Caffè Nero: High Court Rejects CVA Challenge

On 29 September 2021, the English High Court rejected a challenge made in respect of Caffè Nero’s company voluntary arrangement (“CVA”), brought by a landlord on the grounds of material irregularity and unfair prejudice. The single disgruntled landlord, with the backing of the EG Group (“EG”) (who were interested in acquiring Caffè Nero), argued that the directors of the company and the CVA nominees breached their duties in refusing to adjourn or postpone the electronic voting process to vote on the CVA, after EG had submitted an eleventh-hour offer for Caffè Nero.

The challenge primarily focused on the directors’ and CVA nominees’ decision to not adjourn the vote on the CVA and to engage with EG in respect of its offer, which was only received around 27 hours before the voting deadline. The Court held that, as the CVA vote was conducted using the electronic voting procedure, most of the votes for the CVA had already been cast by the time the offer was received and could not be changed, and English insolvency law currently does not provide a CVA nominee or director any clear way to adjourn or postpone an electronic vote without an application for directions to the Court.

The key takeaways arising from the unsuccessful challenge are:

• Duties of directors and CVA nominees: The directors and CVA nominees were found to have acted consistently with their respective duties and in the best interests of Caffè Nero’s creditors in reaching the decision to not postpone the CVA vote. The time constraints and uncertainty surrounding EG’s offer meant that their actions were reasonable as even a “short postponement carried with it very great risk that the CVA would fail”, which would have likely resulted in a value-destructive administration.
• Electronic voting: The electronic voting process for CVAs, while less flexible than physical meetings in its ability to deal with last-minute offers and other unforeseen matters, is still accepted as being the norm for CVA voting. The Court accepted that the only feasible way in which an electronic voting process could be postponed or adjourned would be by way of a court application although, on the facts of this case, it is unclear precisely what relief would be sought.
• Modification to CVA: A modification to a CVA proposal is possible during an electronic voting procedure after the creditors have commenced voting, particularly where the modification is “solely for the benefit of the creditors”. If such CVA proposal is ultimately approved, then “the modification should be treated as having been approved, so long as the company has also consented”.
• Last-minute offers: The decision highlights that bidders seeking to acquire companies in financial distress must engage with the target company and its advisers at the earliest opportunity. Last-minute offers, even if they have the potential to offer a better return to creditors, are less likely to succeed if they are delayed and have any material execution risk as compared to any alternative transaction capable of being executed in the time available.

In this OnPoint, we consider in further detail the key issues considered by the Court in Caffè Nero, together with how this decision will impact CVAs going forward.