creditors) were excluded from dividend; and (ii) non-connected creditors would receive 100p in the £ and (iii) the CVA was extended to allow the Company time to pay.
In December 2019, the Supervisor rejected the proof of BHD on the grounds that the sums passing from BHD to the Company did not in fact represent loans, but payments to the Company for management charges in relation to which invoices from the Company to BHD had been issued post-CVA and the Company accounts altered and re-filed.
It appears that the Supervisor similarly rejected claims of associated creditors in the sum of circa £4.2M (including BHD) at the same time.
In January 2020, the joint liquidators submitted an alternative claim by way of proof for a preference claim, on the basis that payments between BHD and the Company were challengeable as presumed preferences during the relevant period. The joint liquidators invited the Supervisor to either accept the loan claim or the preference claim.
The Supervisor challenged the joint liquidators’ preference claim on the grounds that ‘the relevant date for the crystallisation of a preference does not occur until a liquidator is appointed, given that BHD entered liquidation after the approval of the CVA, this would amount to a post-CVA debt and therefore not provable in the CVA’.
In March 2020 the Company proposed a fourth variation to extend the CVA to allow further time to (i) remedy breaches and (ii) resolve the joint liquidators’ claim.
On 1 April 2020 the Supervisor formally rejected the proof on the grounds that (i) it was in the name of BHD, not the joint liquidators and (ii) the joint liquidators did not have a claim as at the date of the approval of the CVA. The joint liquidators appealed the Supervisor’s decision to reject their proof.
At trial the Supervisor rightly abandoned ground (i) leaving the court to focus on the more interesting issue of what amounts to a contingent claim.
Clearly as at the date of the CVA, BHD was not in liquidation and so therefore (i) no preference claim could exist and (ii) the creditor – being the joint liquidators – did not exist, although BHD did.
The two issues to be determined were (i) were the joint liquidators bound by the CVA as a matter of law and (ii) were the joint liquidators entitled to prove as creditors in the CVA?
The court examined the authorities on contingent liabilities, accepting that it was in the interests of the workability of CVAs that as many creditors as possible were bound by it.
Issue 1: Were the Liquidators bound by the CVA under s5(2) IA 1986?
The court accepted the Supervisor’s argument that a preference claim is one by statute vested in the officeholder as such and that it is not vested in the officeholder as agent for the relevant company, and so it was no answer to say that BHD existed as at the date of the CVA.
However, the condition necessary to bind a creditor to the CVA that the creditor would have been entitled to vote had the creditor had notice of the meeting was interpreted not as being whether at the time of the decision making process the individual was then a creditor entitled to vote but had the joint liquidators been in office at the time of the CVA being approved, they would have been entitled to vote.
The authorities on contingent liabilities relied upon a pre-existing legal relationship between two parties which could form the basis for a future liability. Applying that concept in this case, the court found that at the time of the CVA being approved, BHD had entered into a legal relationship with the Company, by virtue of having paid sums to it in satisfaction of debts (which was said to give rise to the preference) and it was assumed that BHD was then insolvent and that liquidation (and a preference claim) was likely – it was “not in the sunlight, free of the preference regime, but well inside the penumbra of the regime”.
The court found that the joint liquidators’ claim was bound by the CVA.
Issue 2: Were the Liquidators entitled to prove as creditors under the terms of the CVA?
The Supervisor asserted that the terms of the CVA required claims to be valued as at the date of entry into the CVA: there was at that time no claimant, no claim and no value to be attributed to it.
The court rejected this on the basis that the valuation as at the relevant date can be affected by events which occur after the event of formal insolvency.
This extreme example of a contingent liability bound by and provable in an insolvency process, emphasises the court’s wide interpretation of a ‘contingent creditor’ which relies on a pre-existing nexus between the creditor and the insolvent debtor.
In this case and as at the date of the insolvency process, the claimant did not exist and neither did the claim.
The court gave effect to the principle that an insolvency process should catch as many claimants and creditors as possible.