Costs order against CVA supervisors overturned

Overview

In this case, the Court overturned a decision awarding costs against the joint supervisors of a CVA. The Court emphasised that costs orders against a nominee are rare, and some element of personal misconduct is needed to justify them. Even where a CVA is flawed, it is quite another thing to say that its supervisors are guilty of professional misconduct in having supported it. The one does not follow from the other, and if allegations of misconduct are to be made, they must be properly identified and fairly put.

Background

The CVA in question had been promoted by Mizen Design/Build Limited (the "Company"), but was challenged in proceedings brought by two creditors. The Joint Supervisors and the Company were named as Respondents to the proceedings and represented by the same solicitors and counsel.

In January 2023, ICCJ Prentis (also referred to as the “Judge”) upheld one of the challenges, which was made by Peabody Construction Limited (“Peabody”), and rejected the other. An appeal by the Company was dismissed in April 2023. Consequential matters arising from the trial were not agreed, and a consequentials hearing was fixed before ICCJ Prentis on 27 April 2023. The day before, however, the Company was placed into administration by way of an out of court appointment. Nobody attended the consequentials hearing to represent either the Company or the Joint Supervisors, and an order revoking the CVA (which was likely unnecessary given the Company's position is that it was terminated before then) was granted.

ICCJ Prentis also made an order against the Company in respect of Peabody's costs and, significantly, decided that the Joint Supervisors should be jointly and severally liable for those costs, at least from the point of the trial onwards. ICCJ Prentis acknowledged that the order was unusual, but found that it was justified by the “unusual position adopted by the supervisors” in choosing to be represented by the same counsel as the Company and taking a positive position in alignment with the Company on the CVA, “notwithstanding the well-known obligation of neutrality in supervisors”.

The Joint Supervisors appealed, advancing several grounds, including that: (1) they were named as parties in the proceedings only in their capacity as Joint Supervisors and not in their personal capacity, and so any order against them personally was inappropriate; (2) the Company was the unsuccessful party, not the Joint Supervisors, who had taken an essentially neutral stance in the proceedings; (3) there was nothing in ICC Judge Prentis' judgment (specifically, no criticism of their conduct) which would have justified the costs order against the Joint Supervisors; and (4) a costs order may be made against a nominee under a CVA or IVA only where there have been findings of personal misconduct, and there was no such finding here and no proper basis for making one.

Peabody then sought to argue that the order against the Joint Supervisors should be upheld due to: (1) the Joint Supervisors’ failure to engage in seeking to agree consequential matters and to attend the consequentials hearing; (2) the "inherently flawed nature” of the CVA; and (3) an attempt made during the appeal to vary the terms of the CVA to address one particular flaw (referred to as "the quirk"), which showed that the Joint Supervisors lacked independence and neutrality.

The Court’s Decision

The Joint Supervisors, as named parties to the proceedings, were in principle susceptible to having a costs order made against them under CPR, rule 44.2, even though the rationale for their joinder was only to ensure they were bound by any order made in relation to the CVA. The question was whether there were proper grounds for ICCJ Prentis making the costs order he did.

Costs orders against a nominee are rare. Logic and principle suggests that some element of personal misconduct is needed to justify them, and even that may not be enough.

Here, the rationale for the Judge's conclusion that the Joint Supervisors were guilty of misconduct was the fact that he considered they had moved, as he put it, from a position of neutrality to a position of "litigation aggression". In reaching that conclusion, the Court on appeal (the “Court”) found that the Judge misdirected himself and erred in principle. First, the Judge thought it significant that the Joint Supervisors had instructed the same solicitors and counsel as the Company. The Court found that this was not necessarily a signal that the Joint Supervisors were moving from a position of neutrality to one of litigation aggression. Counsel agreed that it is a common practice for the company and nominees who are added to proceedings in order to be bound by the outcome to be represented by the same legal team.

Second, certain evidence available indicated there had been no movement to a position of litigation hostility. A witness statement provided by one of the Joint Supervisors stated that the position of the Joint Supervisors was neutral. Therefore, it was a misdirection for the Judge to conclude there had been a shift away from that accepted position of neutrality as a result of certain statements made in the skeleton argument. The Joint Supervisor reaffirmed his evidence at the start of the trial (after the date of the skeleton), and there was no finding that he was untruthful.

Third, the Judge was wrong to conclude that the Joint Supervisors had moved to an improperly aggressive litigation posture by virtue of the fact that they had indicated they would seek costs against Peabody if its challenge to the CVA had been successfully resisted. It is not unusual for supervisors, to the extent they have incurred costs in connection with a failed challenge to a CVA, to seek to recover them from the unsuccessful applicant. The reason is simple: if the applicant does not pay, the supervisors' costs will have to be borne by the company, and thus (indirectly) by its creditors, who will thus be worse off. The Court found the logic of that explanation to be sound and consistent with the supervisors having an ongoing position of neutrality, because it is reasonable for supervisors, acting neutrally, to seek to protect the position of the company's creditors.

Similarly, the matters raised by Peabody did not justify the conclusion that the Joint Supervisors had moved to an improperly aggressive litigation posture, or that the Joint Supervisors had fallen below the required standard of conduct in some other way which was sufficiently serious to warrant the making of a costs order against them personally.

Concerning the failure of the Joint Supervisors to engage in seeking to agree consequentials and their failure to attend the hearing, the Court found it significant that the Judge focused only on the perceived lack of neutrality of the Joint Supervisors as justifying the making of a costs order against them. He did not mention their failure to engage or attend the hearing, and was correct not to do so.

With respect to Peabody’s position that the “flawed nature of the CVA” was consistent with the Joint Supervisors being in breach of their duties as nominees, this was an attempt to re-run an argument that had failed before ICCJ Prentis. The Judge — rightly in the Court’s view — did not allow counsel for Peabody to make this argument, since it was not raised as part of the original application. The point was not developed further, and did not appear as part of the Judge's reasoning. There was no good reason to depart from the approach taken by the Judge, who was rightly cautious about proceeding on the basis that there had been breaches of duty by the Joint Supervisors when none had been alleged or fairly tested at the trial. It is one thing to say that a CVA is flawed, and quite another to say that its supervisors are guilty of professional misconduct in having supported it. The one does not follow from the other, and if allegations of misconduct are to be made they must be properly identified and fairly put.

On the related argument that the “quirk” in the CVA and the Joint Supervisors’ conduct in addressing it somehow evidenced a lack of independence, the Court did not find this persuasive. If a flaw in a CVA proposal is identified, communicating a possible solution to it is not evidence of a lack of independence or neutrality. If anything, it suggested the opposite, because to allow the quirk to remain unaddressed would have been irresponsible.

Conclusion

Some element of personal misconduct is necessary to justify the making of a costs order against a nominee. Here, there were no findings of misconduct in the Judgment of ICCJ Prentis following the trial, because no misconduct was alleged, notwithstanding the deficiencies in the CVA which in the end allowed it to be set aside. The Judge's conclusion when dealing with costs that there had been misconduct — namely a move to an impermissible position of hostility — was based on a mistaken assumption that the joint skeleton argument necessarily signalled an adverse and hostile litigation posture on the part of the Joint Supervisors. The Judge misdirected himself and wrongly took into account in exercising his discretion on costs a factor which was not available or relevant. Accordingly, the Court allowed the appeal.

Judges: Mr Justice Adam Johnson

Counsel: Matthew Weaver KC of Radcliffe Chambers (instructed by Shoosmiths) for the Joint Supervisors

Andrew Mace of 9 Stone Buildings (instructed by Devonshires Solicitors) for Peabody