Chairman incorrectly deals with creditor's claim in IVA vote—AB Agri Ltd v Curtis and others

Reuben Comiskey, barrister at Radcliffe Chambers, discusses AB Agri Ltd v Curtis in relation to challenging an individual voluntary arrangement (IVA) on the ground of material irregularity and examines how the decision may affect creditors and debtors.

Original news

AB Agri Ltd v Curtis and others [2016] Lexis Citation 510, [2016] All ER (D) 121 (Jul)

The court allowed the applicant company’s challenge to an IVA, where an insolvency practitioner (IP) had erred in valuing the applicant’s claim at £1 and/or rejecting it altogether. That had been a material irregularity within section 262(1) of the Insolvency Act 1986 (IA 1986).

What was the background to this case?

Mr Curtis was a director and the major shareholder of Agricultural Contract and Marketing Company Ltd (ACMC), whose business was pig farming. From 2007, AB Agri Ltd supplied pig feed to ACMC. From the outset, AB Agri required Mr Curtis to guarantee ACMC’s liabilities. In April 2015, ACMC went into administration, owing in excess of £470,000 to AB Agri.

In May 2015, AB Agri served a statutory demand on Mr Curtis, and then a bankruptcy petition in June 2015. Mr Curtis sought to propose an IVA, and also indicated that he would be opposing the petition on the basis that the debt was disputed. The court made an interim order and gave directions for evidence to be filed in relation to the dispute.

In October 2015, the creditors’ meeting took place to consider the IVA proposal—with Mr Maxwell as chairman. AB Agri voted against the IVA, but it was admitted to vote for only £1. The IVA was approved, but if AB Agri had been admitted for the full value of its claim the IVA would have been rejected. AB Agri challenged the IVA pursuant to IA 1986, s 262—on the grounds of material irregularity.

What were the issues before the judge?

In the bankruptcy proceedings Mr Curtis made a witness statement in which he alleged that in 2007, before giving the guarantee, he had been told by an unknown employee of AB Agri that it would not be relied upon if ACMC’s finances improved, and that in 2010 he had been told by another unknown employee that the guarantee would be released. AB Agri filed evidence that denied these conversations. Both parties’ witness evidence was available to Mr Maxwell before the meeting.

The first issue was factual—whether the guarantee had been released as alleged. The second was a question of law—whether Mr Maxwell had acted properly in admitting AB Agri to vote for only £1. Mr Maxwell asserted that he had exercised his discretion to reject AB Agri’s claim as it was disputed, and that he only valued it for £1 to keep them informed of the progress of the IVA proposals. He also asserted that he had rejected the claim because he had reached the conclusion, on the basis of the witness statements, that the bankruptcy petition was bound to fail.

What did the judge decide, and why?

As to the first issue, the judge, HHJ Behrens, decided that on Mr Curtis’ evidence the guarantee had never been released. In the second issue, the judge decided that Mr Maxwell ought to have permitted AB Agri to vote for the full amount of its debt.

As to this second issue, the judge noted that the only provision of the Insolvency Rules 1986, SI 1986/1925 (IR 1986) permitting a chairman to admit a vote for only £1 was IR 1986, r 5.21(3), which applies only in relation to unliquidated debts, and AB Agri’s debt was liquidated.

Mr Maxwell therefore had to approach the question of AB Agri’s entitlement to vote by reference to IR 1986, r 5.22 and in particular IR 1986, r 5.22(4), which permits a chairman to admit a claim for voting purposes but to mark it objected to. The judge referred to the guidance of Harman J in Re a debtor (no 222 of 1990) ex p Bank of Ireland [1993] BCLC 233—a claim should only be rejected if the chairman is certain it is bad, and if there is any doubt he should admit it but mark it as objected to. The question of whether or not AB Agri’s bankruptcy petition was likely to succeed was irrelevant.

The judge considered that Mr Curtis’ account was sufficiently unlikely that a robust chairman might have concluded that his dispute did not have any realistic prospect of succeeding. In any case, it ought to have been clear to Mr Maxwell that AB Agri’s claim was not bound to fail when he saw the witness statements filed on its behalf. He therefore ought to have admitted AB Agri for the full amount of its claim, even if he marked it as objected to.

This constituted a material irregularity— the IVA proposal was set aside, and the petition allowed to proceed (with the dispute now determined in AB Agri’s favour). In addition, the judge concluded that Mr Maxwell’s conduct fell below the standard to be expected of an IP, and so he was ordered to pay 50% of the costs.

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

The judgment is a useful reminder of the extent of a chairman’s discretion—it is not as wide as it might appear from the rules. In practice, a creditor’s claim must be obviously bad in order for it not to be admissible for voting purposes.

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

There are practical lessons to take away from this case.

For creditors

A chairman’s decision on voting can be challenged under both IR 1986, r 5.22 and IA 1986, s 262. However, the chairman is not liable for costs in relation to a challenge under IR 1986, r 5.22. Therefore, where a creditor thinks it can show that the chairman has acted improperly, it should make use of the IA 1986, s 262 procedure.

For debtors

The case shows why it can be inadvisable to propose an IVA while disputing a bankruptcy petition. In the IVA application AB Agri was able to cross-examine Mr Curtis on his witness statement in order to demonstrate that the guarantee had not been released—a procedural advantage which would not have been available on the hearing of the petition.

Mr Curtis might have done better to deal with the petition first, and only propose the IVA if his challenge to the petition failed.

Reuben Comiskey represented the applicant in this case.

Interviewed by Evelyn Reid.

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

Further Reading

If you are a LexisPSL subscriber, click the links below for further information:

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?

Not a subscriber? Find out more about how LexisPSL can help you and click here for a free trial of LexisPSL Restructuring and Insolvency.

First published on LexisPSL Restructuring and Insolvency

Relevant Articles
Area of Interest