In a previous blog about the case of Mizen we considered the case from the point of view of “guarantee stripping”, looking at how the CVA dealt with those claims. However, the CVA was challenged on a number of bases, including whether it was unfairly prejudicial as a consequence of “vote swamping”.
In this blog, we look at that aspect of the case.
This is the first time the point has been considered (we believe) since the case of New Look. In New Look the landlords were unsuccessful in their arguments on this point, but in Mizen the guarantee creditors in Mizen succeeded.
What is vote swamping?
Vote swamping is where unimpaired creditors vote in favour of a CVA, resulting in it being approved and binding those creditors who voted against the proposal and whose claims are compromised. An unimpaired creditor is likely to vote in favour of a CVA, but when those votes significantly outweigh those of impaired creditors, is that unfairly prejudicial?
New Look confirmed that the votes of unimpaired creditors should be counted in the CVA vote but where a CVA is approved as a consequence of the votes of unimpaired creditors, the court said that this was a “highly relevant factor” in determining whether there has been unfair prejudice and set out a number of factors to consider, including:
- Has there been a fair allocation of the CVA assets?;
- The nature and extent of any different creditor treatment, the justification for that treatment and its impact on the outcome of the meeting; and
- The extent to which others in the same position as the objecting creditors approved the CVA.
The court also said that a finding of unfair prejudice should not be precluded because the same result might have been achieved by a Part 26A plan.
What happened in Mizen?
Mizen’s CVA was approved by 88.28% of creditors and those voting in favour largely consisted of unimpaired creditors. Creditors voting against amounted to 9.95% which included Peabody, one of the guarantee creditors, who claimed that the passing of the CVA by largely unimpaired creditors was unfairly prejudicial.
The court considered the points made in New Look:
Fair allocation of assets – in Mizen, the company’s shareholder (who provided the guarantee to the guarantee creditors) intended to support the CVA and provide funds that would be distributed to all creditors. In other words, shareholder monies would benefit more than just the guarantee creditors, which wouldn’t otherwise be the case but for the CVA.
Nature and extent of differential treatment – in Mizen, although the treatment of the guarantee creditor claims was justified (to prevent ricochet claims), those creditors were to lose their contractual guarantee rights when there had been little disclosure about the value of those rights in the CVA or the alternative insolvency of the shareholder. The guarantee creditors would be paid out of the same funds as non-guarantee creditors who had had the benefit of full disclosure under the CVA.
Did others in the same position object? – in Mizen, there was one other guarantee creditor who voted in favour of the CVA but this did not seem to carry much weight (perhaps because they also were a connected creditor).
In light of the above, the court found that Peabody had been unfairly prejudiced as a consequence of having also determined that, had this been a Part 26A plan, on the evidence before it, the same proposal would not have been approved.
Although the question of vote swamping and unfair prejudice is a question of fact, it is clear from Mizen that in the right circumstances a CVA can be successfully challenged on the basis of unfair prejudice where it has been approved as a consequence of the votes of unimpaired creditors; “vote swamping” is a relevant factor when assessing the fairness of a CVA proposal.
Since this blog was posted, the Mizen decision has been appealed. To read our blog on the appeal judgment see here.