Vol 3 (2006) - Issue 2

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TXU – CVAs v. S425 Schemes

In the insolvency of the TXU Europe group, the distribution
and exit procedure chosen to conclude the administrations and certain liquidations of the Holding Companies was the Company Voluntary Arrangement (‘CVA’). Certain creditors challenged the Holding Company CVAs under s6 of the Insolvency Act 1986, in which one of the arguments was that the office-holders should not have proposed CVAs, but s425 Companies Act 1985 Schemes of Arrangement (‘Schemes’). Why were CVAs chosen, and was this a misuse of the office-holders’ discretion on exit procedures?
Background to the CVAs
The insolvency of the TXU Europe power group was the largest ever in the UK. The group fell into two parts, the Operating Companies, with assets of some GBP 2.1 billion and liabilities of some GBP 2.3 billion; and the Holding Companies, with assets of GBP 0.6 billion and liabilities of GBP 2.5 billion. Complex, interlocking CVAs for twenty-eight of the Operating Companies and, separately, sixteen of the Holding Companies were proposed. Those for the Operating Companies were passed without objection in January 2005, paving the way for more than GBP 400 million to be paid to the Holding Companies. This article does not deal with the Operating Company CVAs.
Whether through CVAs or Schemes, there were seven issues which had to be compromised between the Holding Company estates, of which the key issue was a settlement of potential litigation against the directors and the ultimate holding company, TXU Corp, valued at some USD 220 million (‘the Corp settlement’). The Corp settlement was the driving factor behind many of the critical issues in the case, because:
– it mandated a long-stop date for the holding of meetings to approve the compromises;
– it required any challenge to the compromises to be disposed of by 30 November 2005, or else the settlement would fall away;
– it required releases to be given by all of the key Holding Companies; and
– it required s304 relief to be given under the US Bankruptcy Code by the key Holding Companies and certain Operating Companies.
The other issues comprised:
– GBP 67 million arising from swaps encashed pre-insolvency;
– GBP 11.5 million receipts from certain power companies;
– whether the on-lending of proceeds from several bond issues (totalling approximately GBP 1.4 billion)
from a special purpose vehicle to the UK holding company, TXUEL was subordinated;
– whether another special purpose vehicle, known as EGO BV, had a guarantee claim of approximately GBP 400 million against Energy Holdings No. 3 Limited (EH3);
– which would be the most appropriate date for valuing claims. Significant amounts of debt were in euros, dollars and sterling;
– the agreement of inter-company balances.