Assessing material irregularities in IVAs—Rowbury v Official Receiver

What constitutes material irregularities in individual voluntary arrangements (IVAs) and how will the court assess these? Faith Julian of 9 Stone Buildings examines the decision in Rowbury and others v Official Receiver and others.

Original news

Rowbury and others v Official Receiver and others [2015] EWHC 2276 (Ch), [2015] All ER (D) 129 (Sep)

The applicants sought orders, including to revoke a voluntary arrangement proposed by a bankrupt at a meeting of his creditors. The Bankruptcy High Court held that, as a result of reversing the chairman’s decision not to suspend the meeting and discounting the value of one vote, the arrangement would be revoked and the bankruptcy re-instated.

What was the background to the application briefly?

This was an application for an order under section 262 of the Insolvency Act 1986 (IA 1986), or alternatively rule 5.22(5) of the Insolvency Rules 1986, SI 1986/1925 (IR 1986), to revoke an IVA approved at a creditors’ meeting on 8 December 2014. A second application was also before the court, but not dealt with in this judgment.

The bankruptcy occurred against the backdrop of litigation regarding the debtor’s (or alternatively the debtor’s company’s) entitlement to share in the continuing income stream generated by the film known as Monty Python and the Holy Grail.

What were the legal issues that the Registrar had to decide in this application?

Registrar Briggs was asked to consider whether certain events occurring at the meeting amounted to ‘material irregularities’ for the purposes of IA 1986, s 262(1)(b) such that the IVA could and should be revoked.

It was common ground that an irregularity will be material where, objectively assessed, the error or omission ‘would be likely to have made a material difference to the way in which creditors would have considered and assessed the terms of the proposed IVA’ (Cadbury Schweppes plc v Somji [2001] 1 WLR 615, [2000] All ER (D) 2397, per Robert Walker LJ, as he then was).

Why did these issues arise?

An IVA can only take effect if a proposal or modification is passed by a majority of 75% or more in value of those creditors either present and voting, or voting by proxy. The IVA in this instance was approved with the tightest of margins, with 75.77% of creditors voting in favour of the proposal.

The applicants’ case was that the chairman ought not to have attached value to certain creditors’ rights in the way that he did, and also that he ought to have suspended the meeting for a short period as requested. Had the chairman conducted the meeting differently, the applicants asserted, the proposal would not have been approved.

What were the main legal arguments put forward?

The applicants identified material irregularities in respect of four creditors.

Creditor 1

This debt was acknowledged in the debtor’s statement of affairs, and creditor 1 had already voted against a previous proposal. It intended to vote by proxy, but the proxy incorrectly voted in favour of the proposal, and also voted for the wrong sum. The applicant’s solicitor informed the chairman of these errors, and requested a short suspension. The chairman refused, and the IVA was passed. An email containing a correct proxy was sent just 14 minutes after the IVA was passed. Had the correct proxy been taken into account, the IVA would not have passed.

The respondent advanced no arguments in defence of the chairman’s actions.

Creditor 2

The chairman was informed that creditor 2 intended to lodge a proxy. The applicant’s solicitor requested a short suspension for the proxy to be sent (and also for creditor 1’s proxy to be corrected)—the chairman refused. Creditor 2 lodged a proxy minutes late, rejecting the proposal. Had creditor 2’s vote been counted, the IVA would not have passed.

As above, the respondent did not advance any arguments in defence of this submission.

Creditor 3

The applicant submitted that creditor 3 was not a creditor of the debtor at all, but a creditor of the debtor’s company. Had creditor 3’s vote not been counted, the IVA would not have passed.

The respondent did not challenge this evidence.

Creditor 4

This creditor’s entitlement to vote (and at what sum) was the subject of lengthy submissions (see paras [57]–[92]). The debt arose out of a conditional fee agreement (CFA) pertaining to the Monty Python proceedings. Creditor 4 voted in favour of the IVA. Had it not been permitted to vote, or permitted to vote but not at full value, the IVA would not have been approved.

The applicant’s primary submission was that the debtor was only liable under the CFA if both he and his company were successful in the Monty Python litigation. Only the company was successful—creditor 4, therefore, was not a creditor of the debtor at all. Alternatively the applicant submitted that creditor 4 had been permitted to vote at too high a value. The debt included sums for work that was unrelated to the Monty Python proceedings, and therefore not covered by the CFA.

The respondent’s submission in reply was that a proper reading of the CFA led to the conclusion that the debtor was ‘bound’ to the fortunes of his company—if his company won, both parties were liable under the CFA. Subject to one concession, it was disputed that the debt included sums not properly due under the CFA.

What did the Registrar decide, and why?

Creditor 1

The chairman erred when he declined to suspend the meeting for the filing of a correct proxy, because:

  • the creditor had already voted against a previous proposal
  • the chairman was informed of the mistake on the proxy
  • the mistake would have been obvious when viewed against the background of the actual votes counted at the meeting held to consider the previous proposal
  • the chairman was informed that the mistake was to be rectified
  • the rectification was to take place immediately or within a short space of time sufficient to enable the meeting to continue after a suspension, and
  • the vote if rectified, would make a material difference to the outcome

This error in judgment inevitably led to an irregularity. Creditor 1’s vote was, to the knowledge of the chairman, included for the wrong value on the wrong side of the balance sheet. The irregularity was material as it affected the outcome of the meeting.

Creditor 2

The suspension of up to an hour would have meant that creditor 2’s vote against the proposal was counted and the IVA would not have passed—the failure to suspend was an irregularity that was material.

Creditor 3

This creditor was not a creditor at all—permitting a non-creditor to vote at a meeting of creditors’ was irregular. It was also material—had creditor 3 not been permitted to vote, the IVA would not have been approved.

Creditor 4

As a matter of construction, the debtor was liable under the CFA and creditor 4 was entitled to vote for sums properly due under the CFA. However, in permitting creditor 4 to vote for sums not due to it the chairman erred, resulting in an irregularity. It was material because the necessary reductions, when calculated, made a difference to the outcome of the creditors’ meeting. The registrar declined to ascribe a new value to creditor 4’s claim without hearing further argument (paras [92] and [93]).

In the circumstances, the IVA was revoked and the debtor’s bankruptcy was reinstated.

To what extent is the judgment helpful in clarifying the law in this area?

The judgment is helpful in two respects.

First, it confirms that a claim for solicitor-client costs incurred under a CFA is a provable debt because the debtor is obliged to fulfil obligations under the agreement. It does not matter whether the obligation to pay under the agreement is future, contingent, or present (para [26]).

Secondly, and perhaps more importantly, the Registrar noted that no authority had been cited to him where guidance is given regarding the chairman’s discretion to declare a meeting suspended for a period of up to one hour pursuant to IR 1986, r 5.24(4A). In those circumstances, the Registrar proceeded to give guidance on the matter, but bore in mind that ‘the courts should not be prescriptive as the circumstances of each meeting will always be different’ (para [39]).

What practical lessons can those advising take away from the case?

The judgment is most useful in the guidance it offers to those charged with the task of chairing creditors’ meetings. To that end, the Registrar offered the following:

  • a chairman’s duty is to ensure that the purpose of the creditors’ meeting is achieved fairly and proportionately between the creditors (inter se), and the creditors and the debtor
  • the overall aim is to obtain approval within a limited time frame, but that should not be achieved by railroading the proposal through (Bonney & Anor v Mirpuri [2013] BPIR 412, paras [16], [17])
  • a chairman should exercise any discretion given to him with the purpose and context of the meeting firmly in mind
  • a chairman has to act both in accordance with the governing rules and in a pragmatic way ensuring that the votes counted and cast are not inaccurate
  • there can be no exhaustive list of circumstances when a chairman should declare a suspension but the following ‘come immediately to mind’:
    • where one or more of those attending needs a short break in order to consider a modification or if a creditor’s representative needs to take instructions
    • when a document is being faxed or e-mailed which may help the chairman put a value on a claim or decide whether to allow a creditor to vote
    • where a chairman is on notice of an obvious error which may be remedied within an hour
  • generally, as the insolvency rules provide only a short period for suspension a chairman should be slow to refuse a request unless a suspension would serve no purpose
  • in circumstances where a chairman is informed of a mistake he should take care to give an opportunity for the mistake to be rectified
  • a chairman of a meeting must take account of the material put before him (Re Newlands [2006] EWHC 1511 (Ch), [2006] All ER (D) 299 (Jun), para [28])
  • that material includes an oral representation that a mistake had been made in a proxy which could be rectified if a short period of suspension is granted
  • if a proxy, when amended, had no bearing on the outcome of the meeting, the pragmatic chairman may consider that an adjournment is a waste of time and expense—however the failure to suspend for an hour, or give serious consideration to an adjournment, will be more difficult to justify if rectification affects the outcome of the decision

Faith Julian joined 9 Stone Buildings this year. She is developing a broad commercial chancery practice which encompasses personal and corporate insolvency, real property, landlord and tenant, company, commercial, and chancery.

Interviewed by Barbara Bergin.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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Creditors' meetings in an IVA

What can a creditor do if they want to challenge the individual voluntary arrangement and what grounds are needed to mount a challenge?

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First published on LexisPSL Restructuring and Insolvency

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