Regis CVA - The treatment of intra-group relationships

This case is a reminder to both debtors and nominees that corporate law formalities must be respected and that the insolvency lens may affect the treatment of connected party transactions in future valuations and restructuring processes.

The Regis landlords made multiple complaints regarding the disclosure and valuation of connected party transactions and the large uniform discount applied to multiple landlords for voting purposes (75%).  The only argument found in their favour was the mistreatment of one of the intercompany loans.

Key takeaways -

• Connected party transactions should be fully disclosed and potential legal challenges to them highlighted.  The law need not be applied to each transaction.
• Validity of claims against the debtor should be carefully analysed for the statement of affairs and estimated outcome statement.  Evidence as to the treatment of creditors must be properly diligenced by the nominee and the more complex the CVA, the greater the level of inquiry expected by the court.
• The Estimated Outcomes Statement should note those entries which may be subject to challenge as antecedent transactions, although no value needs to be placed on such recoveries. 
• Treatment of critical creditors must be objectively ascertained by the nominee.
• The court can opine on the appropriateness of the discount applied to creditor claims.
• A post-approval modification to a CVA is material if the change altered the CVA's effect or economic substance.  The test is not whether the change would have affected voting intentions.  

One matter not determined was whether the absence of an effective profit share mechanism constitutes unfair prejudice.  In this case, in reality, the profit share mechanic was not expected to share any upside with the compromised creditors and was therefore ineffective. 

Would this judgment have been different if this had been a live case with real commercial impact on creditors, rather than a terminated CVA where the debtor is now in administration?  No doubt that distinction will be made in future CVA disputes.