In the third (and final) of our blog series on recent CVA cases, in Rhino Enterprises Properties Ltd & Anor [2020] EWHC 2370 (Ch), the High Court gave permission for misfeasance proceedings to be brought against two former joint administrators. This was despite an approved Company Voluntary Arrangement (“CVA”) containing a clause releasing the joint administrators from liability.

The Court held it was ‘at least strongly arguable’ that CVAs were not contracts for the purpose of s.1(1) of the Contracts (Rights of Third Parties) Act 1999 (the “1999 Act”) and that its terms could not be enforced by non-parties.

The dispute in brief

Jason Schofield, the controlling shareholder of Rhino Enterprises Holdings Limited (“REHL”) and Askwith Investments Limited (“AIL”), is suing former joint administrators from Deloitte (the “Administrators”), alleging that the Administrators did not act independently during the administration of:

• Rhino Enterprises Limited and Rhino Enterprises Properties Limited, subsidiaries of REHL (the “Subsidiaries”) and
• Mr Schofield and REHL (the “Applicants”) sought retrospective permission to pursue an application against the Administrators alleging breach of duty and misfeasance on the grounds of the Administrators’ alleged close relationship with Barclays Bank plc (“Barclays”).

In response, the Administrators sought to rely on clause 24.1 of the CVA between the Applicants and their creditors (the “Release Clause”) which released the Administrators from liability for any acts, omissions or defaults committed in their capacity as administrators of the Subsidiaries and of AIL.

The Administrators were not a party to the CVA. The principal issue for HHJ Barker QC was deciding whether the CVA constituted a contract and if so, whether the Administrators could enforce the Release Clause as non-parties. If the CVA was a contract for the purposes of the 1999 Act, then the Applicants could not bring their action against the Administrators because they could rely on the Release Clause.

Ultimately, HHJ Barker QC held it was ‘more likely than not’ that the CVA was not a contract for the purposes of the 1999 Act. Consequently, the Administrators could not rely on or enforce the Release Clause and permission was granted to the Applicants to bring their proceedings against the Administrators.

Background leading to the CVA

The business of REHL and its Subsidiaries was carrying out storage activities. From 2007 onwards, REHL and Mr Schofield took out loans from Barclays to fund the purchase of properties. Barclays required Mr Schofield to use interest rate hedging products – (the “Swaps”). Barclays took security for the loans in the form of floating charges over the undertakings of the Subsidiaries and AIL (the “Companies”).

In 2012, the Financial Conduct Authority identified failings in the sale of interest rate hedging products by major banks, including Barclays. Mr Schofield was advised by an expert on interest swaps, that there was a 60% chance of succeeding in a LIBOR claim against Barclays for mis-selling the Swaps. However, when the Companies sent letters of claim to Barclays to rescind the Swaps, the bank demanded repayment of the Companies loans and of the Swaps. When these were not paid, Barclays appointed the Administrators in August 2013.

The Administrators were provided with the advice obtained by Mr Schofield but also obtained their own advice which put the chances of success at less than 50%. The Administrators chose not to pursue the claims against Barclays and instead accepted its claim of £20.9m in the administration.

The Applicants’ solicitors sent a letter of complaint to the Administrators’ solicitors alleging breach of duty and requesting that the Administrators did not sell properties belonging to the Companies. The Administrators maintained that they were acting in the best interests of the Companies’ creditors and the proceeded with the sale.

In 2014, Barclays agreed that the Companies could exit administration via a CVA and one was approved unanimously on 25 June 2014. The Applicants then sought permission to bring proceedings against the Administrators as set out above.

The concern for insolvency practitioners (“IPs”)

When considering whether to grant permission to the Applicants, the Court was not required to reach a final conclusion on whether a CVA was a contract as this was a matter for the judge at trial. No doubt aware of the implications of his decision, HHJ Barker QC was clear that his ruling was no more than a ‘provisional holding’ on a preliminary application for permission only.

Nevertheless, this case may have significant implications and rightly cause anguish for IPs, their firms and other advisors to IPs for whom it is customary to rely on release clauses if and when required.

Release clauses in CVAs (and elsewhere) afford important comfort and protection to IP’s for the job carried out by them. Not being able to rely on such clauses may result in greater hesitancy from IPs in accepting certain assignments for fear of facing subsequent action.

There are other CVA terms that non-parties to the CVA have a vested interest in being able to enforce. Examples are the indemnities routinely given by the distressed company to an IP which are often recorded in the CVA.

Until more clarity is given, parties and non-parties to CVAs may wish to start recording their obligations to each other in separate, enforceable documents, the contractual status of which is more certain and stable.

For more information on recent CVA cases, please see our blogs on the Irish cases of New Look and Monsoon.