26 June 2018

Burges Salmon recently acted for FSCS in its capacity as a representative creditor in an application for directions made by the special administrators of MF Global UK regarding the implementation of a company voluntary arrangement (CVA). We look at what the court’s decision means for office holders.

Directions applications

Insolvency office holders are often required to make complex, important and time-critical commercial decisions and do so from the “front line”. The threat of criticism, challenge and possible litigation is always at the back of office holders’ minds and, in the current environment, is increasingly at the forefront.

One of the tools available to office holders is the ability under the Insolvency Act 1986 to apply to court for an order directing how a particular issue should be dealt with. As explained by Snowden J in Re Nortel Networks UK Ltd and other companies [2016] EWHC 2769 (Ch), a direction from the court will “prevent subsequent challenge” – put simply, a direction from the court blesses the actions of the office holders.

While there is an obvious and real benefit in obtaining the court's blessing in the form of directions, office holders and their advisors are often hesitant to make such applications. This hesitancy is likely caused by previous cases in which judges have stated: “commercial and administrative decisions are for [administrators], and the court is not there to act as a sort of bomb shelter” (Re T & D Industries plc (in administration); Re T & D Automotive Ltd (in administration) [2000] 1 All ER 333); and in “commercial matters, administrators are generally expected to exercise their own judgment rather than to rely on the approval or endorsement of the court to their proposed course of action” (MF Global UK Ltd [2014] EWHC 2222 (Ch)).

This hesitancy may also stem from a concern that the courts may be unable to provide clear directions within a short timeframe.

The special administrators of MF Global UK have recently put the courts to the test, seeking urgent directions regarding the implementation of a CVA. Both the High Court and Court of Appeal provided clear, but contrasting, directions within a timeframe of just 11 weeks, with the Court of Appeal’s judgment being handed down 24 hours before the CVA lapse date on 12 June 2018.

MF Global UK directions application

The administrators’ application sought urgent court directions as to whether or not the MF Global CVA ought to be implemented before it automatically lapsed under its own terms. The administrators’ dilemma came from the receipt of an unexpected and material new claim submitted after the CVA received creditor approval, but before the final claims bar date (the “new claim”). The new claim was contingent and had been rejected by the administrators, but such rejection is subject to appeal.

Two representative respondents were appointed to respond to the administrators’ application; (i) Financial Services Compensation Scheme Limited (FSCS) to represent those creditors who still wanted the CVA to be implemented and (ii) Attestor Capital LLP to represent those creditors who, in light of the new claim, no longer wanted the CVA to be implemented.

The outcome of the administrators’ application came down to the interpretation of a single condition precedent in the CVA proposal and whether or not this: (a) gave a discretion to the administrators; and (b), if it did, meant that the administrators’ ought to exercise their discretion so as not to implement the CVA.

The decision in the High Court

Mr Justice Hildyard held that the relevant condition precedent in the CVA did not bestow a discretion on the administrators and there was nothing to preclude the CVA from being implemented.

The decision on appeal

The Court of Appeal recognised that the new claim faced ‘a good many hurdles that need to be surmounted before becoming an actual claim’, being a contingent claim that had been rejected by the administrators. Notwithstanding this position, the court:

  • set aside the High Court judgment finding that the relevant CVA clause did provide the administrators with a discretion
  • accepted the surrender of the administrators’ discretion
  • directed the administrators to confirm that the CVA was precluded from becoming effective.

What does this mean for office holders?

  1. Where required, the court is prepared to give office holders clear and decisive directions, although the court remains reluctant to take over decision making.
  2. Where directions from the court are sought, make sure that they are carefully framed and if you are seeking expedition, you will need to convince the court of the urgency – in this case the CVA lapse date.
  3. Make sure your drafting is clear – if a discretion is to be exercised, your contractual documentation should include precise mechanisms for how and when the office holders should exercise the discretion.
  4. Do not underestimate the quantum of possible "woodwork claims" that can arise as late as seven years after the start of an administration. Until the final bar date has passed, anything is possible.
  5. Finally, resolving these types of issues and the potential threat of litigation by way of court directions is consistent with the administrators’ duties to perform their functions as quickly and efficiently as is reasonably practicable.

For further information about this article, please contact Emily Scaife or Hannah Miller.

Key contact

David Hall

David Hall Partner

  • Dispute Resolution
  • Banking Disputes
  • Business Crime and Regulatory Investigations

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