Sisu Capital Fund Ltd & Ors v Tucker & Ors

Unfair prejudice under section 6 of the Insolvency Act 1986 must result from the terms of the voluntary arrangement itself. The court must consider all the circumstances, including realistic alternatives and their practical consequences. It should compare the arrangement with no compromise unless a better, implementable alternative is shown. Conflicts of interest or breach of professional guidance do not, without more, establish unfair prejudice. Officeholders may formulate and support an interlocking group settlement if it is fair, has a reasonable prospect of approval and is not the product of bad faith or improper partisanship. Material irregularity requires both an irregularity and materiality. The applications to revoke or suspend the CVAs and to remove the officeholders were dismissed.

The applicants were holders of bonds issued by Energy Group Overseas BV and creditors of Energy Holdings (No 3) Ltd. They challenged company voluntary arrangements approved for those companies, alleging unfair prejudice, material irregularities and conflicts of interest affecting the administrators and liquidators. The complaints concerned the allocation of £67 million of swap proceeds, £11.5 million of payments by power purchase agreement creditors, the allocation of a settlement with TXU Corp, and the valuation of a guarantee claim under a group financing agreement. The applicants also sought removal of the officeholders.

The central issues were whether the CVAs were unfairly prejudicial under section 6 of the Insolvency Act 1986, whether the meetings involved material irregularities, and whether cause existed to remove the officeholders.

1. Applications dismissed. The CVAs for EH3 and EGO BV were not unfairly prejudicial, and no material irregularity was established. The applications to remove the officeholders also failed.
2. Under section 6, prejudice must be caused by the terms of the CVA itself. The court must consider all the circumstances, including liquidation and other realistic alternatives and the practical consequences of setting the CVA aside. It is not for the court to speculate whether an officeholder could have obtained better terms. Unless a better compromise both would have been accepted and could have been implemented, the comparison is between the proposed CVA and no compromise.
3. Conflicts of interest are relevant factors but do not automatically invalidate proposals or establish unfair prejudice. In a large group insolvency, conflicts may be managed. Officeholders may mediate between creditor groups and formulate an interlocking proposal, provided they honestly regard it as fair and reasonably capable of obtaining the statutory majority. They should not engage in brinkmanship to obtain a more favourable result for one constituency.
4. The allocation of the £67 million, the PPA Payments and the TXU Corp settlement was within the range of reasonable compromises. The GFA claim had been investigated sufficiently and was properly treated as having no value. The overall package also produced substantial benefits for the applicants and was more favourable than the realistic liquidation alternative.
5. A liquidator proposing a CVA does not require liquidation-committee or court sanction merely to put forward proposals. Approval of the CVA binds the company and creditors under section 5. The absence of sanction for the lock-up agreements therefore did not invalidate the CVAs, particularly as the relevant vote was unnecessary to the result.
6. Material irregularity requires both an irregularity and materiality. The creditors received sufficient information, including the applicants’ objections, and the voting meetings were fairly conducted.
7. Removal requires cause measured by the real, substantial and honest interests of the liquidation. The court must balance efficiency, independence and future protection of the estate against delay, cost and the undesirability of encouraging removal applications by dissatisfied creditors. No such cause was shown.