Carraway Guildford (Nominee A) Limited and others v Regis UK Limited and others  EWHC 1294 (Ch)
The judgment in the challenge by landlords to a Company Voluntary Arrangement (“CVA”) approved in respect of Regis UK Limited (“Regis”) has followed quickly on from the decision in a similar challenge to the CVA in the New Look case.
The directors of Regis made a proposal for a CVA which was approved by creditors on 26 October 2018. The requisite majority for approval was achieved by the votes of International Beauty Limited (“IBL”), Regis’s parent company, and Regis Corp which held a debenture over Regis’s assets. Both were made “Critical Creditors” by the Proposal and consequently their rights remained unimpaired whilst landlords received 7% in respect of arrears and suffered a reduction in future rent, in some cases to nil.
Landlords bound by the terms of the CVA applied to Court for revocation on grounds of several aspects they considered to be material irregularities or unfair prejudice. Most of the grounds were rejected but HHJ Zacaroli decided that there was no justification for including IBL as a Critical Creditor, pointing out that the Proposal envisaged that Regis would pay IBL (its shareholder) almost twice as much as it would pay to all its impaired creditors together.
The Judge went on to consider whether the Nominees had acted in breach of their duties and ought to be ordered to repay their fees. He set out the following guidelines and summary of the law applying to the role of Nominee:
1. The Nominee plays an important role in the promotion of a CVA and carries heavy responsibilities.
2. It is not sufficient for a Nominee simply to ensure that the Proposal meets the requirements of the legislation – the Nominee must exercise professional judgment to decide whether the proposal is feasible and ought to be put to the creditors.
3. The principal case (Greystoke v Hamilton Smith  2 BCLC 429) sets out that a Nominee must be satisfied:
a. the debtor’s position as to assets and liabilities put to creditors does not differ materially from the truth;
b. the Proposal has a real prospect of being implemented as it is represented; and,
c. that from the information the Nominee has he can see no prospect of unfairness in the relation to the admission of claims and agreeing values for voting purposes,
and if these elements are not established, he should not report to the Court that a meeting of creditors should be summoned.
4. The steps the Nominee must take to satisfy himself depends on all the circumstances of the case, but the truthfulness of the debtor’s information relied on becomes more important the less he investigates.
5. The degree of scrutiny expected of the Nominee will be greater the larger the company and the more complex the arrangement offered.
6. The focus of considerations of the Nominee’s duties is the Report but the duties apply from the time of his engagement and depend on the information acquired prior to the delivery of the Report.
7. The Nominee cannot be considered to have been in breach of his duties unless the Court has found material irregularity or unfair prejudice, but it does not follow that he must have been in breach if there is such a finding.
The responsible Nominee of Regis’s Proposal was found to have been in breach of his duties by accepting without question that IBL should be treated as a Critical Creditor. However, the Judge decided against an order to repay fees on the basis that even in the case of negligence a professional person is entitled to be paid for his work unless his negligence renders his services valueless. The Judge also acknowledged that no sanction was set by the legislation and there was no precedent for such an order.
The statutory process of voluntary arrangements is perhaps based on a fiction – that the debtor prepares a Proposal and presents it to an independent Nominee for scrutiny. In reality, especially in larger instructions, the Nominee will be engaged at an early stage to assess the debtor’s financial position and assist in drafting the Proposal, if not to prepare the Proposal as a whole.
Nominees should take care with the terms and scope of their engagement. It is advisable to set the extent of the information required from the debtor and the degree of scrutiny of the financial information intended, at the outset.
Throughout their engagement Nominees should remain mindful that although they have a professional engagement with the debtor, their duties are owed to the creditors. In many cases this will be a difficult line to tread. Nevertheless, hard questions should not be avoided.