Newlon Housing Trust & Anor v Mizen Design/Build Ltd & Ors

The court considered two challenges under section 6 of the Insolvency Act 1986 to a company voluntary arrangement (CVA) proposed by Mizen Design/Build Ltd. The principal legal issues were whether there had been a material irregularity in the information provided to creditors at or in relation to the CVA meeting and whether the CVA unfairly prejudiced the applicants. The judge applied established principles on material irregularity and unfair prejudice (including the objective tests in Sisu Capital Fund Ltd v Tucker and Re Trident Fashions plc and the disclosure duties under rule 2.3 of the Insolvency Rules 2016 and comparable scheme authorities).

Findings of legal significance included that (1) the proposal mis-stated the sums appearing in the list of Critical Creditors and the nominees admitted votes on an incorrect basis, but that error was not material to the outcome; (2) the proposal and accompanying Shareholder estimated outcome statement gave insufficient disclosure about the Shareholder's position (including a recent disposal of Mizen Build Limited and the composition and valuation of contingent/guarantee claims), which was a material irregularity in respect of Guaranteed Creditors; and (3) on the question of unfair prejudice, the CVA was unfairly prejudicial to Peabody because Guarantee Creditors were deprived of effective information and their contractual rights were compromised without adequate disclosure and explanation, whereas Newlon's challenge failed because it could not show that the alleged irregularities would have materially affected voting.

This is a first instance hearing of two applications under section 6 of the Insolvency Act 1986 brought by Newlon Housing Trust and Peabody Construction Limited challenging the validity of a CVA proposed by Mizen Design/Build Ltd and supervised by three nominated supervisors. The CVA had been approved by creditors on 19 May 2022. The applicants alleged (a) material irregularity in relation to the CVA meeting and disclosure and (b) unfair prejudice arising from the terms and operation of the CVA.

Background and procedural posture:

• The Company is a privately-owned property developer and construction business; its CVA proposal set out differential treatment among credit classes: Critical Creditors to be paid in full, Non-Critical Creditors to receive c.1.2–1.3p in the pound via a Compromised Creditors' Payment Fund, Guarantee Creditors to receive c.7.5p as compensation for release of shareholder guarantees, and contingent creditors to be compromised to £1.
• The nominees' report and several estimated outcome statements (including a Shareholder estimated outcome statement) accompanied the proposal. The Shareholder was to provide guarantees and funding to support the CVA. The CVA proposed use of funds, supervisors' control over distributions and a Valley House litigation fund funded by the Shareholder.
• Both applicants relied on established authorities on material irregularity, adequacy of disclosure and unfair prejudice in the CVA context, emphasising the duties of disclosure under rule 2.3 of the Insolvency Rules 2016 and the vertical/horizontal comparator approach to unfair prejudice.

Issues framed by the court:

• Whether any irregularity arising from the proposal or conduct of the meeting was material (objectively likely to have made a material difference to creditor voting or the way creditors assessed the proposal).
• Whether the CVA unfairly prejudiced the interests of the applicants, having regard to the alternatives and the vertical (winding-up) and horizontal (between creditor classes) comparisons.

Court's reasoning and conclusions:

• On material irregularity, the court found a misstatement in Schedule 12 as to the balances of Critical Creditors and that some admissions by the nominee were incorrect. However, that particular error was not material to the result because the requisite majorities would still have been achieved even disregarding those votes.
• Newlon’s complaint that nominees failed to respond to a pre-meeting letter and that Newlon was improperly admitted for a lower figure was not shown to be material; Newlon could not show its own voting position would have changed and the alleged irregularities were speculative.
• The Shareholder estimated outcome statement and the Proposal provided inadequate disclosure about the Shareholder’s position and the composition and valuation of contingent/guarantee claims (including a recent disposal of Mizen Build Limited and an unexplained £11.6 million of contingent legal claims). That lack of disclosure was a material irregularity, particularly affecting Guaranteed Creditors who were asked to compromise contractual rights without proper information.
• On unfair prejudice, the court applied vertical and horizontal comparisons and the guidance in recent authorities. The judge concluded that Peabody had been unfairly prejudiced because the Guarantee Creditors were deprived of sufficient information to assess the commercial merits of compromising guarantees, the estimated outcome figures were unreliable and key information about assets (and recent shareholder transactions) was omitted; the differential treatment of creditor classes and the lack of adequate disclosure meant the result was unfairly prejudicial to Peabody. By contrast, Newlon’s challenge failed on the evidence and the point that business continuity and differential treatment in favour of critical creditors did not render the CVA inherently non-viable or unfair in its treatment of Newlon.

Relief and disposition: the court dismissed Newlon's application and upheld Peabody's challenge. The judgment contains extended analysis of disclosure obligations in CVAs, the proper scope of nominees' enquiries, and the application of vertical and horizontal comparator reasoning to creditor classes and shareholder-related disclosures.

The court dismissed Newlon Housing Trust's application and allowed Peabody Construction Limited's application. The judge held that although some errors in the admission of Critical Creditor balances were not materially likely to have affected the vote, the Proposal and Shareholder estimated outcome statement gave insufficient and misleading disclosure about the Shareholder's position and the composition/valuation of guarantee/contingent claims. That material failure of disclosure meant the CVA was unfairly prejudicial to Peabody and justified setting aside the CVA in respect of Peabody's complaint; Newlon failed to show material irregularity or unfair prejudice on the evidence.