Challenging the validity of an IVA

Has the judgment in Narandas-Girdhar and another v Bradstock clarified the position when challenging the approval of a voluntary arrangement by a creditors’ meeting? Katherine Hallett, barrister at 13 Old Square Chambers, explores the decision and the practical implications when seeking to set aside an individual voluntary arrangement (IVA).

Original news

Narandas-Girdhar and another v Bradstock [2016] EWCA Civ 88, [2016] All ER (D) 151 (Feb)

The Court of Appeal, Civil Division, dismissed an appeal against the refusal to set aside an IVA. The judge had given the debtor’s modified proposal the correct construction and had not erred in finding that it was not conditional upon the debtor’s wife’s IVA also being approved. Further, the judge had not erred in finding that the Revenue and Customs Commissioners had subsequently ratified the proxy vote cast on its behalf, even though the proxy form had not specifically addressed the proposal that had eventually been passed.

What was the background to the appeal, briefly?

Mr Parekh had entered an IVA in 1999. The proposals as originally drafted had provided that any IVA would be conditional upon the acceptance of IVA proposals in respect of his wife. However, a modification removed that condition. Mrs Parekh’s proposals were not approved.

No creditors attended the creditors’ meeting. The chairman held proxies, which he exercised in favour of the modified proposals.

In 2010, having subsequently been made bankrupt due to the failure of his IVA, Mr Parekh sought a declaration that his IVA was a nullity because:

  • his modified proposal was conditional upon his wife’s proposals also being accepted, and
  • the chairman had exercised HMRC’s proxy in favour of the modified proposals outside his authority

What were the legal issues the Court of Appeal had to decide?

Factually, Mr Parekh challenged the judge’s findings that:

  • the modified proposals were not conditional upon his wife’s proposals also being accepted (the construction issue), and
  • although the chairman had not been authorised by HMRC to cast its vote in favour of the modified proposal, HMRC had subsequently ratified that vote (the ratification issue)

Legally, Mr Parekh also challenged the judge’s finding that the chairman’s want of authority was, at most, a material irregularity at or in relation to the creditors’ meeting so that his challenge was time-barred by section 262(3) of the Insolvency Act 1986 (IA 1986) and otherwise prohibited by IA 1986, s 262(8) (the material irregularity issue).

What were the main legal arguments put forward?

Construction issue

Principally, Mr Parekh argued that the judge had been wrong to have regard to the deletions, as removed by the modification.

Ratification issue

Mr Parekh argued that, on the facts, the judge had been wrong to conclude that HMRC had ratified the exercise of its proxy.

Material irregularity issue

Mr Parekh argued for a narrow interpretation of IA 1986, s 262 such that it does not apply to anything short of an IVA which has actually (validly) been approved at a creditors’ meeting summoned under IA 1986, s 257. Thus, ‘material irregularity’ means some irregularity which does not of itself render the approval of the IVA a nullity. On the other hand, the supervisor argued for a broader interpretation such that IA 1986, s 262 applies to regulate the validity or otherwise of an IVA wherever the allegedly invalidating event (or non-event) occurs at, or in connection with, a creditors’ meeting summoned under IA 1986, s 257.

What did the Court of Appeal decide, and why?

The Court of Appeal dismissed the appeal on the construction issue. The judge was entitled to have regard to the deletions removed by the modification: if the fact of deletion shows what the parties did and did not agree and there is ambiguity in the words which remain, the deleted provision may be an aid to construction, albeit one which must be used with care.

Mr Parekh also failed on the ratification issue. The judge’s approach and decision could not be faulted.

Although strictly obiter, the Court of Appeal went on to consider the material irregularity issue because of differences in approach at first instance. The Court of Appeal reviewed the existing decisions and concluded that the broader view of IA 1986, s 262 was to be preferred. This was for two principal reasons:

  • first, the clear language of IA 1986, s 262(8) assumes that a material irregularity might be serious enough to invalidate the IVA otherwise than in pursuance to an application under the section, but for the statutory ban of IA 1986, s 262(8), coupled with the time limit in IA 1986, s 262(3) and (2). That would be inconsistent with the notion that material irregularity means only some mere irregularity which does not have an invalidating effect
  • second, the narrower view would deprive the court of the flexible jurisdiction under IA 1986, s 262(4) to make sensible provision in an appropriate case for suspending approval or summoning a further creditors' meeting to consider a revised proposal. It would so greatly emasculate the obvious purpose of IA 1986, s 262 in its context as to conflict with Parliament’s intention, purposively viewed

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

The case is very helpful in clarifying the correct interpretation of IA 1986, s 262, where there had hitherto been conflicting decisions. Re Plummer [2004] BPIR 767 was held to be wrongly decided, in favouring a narrower view.

The Court of Appeal also stressed that its decision did not mean that IA 1986, s 262 is entirely at large as a basis for challenging the validity of an IVA. The qualifying requirements are that the irregularity should be material (more than de minimus or irrelevant) and it should have occurred at, or in connection with, a creditors’ meeting summoned under IA 1986, s 258.

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

Certain aspect of the supervisor’s evidence was ignored and criticised at first instance because of the manner in which it was drafted. It did not distinguish between facts within and outside his knowledge and, as to the latter, did not identify the source of his information or belief. The supervisor applied his own interpretation to the chairman’s note of the creditors’ meeting without making that clear and he also claimed direct knowledge of events which he did not have. This should remind practitioners of the importance of careful drafting of witness statements, which should distinguish between (and explain) events of which the deponent has direct knowledge and those of which he has only indirect knowledge.

Katherine is a barrister at 13 Old Square Chambers, specialising in insolvency, property and commercial litigation, including advisory work. She is regularly instructed in claims involving challenges to IVAs.

Interviewed by Alex Heshmaty.

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

Further Reading

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

What effect does a bankruptcy order have on an individual voluntary arrangement, its assets and its creditors?

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First published on LexisPSL Restructuring and Insolvency

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