CVAs – not quite contracts?

28 October 2020

The Rhino Enterprises case could make it harder for supervisors (as well as their firm, employees, staff and advisers), the company's directors or other third parties to rely on ‘no personal liability’ wording, releases or indemnities seemingly in their favour if they are set out in a CVA proposal

HHJ Barker QC had to consider whether to grant permission to contributories to bring misfeasance claims against the former administrators (and CVA supervisors). Central to the case is whether a CVA is a ‘contract’ for the purposes of the Contract Rights of Third Parties Act 1999. If it is, that would potentially allow the administrators, as non-parties to the CVA, to rely on wording in the CVA releasing them from liability for any acts, omissions or defaults as administrators. However, at the permissions hearing, HHJ Barker QC thought it strongly arguable and probably correct that a CVA – although a form of quasi-contract – was not an actual contract for the purposes of the 1999 Act. As full argument was not heard, this point will need to be addressed at trial.

Protection and provisions?

A challenge to the Regis CVA assumed that such ‘no liability’ provisions were effective to protect supervisors (who are not, strictly, party to the CVA). This case then promises to be the first consideration by the courts on the jurisdictional scope of CVAs that contain a release clause.

A conclusion that a CVA does not benefit from the statutory exemption to the doctrine of privity of contract provided by the 1999 Act could have implications for the drafting of common provisions in CVAs. For example:

• no personal liability wording: CVAs commonly include ‘no personal liability’ wording in favour of the supervisors (and their firm, staff etc) and the company's directors – eg for any liability in connection with the preparation or implementation of the CVA;

• indemnities: the CVA company will often provide indemnities under the CVA to the supervisors – eg in respect of fees or costs defending a CVA challenge; and/or

• third-party guarantors: CVAs (such as the recent Poundstretcher CVA) may compromise landlords' claims against group/third-party guarantors to prevent ricochet claims against the CVA company.

If the 1999 Act doesn't apply to CVAs, these sorts of provisions may be harder to rely on by non-CVA parties, such as the supervisor or its firm and employees, if they are only set out in the CVA. Of course, other arguments may well be available. For example, could the company be estopped from refusing to pay a supervisor’s remuneration for work done or costs in defending a CVA challenge while nevertheless taking the benefit? Similarly, would the court permit a landlord to bring a claim against a parent guarantor if they have agreed not to in the CVA, even if the 1999 Act could not be relied on by the guarantor?

Conclusion

The case might mean that greater focus should be directed at documenting certain arrangements separately where possible – eg in nominee engagement or retainer terms or in separate deeds of release or indemnities (as is common in schemes of arrangement).

The case will no doubt be closely followed by insolvency practitioners.

This article first appeared on Linklaters Insolvency Bitesize blog