The Rhinoceros in the room: are company voluntary arrangements contracts enforceable by third parties?

21 September 2020

In the recent case of Re Rhino Enterprises Properties Ltd & Anor [2020] EWHC 2370 (Ch) the court held that it was at least strongly arguable that a company voluntary arrangement (a “CVA”) was not a contract for the purpose of s.1(1) of the Contracts (Rights of Third Parties) Act 1999 (“the C(RTP)A”).
 

This judgment relates to permission sought to pursue an application for misfeasance against former administrators under the Insolvency Act 1986 (“the Act”). The applicants were a company in administration and its controlling shareholder who wanted to pursue proceedings against the company’s former joint administrators. The applicants argued that the respondents had breached their fiduciary and other duties as administrators and/or had been guilty of misfeasance.

Facts

The applicants sought an order for permission under paragraph 75 of Sch.B1 of the Act to pursue an application against the respondents as former joint administrators of the company, so that the court could examine their conduct and potentially order them to contribute a sum to the company’s property by way of compensation. Permission for such an application is at the discretion of the court. The threshold test for granting permission under paragraph 75(6) of Sch.B1 of the Act is that (i) there is a reasonably meritorious cause of action and (ii) granting permission is reasonably likely to result in a benefit to the company’s estate.

The application was based on allegations that the respondents had breached their fiduciary and other duties as administrators and/or were guilty of misfeasance. The respondents argued that the applicants could not bring any such claim because the applicants had undertaken, by way of a clause in a CVA, not to bring a claim against the respondents in connection with their conduct as joint administrators (“the Release Clause”). The respondents argued that it would be sanctioning a breach of the CVA ‘contract’ to permit the applicants to pursue a claim against the respondents which they had expressly agreed to release and had undertaken not to bring.

The respondents were not parties to the CVA, which was binding on the company and its creditors. The question of whether the respondents could enforce the Release Clause therefore depended on whether the CVA was a contract for the purposes of the C(RTP)A. The C(RTP)A however, does not contain a definition of a “contract”. If the CVA was a contract then the respondents could rely on their third party rights under s.1(1) C(RTP)A to enforce the Release Clause.  The applicants, however, maintained that CVAs are not contracts and derive their legal force from statute, rather than as contracts.

Outcome

The court found the respondents’ contention that a CVA was a contract was wholly unconvincing, but was not willing, in the hearing of an application for permission to bring a misfeasance action and without further evidence, to make an outright finding that a CVA was not a contract. However, the court said that it was at least strongly arguable that a CVA was not a contract but was (at most) a form of quasi-contract that was for some purposes treated as if it was a contract.

The court noted that the provisions of the Act relating to voluntary arrangements do not refer to CVAs as contracts, agreements, enforceable promises or bargains, but to “arrangements”. Although voluntary arrangements bring about compromises or variations of contracts, the court noted that it does not follow that they are themselves contracts.

The court commented that neither side had cited any authority in which a release contained in a CVA has purported to protect officeholders from the provisions of paragraph 75 of Sch.B1 of the Act, or from misfeasance claims generally. The C(RTP)A was therefore unlikely to apply, meaning that the CVA in this case could not be enforced by third parties such as the respondents.

The application for permission to pursue a claim for misfeasance was granted.

Comment

In this case, given that there was not a single authority cited where a CVA has been held to be a contract, it was perhaps unsurprising that the conclusion was that it was at least strongly arguable that a CVA was not a contract for the purposes of the C(RTP)A. There are authorities that refer to CVAs as “hypothetical” contracts, but no authorities referring to CVAs as actual contracts without qualification. It will be interesting to see the outcome of the permitted application and whether further evidence will tip the balance on the central question of whether CVAs can be considered contracts capable of enforcement by a third party.

Further Information

For further information, please contact a member of our Dispute Resolution team.

 

About the authors

Hannah Fitzwilliam is an associate in the Dispute Resolution team. She advises on a broad range of contentious matters involving both individuals and corporate clients. She has experience of litigation in the High Court and of settling disputes through negotiation. Hannah regularly advises on complex and high value disputes, often with a cross-border element.

Lucy Bluck is a trainee solicitor at Kingsley Napley. She is currently in her third seat in the dispute resolution team.

 

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