Unfair Prejudice in Scottish CVAs: An Equitable, Fact-Sensitive Inquiry (Not a Rule-Bound “Vertical/Horizontal Comparator” Exercise)
Court: Outer House, Court of Session
Citation: [2026] CSOH 29
Date: 25 March 2026
Judge: Lord Sandison
1. Introduction
This petition was brought by The Advocate General for Scotland on behalf of HMRC seeking an order under
section 6(4)(a) of the Insolvency Act 1986 to revoke creditor and shareholder decisions approving a
Company Voluntary Arrangement (CVA) for Petrofac Facilities Management Limited (PFML).
PFML opposed the petition and sought expedition given acute liquidity pressures and the need to complete a sale of the wider
Asset Solutions business to CB&I.
The core dispute concerned whether the CVA “unfairly prejudiced” HMRC (s 6(1)(a)), where HMRC’s principal affected claim
was a large, long-running and disputed National Insurance contributions liability (about £151m) arising from alleged
avoidance arrangements spanning 1999–2014. The CVA was designed to facilitate a competitive sale process driven by the
administrators of PFML’s ultimate parent, Petrofac Limited, and the buyer required (as a condition precedent) a full and final
compromise of HMRC’s disputed claim and releases of major secured liabilities (over £1bn), the latter implemented via an
inter-creditor agreement rather than the CVA itself.
Lord Sandison refused the petition, holding that HMRC had not established unfair prejudice.
2. Summary of the Judgment
- Unfair prejudice is an equitable, context-driven inquiry: the court emphasised the need to focus on whether, in all the circumstances, it is equitable to impose the CVA bargain on an unwilling creditor, cautioning against treating “vertical” and “horizontal” comparisons as rigid rules.
- No prejudice on outcome/value comparison: the CVA offered HMRC a return above the reasonably realisable value of its rights in the near-certain alternative of formal insolvency. The court accepted uncontroverted evidence that HMRC would receive at least 0.45% under the CVA versus about 0.12% in insolvency (and likely 2.23% under the CVA if the sale completed).
- Differential treatment not unfair: leaving secured creditors and “Category I” trade/operational creditors outside the CVA compromise was justified by (i) secured creditors not being comparable to unsecured creditors and receiving broadly what they would recover on enforcement/insolvency, and (ii) credible business necessity and transaction viability reasons for paying critical suppliers in full.
- “Drowning out” is not itself unfair: the mere fact that large creditors’ votes outweighed HMRC’s did not establish unfairness absent some improper advantage-taking.
- Other factors carried limited weight: (i) the “honest and reasonable creditor” notion was not a complete guide; (ii) HMRC’s claim being disputed did not warrant a meaningful valuation discount on the evidence; and (iii) HMRC’s “involuntary creditor” status was, in principle, relevant but attenuated here by the long delay in assessment/prosecution of the claim.
3. Analysis
3.1 Precedents Cited
Prudential Assurance Co Ltd v PRG Powerhouse Ltd [2007] EWHC 1002 (Ch), [2007] Bus LR 1771, [2007] BCC 500
Cited for the analytic language of “vertical” and “horizontal” comparisons and the recognition that satisfying a vertical comparator
(doing better than the insolvency baseline) is not automatically determinative of fairness. HMRC relied on it to argue that even
if insolvency returns were slightly worse, the CVA could still be unfair due to how value was allocated and who voted it through.
Lord Sandison accepted the limited role of such comparator language but warned against its hardening into rigid doctrine.
Discovery (Northampton) Ltd v Debenhams Retail Ltd [2019] EWHC 2441 (Ch), [2020] BCC 9
Used for two propositions: (i) the vertical comparator is not always liquidation—rather, the “realistically available alternative”
depends on the facts; and (ii) “contagion risk” can justify keeping trade creditors whole because compromising even non-essential
suppliers may destabilise wider supplier confidence. The court accepted the general legitimacy of these commercial dynamics in rescue
transactions, while expressing some scepticism about contagion risk being universally applicable, and instead relied on the
case-specific affidavit evidence that PFML had examined supplier influence and operational risk.
Relied upon by both sides for the idea that a CVA should not push a creditor below an “irreducible minimum” (the realistic insolvency
alternative), and for the importance of good faith and care in ensuring fairness where a compromised creditor may be outvoted.
Lord Sandison’s reasoning aligns with the “irreducible minimum” concept but recasts it in broader equitable terms: the real question
is the value of the compromised rights in the only realistic alternative (imminent insolvency), and whether the CVA gives more than that.
Re a debtor (No 101 of 1999) (No 1) [2001] 1 BCLC 54
Cited for warnings against a narrow fairness test that asks only “better than insolvency,” and for concern where uncompromised
creditors use voting power to eliminate a competing debt at no cost. Lord Sandison did not adopt a presumption of unfairness from
outvoting by non-compromised creditors; he treated “drowning out” as descriptive, not analytical—relevant only if tied to
unfair advantage-taking or an inequitable allocation of value.
Lazari Properties 2 Ltd v New Look Retailers Ltd [2021] EWHC 1209 (Ch), [2021] Bus LR 915, [2022] 1 BCLC 557
Central to the parties’ framing of the horizontal/vertical analyses and to the proposition that differential treatment can be justified.
PFML used it to argue that excluding suppliers is conventional and that voting by unimpaired creditors is not inherently unfair.
Lord Sandison agreed with the underlying permissibility of differential treatment but explicitly cautioned against converting such
case-law frameworks into rule-based tests. The judgment thus treats Lazari as informative but not prescriptive: the touchstone is
equity in context.
Invoked for the “honest and reasonable person” approach. PFML argued that support from compromised creditors (e.g., HSBC and Moelis)
suggested that a reasonable creditor would approve the CVA. Lord Sandison significantly limited the usefulness of that surrogate:
HSBC and Moelis had recourse beyond PFML, so their rational preferences did not mirror HMRC’s; and the “honest and reasonable” test,
while potentially helpful, is not a complete or reliable answer in every case.
Re T&N Ltd [2004] EWHC 2361 (Ch), [2005] 2 BCLC 488
Cited to support the notion (developed in scheme jurisprudence) that courts are slow to sanction restructuring that leaves creditors
worse off than winding-up. The case was used as an analogue to justify vertical comparator thinking in CVAs. Lord Sandison accepted
the relevance of comparing to the realistic alternative but resisted importing overly formulaic scheme/CVA decision rules, preferring a
broader equitable assessment.
Re AGPS Bondco plc [2024] EWCA Civ 24, [2024] Bus LR 745, [2024] BCC 30
Cited for modern appellate treatment of comparator reasoning and for recognition that trade creditors are often excluded from compromise
in sale/rescue contexts. While the decision is English and concerned with restructuring tools adjacent to CVAs, it was deployed to show
that differential treatment is structurally normal in rescue transactions. Lord Sandison’s approach is consistent with this, but again
grounded in evidence of necessity and value-source rather than “accepted market practice” alone.
Re Magyar Telecom BV [2013] EWHC 3800 (Ch), [2014] BCC 448
Cited on cross-border effectiveness: contractual variations/discharges effected under the governing law will usually be recognised
elsewhere. PFML relied on this in explaining why certain foreign-law (Libyan) liabilities were excluded from the CVA compromise due to
doubts about recognition/enforcement, opting instead for consensual compromise. Although not decisive to HMRC’s unfair prejudice claim,
it supported the proposition that category carve-outs may reflect genuine legal constraints rather than value manipulation.
Phillips v Allan 108 ER 1120, (1828) 8 B&C 477
Cited to support the UK-wide legislative effect of a CVA such that a Scottish CVA can compromise English-law liabilities because it
takes effect under a UK Act of Parliament. This supported PFML’s reasoning about which liabilities could sensibly be bound into the CVA.
3.2 Legal Reasoning
(a) Re-centering the test: equity and the value of compromised rights
Lord Sandison framed “unfair prejudice” as requiring (i) prejudice (a detriment relative to the value of rights compromised or
relative to comparable creditors), and (ii) unfairness (whether it is equitable to impose the bargain). He treated vertical and
horizontal comparisons as potentially helpful “angles,” but criticised the risk of “sclerosis” if such concepts become treated as
generally applicable rules.
(b) The realistic alternative dominated the valuation exercise
A key factual finding was that, absent the CVA and linked sale, PFML’s imminent formal insolvency was “a moral certainty,” with no
realistic prospect of paying material debts through continued trading, and negligible prospects of a sale with debts intact.
Against that background, any supposed negotiating leverage in HMRC’s claim was treated as “inconsequential.”
The court accepted evidence that HMRC’s CVA return (minimum 0.45%, likely higher) exceeded the reasonably realisable insolvency value (0.12%).
This defeated the contention that HMRC was being forced to accept less than its rights were worth in reality.
(c) Differential treatment: who is truly comparable, and could the surplus be reallocated?
The court approached “horizontal” concerns through comparability and value-source:
- Secured creditors (Categories F and G): they were not comparable to HMRC because of security. Their estimated 4.48% return was said to match what they would receive in PFML insolvency, making it hard to characterise as unfair to HMRC. Critically, the court asked whether their return could realistically have been diverted to unsecured creditors; it concluded that the secured creditors had the negotiating “whip hand,” and that the deal (including the carve-out for the unsecured compromised fund) was evidenced as “the best available.”
- Trade/operational creditors (Category I): paying critical suppliers in full was justified on evidence of operational safety, legal compliance, and commercial viability of the business post-sale. The court accepted these justifications, albeit with expressed reservations about contagion risk’s generality and about the business rates explanation; nonetheless, absent contrary material, PFML’s evidence-based judgment about trading necessity carried the day.
(d) Voting dynamics: “drowning out” is not a free-standing ground
Lord Sandison held that weighted voting inevitably gives larger creditors more influence; “drowning out” becomes meaningful only if
linked to an unfair exploitation of that influence. On the facts, given the inevitability of insolvency and the absence of evidence
that greater distributable value could properly have been shifted to HMRC, the voting outcome was not an indicator of unfairness.
(e) Limiting “reasonable creditor” and other peripheral arguments
- HSBC/Moelis as proxies: rejected as surrogates for HMRC because they had other recourse producing 10–20% overall returns.
- Disputed debt: while discounting might be conceptually possible, the similar tribunal outcomes and evidential context did not justify material discounting here.
- Involuntary creditor: potentially relevant in principle, but attenuated by delay in assessment/enforcement; the court proceeded on the basis that the position in 2026 was partly attributable to HMRC’s own inaction.
- Future payroll tax benefit: too speculative to weigh in the fairness assessment.
3.3 Impact
- A Scottish articulation of unfair prejudice as an equitable, evidence-led inquiry: While Scottish courts often draw on English insolvency authorities, this judgment is a clear reminder that comparator language is an aid, not a substitute for assessing fairness in context. Practically, parties should expect the Court of Session to focus on (i) the realistic counterfactual, (ii) the source of any “surplus,” and (iii) whether reallocation was realistically available.
- Greater emphasis on transaction reality in CVA-linked sales: Where a CVA is a condition precedent to a competitive sale and insolvency is imminent, challengers face an evidentially demanding task to show that better value could realistically have been obtained for the compromised creditor.
- Supplier carve-outs likely to withstand challenge if evidenced: Excluding critical suppliers (and sometimes contagion/de minimis groups) is not treated as inherently suspect, but requires credible operational and commercial evidence tied to the company’s business model and regulatory constraints.
- Limits on HMRC-specific fairness arguments: The court confirmed that involuntary status and the public nature of HMRC do not confer special CVA protection for non-preferential tax claims; any “equitable pull” is highly fact-sensitive and can be weakened by delay and litigation posture.
- Voting complaints require more than arithmetic: The fact that unimpaired/secured creditors could outvote an objector will not, without more, establish unfair prejudice; challengers must show an inequitable capture of value or unjustified discrimination.
4. Complex Concepts Simplified
- CVA (Company Voluntary Arrangement): a statutory compromise between a company and its creditors, approved by creditor voting thresholds, binding dissentients (subject to limited exceptions).
- Unfair prejudice (s 6): a court-controlled safety valve—creditors can challenge a CVA if it unfairly harms them. It is not enough that a creditor dislikes the deal; the harm must be inequitable in context.
- Vertical comparison: comparing what the creditor gets under the CVA with what it would likely get in the realistic alternative (often administration/liquidation). It identifies a practical baseline.
- Horizontal comparison: comparing how one creditor/group is treated relative to other creditors/groups, asking whether differences are justified.
- Prescribed part (s 176A): a ring-fenced pot carved out of floating charge realisations for unsecured creditors in insolvency (subject to a statutory cap), often small compared to total debt.
- Secured vs unsecured: secured creditors have security over assets and are paid from those assets first; unsecured creditors share what is left (often very little).
- Connected creditors: creditors connected to the company (e.g., group companies). Their votes can be relevant but are treated with caution in statutory thresholds and fairness analysis.
- Contagion risk: the idea that compromising some suppliers may cause wider supplier withdrawal or harsher terms, threatening business viability.
5. Conclusion
Lord Sandison’s opinion in The Advocate General for Scotland for an order under section 6(4) of the Insolvency Act 1986 (Court of Session)
reaffirms that “unfair prejudice” challenges to CVAs are not won by formulae. The court will ask, in substance, whether it is equitable
to impose the bargain on the objector given the realistic alternative and the real-world constraints of rescue transactions.
On the evidence, PFML’s CVA gave HMRC more than the insolvency-value of its rights, and the differential treatment of secured creditors
and critical suppliers was justified by comparability and business necessity.
The decision is a practical guide for Scottish CVAs tied to urgent sale processes: challengers must demonstrate not merely differential
treatment or being outvoted, but an unjustified allocation of value that could realistically have been distributed differently.