Heis & Ors v Financial Services Compensation Scheme Ltd & Anor

A condition precedent in a company voluntary arrangement requiring administrators to confirm that post-challenge-period disputed claims should not preclude the arrangement from becoming effective requires a value judgment. It is not confined to protecting against a late statutory challenge.

The judgment must address whether a material change in disputed claims has altered the liability assumptions on which creditors approved the arrangement, so that it would be unfair to hold them to the proposed bargain. A serious, unanticipated and potentially transformative contingent claim may satisfy that condition even though it may never mature into an actual liability.

MFGUK’s creditors approved a company voluntary arrangement which offered creditors an immediate exit payment or continued participation in the administration. Attestor, a participating creditor, appealed from Hildyard J’s decision that the administrators should confirm that the arrangement could become effective despite a late disputed indemnity claim by Deutsche Bank of approximately €127 million.

The claim was contingent, disputed and not contemplated when creditors approved the arrangement. Its potential effect was nevertheless to expose participating creditors, who would fund exit payments, to substantially different risks and returns.

The central issue was the proper interpretation of paragraph 3.1(e) of the CVA: whether it addressed only a possible late statutory challenge, or required an assessment of whether the changed state of disputed claims should prevent the CVA taking effect.

1. Appeal allowed. Sir Colin Rimer, with whom Lady Justice Asplin and Lord Justice McFarlane agreed, held that Hildyard J had adopted the wrong construction of paragraph 3.1(e). The Court set aside the direction that the CVA was not precluded from becoming effective.

2. A CVA has contractual effect and is construed objectively, by reference to its language, context, purpose and the background known to the parties. Paragraph 3.1(e) could not plausibly have been intended merely to fill a supposed gap concerning late challenges under Insolvency Act 1986 section 6. Its language did not identify such a purpose, its structure differed from the mechanical condition in paragraph 3.1(d), and a pending challenge would not ordinarily make a CVA incapable of coming into force.

3. The clause instead required the administrators to make a value judgment. They had to decide whether the disputed claims remaining after the Challenge Period, particularly a material change from the claims existing when creditors approved the CVA, meant that it would be unfair for the CVA to become effective. Unchanged disputed claims would ordinarily not have that consequence. The condition operated before exit payments became due and before participating creditors had to fund them.

4. The Court accepted the administrators’ surrender of the task to the Court. Although the Deutsche Bank claim was contingent and faced further hurdles before becoming an actual liability, it was serious, would require a reserve, and could radically alter the CVA’s operation. It was an unanticipated claim which substantially falsified the liability assumptions underlying the participating creditors’ agreement to fund the exit payments. Fairness to all creditor classes therefore required a direction that the administrators confirm that the CVA was precluded from becoming effective.

• Court of Appeal (Civil Division): Allowed Attestor’s appeal and replaced the direction made below with a direction that the CVA was precluded from becoming effective: [2018] EWCA Civ 1327.
• High Court (Business and Property Courts, Insolvency and Companies List): Hildyard J directed that the administrators should confirm that the disputed claims did not preclude the CVA from becoming effective: [2018] EWHC 1372 (Ch).