In an insolvency proceeding involving unsecured American judgment creditors who were not party to company voluntary arrangement (CVA) made by English creditors, English Court of Appeal (Civil Division) dismisses appeal by American creditors from pari passu arrangement with CVA creditors because it would be more beneficial to Americans than winding up corporation.
The creditors of TBI held a meeting at which they adopted various arrangements under a "company voluntary arrangement" (CVA). It laid out that unsecured creditors would, pari passu, get the benefit of all of TBI's assets. The group chose TBI's joint administrators to collectively oversee the CVA. The U.S. claimants went to the meeting but the group (mistakenly, it seems) did not let them vote because trial of the main action was imminent.
To resolve a controversy over whether the CVA would bind the American claimants, the administrators asked the court to declare that the CVA did apply to them under Section 5(2)(b) of the Insolvency Act of 1986. The claimants opposed the request and moved that the court make the administrators set aside enough assets outside of the CVA to satisfy their damage claims in the main suit. The judge held that the CVA did not bind the U.S. claimants. Whereupon, the administrators set aside 3,000,000 to meet any liability that might result from the main action.
After several days of trial in the tort action, TBI consented to a judgment of $575,000 in November 2001. The joint administrators then asked the court to limit payment of the consent judgment to an amount in pari passu with any sums paid to TBI's other creditors under the CVA.
First, they urged that the American claimants should obtain leave of court to execute the judgment subject to any conditions the court might set under Section 11(3)(d) of the Act. Second, they maintained that it would be unsound to allow claimants to recover 100% of the judgment. This would war against the theory of pari passu disbursal and would thwart the mission of the CVA.
The administrators then asked the court to dissolve their undertaking and to instruct them under Section 14(3) of the Act. In December 2001, the court granted their request. It held that the U.S. claimants could secure no higher a return on their judgment debt than the other creditors. The claimants filed an appeal. The English Court of Appeal (Civil Division), however, dismisses it.
In the Court's view, the administration order tried to achieve two main goals. The first was to get a judicial confirmation of the CVA. Second, the CVA aimed to realize TBI's assets more effectively than would come out of a winding up or liquidation. As long as the administration order was in effect, either the administrator or the court would have to consent to any levy by plaintiffs upon TBI's property.
As the lead opinion points out, the parties agree that the courts should not treat the U.S. claimants less beneficially than the CVA creditors. "I think that they are also entitled to say that they should not be treated less favourably than they would be if the administration order were now discharged and the company were wound up. I put it in that way because the Greenbergs cannot now be compelled to participate in the voluntary arrangement and should not be adversely affected by the fact that other creditors have chosen to do so; but the only alternative to the continuation of the administration order is a winding up."
"The reason is that discharge of the administration order before the completion of the voluntary arrangement would trigger a certificate of non-compliance under clause 9.1, with the consequence that the moratorium imposed on the CVA creditors under the arrangement would cease. The company would be insolvent." [Para. 31]
The converse proposition is also true. "There is no basis on which the Greenbergs can claim to be treated more favourably than they would be treated if either (I) their debt is paid pari passu with the claims of the CVA creditors or (ii) the administration order were now discharged and the company were wound up. The directions which the judge has given treat the Greenbergs no less favourably than the CVA creditors."
"The question, therefore, is whether, if the administration continues and the Greenbergs' debt is paid pari passu with the claims of the CVA creditors under the voluntary arrangement, the Greenbergs will be treated less favourably than they would have been if the administration order were now discharged and the company were wound up."
"The answer is that they will not be treated less favourably. ... [As an algebraic analysis shows] the dividend that will be received by the Greenbergs if they are treated pari passu with the CVA creditors will always be greater than the dividend which they would receive in a liquidation." [Para. 33]
Citation: Smith et al. v. Greenberg et al.,  All E. R. (D) 36 (approved judgment) (Ct. App., Civ. Div. August 8, 2002).