Mizen Design/Build Limited v Peabody Construction Limited

A CVA proposal must give creditors sufficient information to make a reasonable judgment about whether it is in their commercial interest. Where a CVA compromises guarantees given by a related company, the proposal may need to disclose potentially significant antecedent transactions affecting that company’s estimated insolvency outcome. The disclosure obligation is fact-sensitive and does not require every item that would appear in a separate CVA by the related company. A material irregularity is material if proper disclosure might have affected the voting outcome. The court need not decide other grounds once one material irregularity is sufficient to invalidate the CVA.

Mizen Design/Build Limited appealed from ICC Judge Prentis’s decision of 24 January 2023, reported at [2023] EWHC 127 Ch. The judge upheld Peabody Construction Limited’s challenge to a company voluntary arrangement on grounds of material irregularity and unfair prejudice. The CVA compromised Peabody’s guarantee rights against the appellant’s shareholder and relied on an estimated outcome statement predicting the shareholder’s insolvency dividend. The appeal concerned whether the proposal adequately disclosed potentially challengeable antecedent transactions and explained the guarantee liabilities, and whether any irregularity was material to the voting result.

1. Appeal dismissed. The court approached the findings of material irregularity and unfair prejudice as evaluative findings, reviewable for error of law, failure to consider relevant matters, omission of relevant facts or perversity.
2. Under rule 2.3 of the Insolvency Rules 2016, a proposal had to provide sufficient information for creditors to make a reasonable judgment about whether the CVA was in their commercial interest. The obligation was objective in operation and fact-sensitive.
3. The shareholder’s estimated outcome statement was presented as a realistic picture of the likely return in an administration. Because the CVA compromised the shareholder’s guarantees, potentially significant claims concerning antecedent transactions in the shareholder were relevant to guaranteed creditors’ assessment. The proposal should therefore have referred, to an appropriate extent, to the Mizen Build disposal and the later-disclosed dividend transaction.
4. The absence of such disclosure was a material irregularity. The materiality question was whether proper disclosure might have affected the vote, not whether it was more likely than not to do so. The dividend transaction could potentially have trebled the estimated administration return, and the court considered that NHBC’s vote might have changed.
5. The court did not need to determine the further alleged irregularity concerning the composition of the guarantee-creditor liabilities, or the unfair-prejudice ground. It nevertheless expressed reservations about parts of the judge’s unfair-prejudice reasoning.
6. The court also identified, but did not decide, an apparent funding and drafting defect in the CVA concerning the treatment of guarantee creditors.

• High Court, Chancery Division: ICC Judge Prentis allowed Peabody’s challenge to the CVA on grounds of material irregularity and unfair prejudice on 24 January 2023: [2023] EWHC 127 Ch.
• High Court, Chancery Division, on appeal: Sir Anthony Mann dismissed the appeal. The CVA could not stand because the non-disclosure was materially irregular.