Challenge to Caffe Nero’s CVA fails
The High Court has recently rejected a creditor landlord’s challenge to the Caffe Nero CVA, which will remain in effect. The decision provides guidance on the use of the electronic voting procedure for creditors, and last-minute modifications to a CVA which can be made once the voting window has begun.
What is a CVA?
A CVA (Creditors’ Voluntary Arrangement) is a legally binding agreement between a company and its unsecured creditors. It is a flexible procedure which can allow for debt reduction, more time for payment, and for variations to contracts such as leases.
A CVA will bind all of the company’s unsecured creditors regardless of how they voted if 75% (in value) vote in favour of the proposals. Once approved, a CVA can only be challenged on the basis of “material irregularity” (which relates to how the vote was conducted) or “unfair prejudice” (which relates to the fairness of the overall effect of the CVA on particular creditors).
Caffe Nero CVA
As with a large number of high street retailers, Caffe Nero was hit hard by Covid. In an attempt to avoid falling into administration, Nero Holdings Limited (“NHL”) proposed a CVA in November 2020. The nominees and directors opted to utilise the electronic voting system, requiring creditors to vote on the proposals by 23:59 on 30 November 2020.
One of the primary proposals in the CVA was to reduce Caffe Nero’s rent arrears, future rent, service charges and insurance.
EG Group Limited offer
At 20:48 on 29 November 2020, EG Group Limited (“EG”) made an offer to purchase NHL. The terms of this offer were conditional upon the CVA being approved, but if accepted, meant that the rent arrears would be paid in full. Rather than delaying the deadline for the creditors’ vote, as EG suggested, the nominees and directors of NHL proceeded with the original deadline, but announced to the creditors (1) at 14:30, that the offer had been made by EG; and (2) at 22:20, a proposal that the CVA would be modified with the effect that the rent arrears would be paid in full if the EG offer were to be agreed within 6 months.
The CVA was later approved within the deadline by the requisite majority.
Funded by EG, one of NHL’s landlords challenged the CVA approval. The challenge encompassed both material irregularity and unfair prejudice:
• The landlord submitted that NHL’s nominees and directors should, upon receipt of EG’s offer, have adjourned or postponed the voting deadline. The Judge highlighted however that the Insolvency Rules (“the Rules”) contain no mechanism to extend an electronic voting deadline and that the only way to do so would be by making an application to the court. He noted that the timing of EG’s offer had in reality left little time for NHL’s directors and nominees to make such a decision.
• It was further submitted that NHL had failed to engage with EG in relation to its offer. The Judge considered this but concluded that any such failure did not amount to material irregularity.
• The Judge rejected the landlord’s assertion that the announcement of EG’s offer was misleading as it did not fully set out the terms of the offer. He also rejected the argument that the nominees’ report should have been updated to confirm that the alternative to the CVA was no longer administration, but a sale to EG, on the basis that there is no requirement in the Rules that the nominees’ report contain this information. The Judge considered that the announcement to the creditors was sufficient.
• The landlord also submitted that the fact that a number of votes had already been cast when the announcement in relation to the modification was made amounted to a material irregularity. The Judge confirmed however that, if a CVA is ultimately approved, a modification made within the voting window and after votes had been cast is also to be treated as approved (so long as the company has also consented). As the modification in this case was wholly in favour of the creditors this did not amount to material irregularity.
As the alternative to a CVA was a sale to EG, whereby NHL would remain solvent, the landlord submitted that the CVA was unfairly prejudicial. The Judge rejected this argument on the basis that whether or not the creditors would have been unfairly prejudiced would depend entirely on what course of action EG were to take had the CVA not been approved. In this respect, the court was not convinced that EG would have made a similar offer had the CVA failed, as such an offer, rather than purchasing separate parts of NHL at a discount, would not have been in EG’s commercial interests.
On the basis of the above, the Judge rejected the challenge on all grounds.
This case highlights the inflexibility of the electronic voting procedure which is prescribed by the Rules, especially in instances where an offer is made during the voting window which may have an effect on the creditors’ decision. It also confirms that modifications which are introduced during the voting window, and once votes have been cast, are in principle acceptable (although it is important to note that on the facts of this case, the modification was creditor-friendly, a factor which the Judge gave some weight to).