High Court rejects challenge to Caffè Nero’s CVA

The High Court has firmly rejected all allegations of material irregularity and unfair prejudice brought by a disgruntled landlord against Caffè Nero’s CVA which had secured the overwhelming support of creditors late last year. Linklaters advised Caffè Nero.

The unsuccessful landlord’s challenge was funded by Euro Garages following its failed last minute takeover bid for the Caffè Nero group on the eve of the CVA. The result vindicates the “strong and rational” decision reached by the nominees and directors under extreme pressure not to postpone or adjourn the CVA voting in light of EG’s offer, but instead to disclose the offer to creditors and modify the CVA proposal for their clear sole benefit. In a strong signal of support, the judge concluded that the nominees could not have sensibly decided otherwise. The actions of the directors were also found to be free from criticism – with the allegations of breach of duty rejected in full.

There are three key takeaways for nominees of CVAs and IPs more generally:

• Support for the use of electronic voting in CVAs: despite the inflexibility of the procedure, the judgment helpfully confirms that a nominee cannot be criticised for adopting what has become the standard practice in CVAs of using an electronic voting procedure to obtain a decision from creditors on a CVA proposal.
• The court may have a residual power to overcome the shortcomings in the electronic voting procedure: in the absence of an express power in the insolvency legislation to adjourn or postpone an electronic voting procedure, the decision provides a potential pathway in future CVAs for a director or nominee to apply to court to do so. But such an application would not be without risk and it remains uncertain just what, precisely, a court could practically order and whether it would enable creditors to change their votes. The High Court considered this lacuna may need to be looked at by the Insolvency Rules Committee.
• Modifications benefitting creditors may be effective after votes are cast: where a modification to a CVA is proposed before the end of the electronic voting period, votes already received in favour may, in certain circumstances, be counted in favour of the proposal as modified. The key questions are whether the company supports the modification and whether it is solely for the benefit of creditors. The decision also offers reassurance of the effectiveness of provisions often found in CVA proposals allowing for the company to make non-material variations with the approval of the supervisors after the CVA is in force.