A new approach to challenges to CVAs? Advocate General for Scotland v Petrofac Facilities Management Ltd

The case of Advocate General for Scotland v Petrofac Facilities Management Ltd, heard in the Court of Session, followed a challenge to a CVA on grounds of unfair prejudice. In fact, it is the first reported decision by a Scottish court in such circumstances. The court took a new approach to assessing unfair prejudice, which could have significant consequences if it is followed in future cases.

The background

Petrofac’s financial struggles are widely known as they were frequently covered in the media. The group’s parent company, Petrofac Limited, entered administration in October 2025 after the courts in England & Wales refused to sanction its proposed restructuring plan. In December, the administrators agreed a sale of the group’s ‘Asset Solutions’ division, including the main trading entity, PFML. This was subject to a number of conditions including that PFML settle a long-running dispute with HMRC over an alleged outstanding £150 million in unpaid National Insurance Contributions.

In January 2026, PFML proposed a CVA that would deal with HMRC’s claim and a number of others. Under the CVA, PFML’s secured creditors would receive a share of the sale proceeds amounting to roughly 4% of their claims. It was estimated that HMRC would receive at least 0.45% of its debt, as opposed to a likely return of 0.12% if PFML entered into a formal insolvency process.

The CVA was approved by PFML’s sole shareholder, and by most of its creditors (largely those whose claims were not being compromised). The two votes against came from HMRC and another smaller creditor. HMRC asked the court to revoke the approval of the CVA on the basis that it was unfairly prejudicial to their interests.

The decision

Typically, the courts have assessed “unfair prejudice” by reference to two tests: a “vertical comparison” and a “horizontal comparison”. The vertical comparison is between what the creditor would receive under the CVA and what they would receive in a realistically available alternative insolvency process. The horizontal comparison looks at the creditor’s treatment under the CVA and how other classes of creditor are treated, assessing whether any differential treatment is fair and justified in all the circumstances of the case.

Rather than adopt the usual tests, Lord Sandison posed the question a different way. He held that the court must determine whether there is prejudice, and then whether that prejudice is unfair in a relevant sense.

He also held that prejudice is to be determined by considering whether the outcome for the creditor is equivalent to the “reasonably assessed value” of their rights, or the outcome for others in a “truly comparable” position. Unfairness is to be assessed by asking whether it is “equitable” to impose the CVA on an unwilling party – and the court was not willing to restrict how that assessment should be carried out by limiting the process to only the vertical and horizontal comparisons. Applying this approach, the court held that HMRC was not unfairly prejudiced and refused to revoke the CVA.

Conclusion

What makes the decision surprising – and potentially consequential – is that the court undertook the vertical and horizontal comparisons, but it did not stop there. It used those comparisons as a tool when considering the much broader overall question of “unfair prejudice”. This approach enabled the court to take a much wider range of circumstances into account. If it is followed in future cases then predicting the outcome of challenges to CVAs will become more difficult.

If you would like to have a further discussion about any of these issues, or other insolvency-related matters, please contact our Commercial Disputes and Restructuring and Business Advisory teams or your usual Shepherd and Wedderburn contact.

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