It has been a while since we have had any cases challenging the fairness of a CVA, but in this recent Scottish decision where HMRC challenged the approval of Petrofac’s CVA on the basis of fairness, the court was required to consider HMRC’s contention that the CVA unfairly prejudiced its interests.

In The Advocate General for Scotland for an order under section 6(4) of the Insolvency Act 1986 (Court of Session) [2026] CSOH 29 (25 March 2026) Lord Sandison distances himself from the approach that has been taken by the English courts when considering whether a creditor has been unfairly prejudiced  – preferring a broader, fairness-based approach.

Why did HMRC challenge?

The CVA was approved by 85.9% in value of creditors voting – 312 creditors in number.  Only HMRC (a creditor for c£151.8m) and a smaller creditor with a claim of c£357k voted against the proposal. 

The majority of those voting in favour were creditors whose claims were not compromised under the CVA (roughly 80%) with 14% of connected creditors also voting in favour.  Only two other major creditors whose claims would be compromised under the CVA with claims of c£48m and c£7.4m voted in favour.

One of the arguments raised by HMRC was their vote was “drowned out” because the CVA was approved by creditors whose claims were not compromised or were connected, providing an advantage to those creditors at the expense of HMRC who were being forced to accept a 97.7% haircut.

Horizontal and vertical comparator tests

In England, the question of fairness is largely assessed by applying the horizontal and vertical comparator tests. 

The vertical comparator test looks at what a creditor receives under a CVA, compared to what they would receive in an alternative insolvency process. 

The horizontal comparator test considers how a particular creditor is treated under the CVA compared to other creditors, and if they are treated differently, is that different treatment justified.

Under Petrofac’s CVA it gave HMRC a recovery of at least 0.45%, compared with 0.12% in a formal insolvency – Lord Sandison noted that even that minimum CVA return was not “minimal” in the wider context, leading him to conclude that there was no prejudice to HMRC.

When considering the horizontal comparator test, and how HMRC were treated compared to other creditor groups Lord Sandison worked through each of the different creditor classes concluding that the differences were not unfair.

The treatment of secured creditors was not unfair because they were not comparable to HMRC (they were secured) and without their support the sale proposed as part of the CVA could not proceed, and there were other creditors whose differential treatment was justified because they were critical.

Although considering both the horizontal and vertical comparator tests Lord Sandison urged against applying those as rigid rules – preferring what could be described as a holistic approach.  Although noting that it was important not to lose sight of the basic nature of the exercise being undertaken, namely a determination of whether or not the CVA in question unfairly prejudices the interest of the challenging creditor, he said that:

“Unfairness in this context falls to be assessed by asking whether, in all the relevant circumstances, it is equitable to impose the bargain the CVA represents upon an unwilling party.”

He notes that relevant circumstances in assessing unfairness are likely to include (but not be limited to):

  • the financial backdrop to the CVA;
  • the source of any “bargaining surplus” provided by the CVA;
  • whether that surplus or its equivalent in value could have been made available in a different way or with a different more equitable pattern of distribution; and
  • how similar or otherwise the rights are of those creditors who the challenging creditor is comparing themselves to.

One further question Lord Sandison poses is to ask whether an honest and reasonable person in the position of the challenging creditor would hold out against the imposition of the bargain. However, he goes on to say that is simply one approach to the relevant question and may not in itself furnish a complete or reliable answer in every case.

Thoughts

This is a Scottish decision, and therefore only persuasive authority in England, but could this signal a sea change in how the English court might approach fairness if an English approved CVA is challenged? 

Post Regis and New Look questions of fairness looked a little easier to navigate, but the judge’s preferred approach in this case – to have open-ended standards instead of “abstruse concepts such as vertical and horizontal comparisons” would – if the English judges followed suit – potentially introduce choppier waters.

That is not to say that the horizontal comparator and vertical comparator test are not relevant at all, they were considered by Lord Sandison here.  But Lord Sandison also introduces this additional, as we have termed it, more holistic approach, that arguably adds more variables into the question of: is there unfair treatment?

In this case, the Court found that HMRC’s challenge on the basis that the CVA unfairly prejudiced their interests did not succeed – there was no unfair treatment and HMRC was not prejudiced.