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Fairness to Creditors – Court of Appeal Blocks Finance Company CVA

Company voluntary arrangements (CVAs) are a vital means of ensuring orderly management of corporate insolvencies – but what happens if a late claim emerges that fundamentally upsets the balance of fairness between creditors? The Court of Appeal considered that issue in a guideline case.

The case concerned a company that was a major player in financial markets before entering administration. It was hoped that a proposed CVA would be one of the final steps in a lengthy insolvency process. The CVA had been approved by creditors and was about to be implemented when a bank presented a wholly unexpected claim, potentially worth 127 million Euros, at the eleventh hour.

The claim was presented three days before the expiry of a deadline set by the CVA’s joint supervisors, which coincided with the end of the period within which creditors were entitled to make a statutory challenge to the CVA. After the supervisors sought court guidance as to how they should respond, a large number of creditors, with the backing of the Financial Services Compensation Scheme, argued successfully that the emergence of the bank’s late claim should not prevent the CVA from becoming effective.

However, in upholding an appeal brought on behalf of a smaller class of creditors whose interests were different from those of the majority, the Court found that the supervisors were obliged to exercise a value judgment as to whether, in the light of the changed circumstances, it would be fair for the CVA to proceed. The bank’s late claim was obviously a game changer and, if accepted, would result in an outcome to the CVA that bore no relation to that which might reasonably have been expected.

The financial assumptions on which the CVA was founded had been substantially shown to be false by the bank’s late claim and fairness to all creditors demanded that the supervisors be directed to confirm that the CVA could not become effective.

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