HT-2023-000016 - [2024] EWHC 1825 (TCC)

There is a clear attraction in Henry’s argument. Construing clause 8.3 as meaning that all assets (other than those specified) are excluded from the funds available for distribution has the effect that any (unidentified) assets that ProMep may have, including any claims against its creditors, are to be taken into account in adjudicating upon the creditors’ claims. That gives a substantive purpose to paragraphs 29 to 31 of the standard terms.

That construction is also consistent with the provisions of the Proposal that compare the outcomes of the CVA and a liquidation (in which all claims and cross-claims would be the subject of the mandatory set-off). In both columns of the comparison there is no reference to any assets other than ones that are expressly addressed in the Proposal and the Statement of Affairs (whether they form part of the distribution fund or are “excluded from the CVA” by clause 8.3).

Mr Halkerston emphasised the importance of the company’s obligations to fully disclose its assets in the Proposal and Statement of Affairs so that all creditors were on an equal footing with the same information as to the company’s financial position.

Rule 2.3(1) provides that the Proposal must set out, so far as is known to the proposer, the company’s assets with an estimate of their respective values (sub-paragraph (a)) and which assets are to be excluded from the CVA (sub-paragraph (c)). Sub-paragraph (x) requires the proposer to set out: “any other matters that the proposer considers appropriate to enable members and creditors to reach an informed decision on the proposal.”

In Lazari Properties 2 Ltd. v New Look Retailers Ltd [2012] EWHC 1209 (Ch), Zacaroli confirmed that the duty to treat creditors equally applied to CVAs and, in respect of disclosure, said this:

There is obviously force, therefore, in Henry’s argument that the assets disclosed in the Proposal, and indeed the subject of the comparison of outcomes, ought to have included any potential claims against Henry. There was no mention of them and that would seen to be a significant failure of disclosure. That factored into Henry’s case on the construction of clause 8.3 on the basis that “all of the company’s assets” (other than those specified) could only refer to disclosed assets which were “excluded from the CVA” and not available for distribution. Any other undisclosed assets would be subject to the automatic set-off in consequence of the adjudication of the creditors claims or even if no claims were submitted.

It is obviously a concern that the Proposal made no reference to any potential future claims (and I return to this point below) and it creates, as I have indicated, an attraction in Henry’s argument. Despite that attraction, it seems to me that Henry’s position cannot be right.

The first and primary difficulty, however, with Henry’s position is that it requires clause 8.3 to be construed as defining the distribution funds when clause 8.3 does not do so. Clause 5 sets out what monies will form the distribution fund. Clause 8.3 says that all assets (other than those that have already been referred to in clause 5) are “excluded from the Arrangement”. That is expressly on the basis that the excluded assets will be utilised to implement the arrangement and fund future trading. These assets include but are not limited to identified assets.

Henry’s principal argument on construction is that “excluded from the Arrangement” means only excluded from the distribution fund and therefore not available for payment of the dividend. That is not consistent with the intention that the assets excluded from the arrangement will be available to implement the arrangement and, perhaps more importantly, fund the future of the company. Henry points to the same wording in clauses 5.15 and 5.24. However, the intention of these clauses, in my view, is that if monies were received from the adjudications that had already taken place or were pending, but received after a specified date, they would not only be unavailable for the dividend but would also be retained to the benefit of ProMep. If Henry’s construction were right, any such monies (due from Henry to ProMep), even though excluded from the distribution funds, would still be subject to the set-off. The wording of clauses 5.15 and 5.24 fits with ProMep’s construction of clause 8.3 but, in my view, not with Henry’s.

The modified proposal removed the time limit and provided that the supervisors should review the adjudication and retention realisations on or before 31 March 2022 and inform the creditors whether a further extension was required to allow those realisations. That modification does not indicate a change of intention as to dealing with the proceeds of the adjudications. I note that the “Notice of termination or full implementation of the voluntary arrangement” (CVA4) set out the realisation from the adjudications which was ultimately less than the figure in the statement of affairs.

Henry also relies on the contention that ProMep’s construction of clause 8.3 renders the provision for insolvency set-off pointless and, therefore, does not give effect to clause 9.8. Again there is force in this argument but less force than there might be because the provisions in Appendix E are standard terms and not the bespoke terms of the Proposal. The fact that there may not be circumstances in which the insolvency set-off operates should not force a construction of other clauses that does not accord with their express provisions. The authorities to which I was referred, including those above, similarly address a common, and it may be said standard position but not the particular terms of this Proposal. Gye v McIntyre is a case about bankruptcy and the operation of the statutory set-off in bankruptcy. There was no contractual exclusion of any assets from the operation of the bankruptcy.

Mr Halkerston also cited Re Sigma Finance Corporation [2009] UKSC 2 in this context. In that case, the issue was, in summary, whether the concluding words of a clause, clause 7.6, providing for the discharge of short term liabilities, gave priority to such liabilities during the realisation period. As a matter of construction, it was held that the clause did not have that effect because that would have changed the clear structure of the financial relationship. By analogy, it is submitted that, in this case, to give clause 8.3 the effect for which ProMep contends would change the clear structure of the CVA in which all mutual dealings were to be taken into account in the operation of clause 9.8. That, however, involves the assumption that the clear basic scheme of the CVA was one in which all debts and liabilities would be adjudicated upon under clause 9.8 applying the insolvency set-off. Having regard to clause 8.3, Henry cannot make that assumption.

Henry also contends, as I have indicated, that ProMep’s position lacks commercial sense and/or would not be how a reasonable person with the relevant background knowledge would construe the Proposal. I repeat what I have said in respect of ProMep’s submission as to commercial purpose and I cannot conclude that this lacks commercial sense or does so to the extent that the court should depart from the normal meaning of the words used in clause 8.3.

As a matter of construction, therefore, I prefer ProMep’s construction and I do not make the declarations sought by Henry. It follows that there is no reason not to enforce the adjudicator’s decision.