Carraway Guildford (Nominee A) Ltd & Ors v Regis UK Ltd & Ors

The court considered a challenge by certain landlord creditors to a company voluntary arrangement (CVA) proposed by Regis UK Ltd under Part 1 of the Insolvency Act 1986. The applicants relied on material irregularity in the creditors' meeting and unfair prejudice, principally arising from disclosure about antecedent transactions (the 2017 and 2018 transactions), the treatment of two large creditors (Regis Corporation and International Beauty Limited) as "Critical Creditors", the method of valuing and discounting landlords' claims for voting purposes, and the terms by which leases were varied under the CVA. The nominee's report and conduct in recommending the proposal for a creditors' meeting was also challenged.

The judge applied the established test for material irregularity (whether non-disclosure had a substantial chance of affecting the way creditors voted), considered the relevant Insolvency Rules 2016 requirements for disclosure and the nominee's duties, and examined whether statutory causes of action (notably sections 238, 239 and related provisions of the Insolvency Act 1986) might have been lost by approval of the CVA. The court concluded that disclosure of the 2017 transactions did not give rise to a material irregularity because any statutory claims were in practical terms unlikely to succeed; disclosure about the 2018 debenture ought to have been clearer but was not materially prejudicial. The court held, however, that treating the shareholder IBL as a Critical Creditor was not justified and amounted to unfair prejudice to impaired creditors. A limited failure by the nominee (Mr Williams) to scrutinise the propriety of treating IBL as a Critical Creditor fell below the standard required of a reasonable nominee, but the court declined to deprive the nominees of their fees. The court found there remained utility in revoking the CVA and ordered revocation.

Background and parties: The applicants were certain landlords whose leases were modified by a CVA proposed by Regis UK Ltd (the Company). The Nominees (Mr Williams and Ms Laverty) reported on and supervised the CVA. The proposal followed corporate transactions in 2017 and a settlement and debenture in August 2018. The CVA was approved by creditors in October 2018 and later terminated by the appointment of administrators in October 2019. The landlords sought relief under section 6 IA 1986 seeking revocation or suspension of the CVA, a further creditors' meeting, repayment of the nominees' fees and a declaration that post-approval modifications required creditor approval.

Nature of the application / relief sought: The applicants challenged the CVA on grounds of material irregularity and unfair prejudice and sought (i) revocation or suspension of the CVA (section 6(4)(a)), (ii) an order convening a further meeting (section 6(4)(c)), (iii) repayment of the nominees' fees (section 6(6) supplemental directions), and (iv) declarations about required creditor approval for modifications.

Issues for decision: The court tried 21 agreed issues grouped broadly into disclosure adequacy (including disclosure of antecedent transactions and the statement of affairs/estimated outcome statement), the proper admission and treatment of Regis Corp and IBL as Critical Creditors, the appropriateness of applying a 75% discount to landlords' future-rent voting claims, the fairness of lease modifications and mitigation measures (termination rights and profit-share), and whether the Nominees breached their duties so as to justify repayment of their fees.

Reasoning and conclusions:

• Disclosure and antecedent transactions: the court applied the established substantial-chance test for material irregularity (Somji; Trident). The 2017 transactions were found unlikely to give rise to sustainable statutory claims because the company had been solvent at the relevant times; greater detail would therefore not have produced a substantial chance of changing creditor votes.
• The 2018 settlement and the debenture should have been identified as potentially giving rise to a section 238 challenge, but the Nominees' report and other disclosures set out facts (use of franchise/licence benefits by the operating company and the commercial rationale for the security) that would have materially weakened any such claim; on the evidence the omission did not produce a material irregularity.
• Statement of affairs and estimated outcome statement: potential antecedent-transaction recoveries needed disclosure in substance but did not require valuation in the statement of affairs; no material irregularity arose from the presentation used.
• Comparator for likely alternative: the judge accepted the nominees' and experts' view that a "shut-down" administration was a reasonable alternative to the CVA at the relevant time; reliance on later events (the administrators' post-appointment trading and sale) was impermissible hindsight.
• Critical creditors: Regis Corp's position could be justified on commercial grounds given its bargaining position and the contingent nature of its claims; by contrast treating IBL (the shareholder vehicle) as a Critical Creditor and permitting its unimpaired recovery of c.£594,000 was not justified and amounted to unfair prejudice to impaired creditors.
• Discount to landlords' voting claims: a large blanket 75% discount lacked adequate justification and, while not determinative of the meeting outcome, the method was questionable in fairness terms (though the judge did not set the CVA aside on that ground alone).
• Nominees' duties and relief: the nominee has important duties under the Insolvency Rules and case law (Greystoke). Mr Williams' failure to investigate whether it was reasonable to treat IBL as a Critical Creditor fell below the standard of a reasonable nominee in the particular respect. Nevertheless, the court refused to order repayment of the nominees' fees because the services were not valueless, the shortfall was limited, and deprival of fees is an exceptional remedy.
• Disposal: given the unfair prejudice arising from the treatment of IBL the court concluded there were grounds to revoke the CVA and, notwithstanding its termination on administration, there remained utility in revocation for limited purposes; the CVA was therefore revoked.

This was a first instance decision. The court found that the CVA was unfairly prejudicial to the applicants by reason of the unjustified treatment of IBL as a Critical Creditor and, for that reason, revoked the CVA. The court also found a limited failure by one nominee to meet the standard expected of a nominee but declined to order repayment of the nominees' fees because the services were not valueless and deprivation of fees is an exceptional remedy. The judge refused other relief sought by the applicants to the extent inconsistent with those conclusions.