IVAs and the importance of disclosure (Golstein v Bishop)

Richard Ascroft, barrister at Guildhall Chambers, says that Golstein v Bishop underlines the importance of ensuring disclosure of all matters potentially relevant to an assessment by creditors of proposals for an individual voluntary arrangement (IVA).

Original news

Golstein v Bishop [2016] EWHC 2804 (Ch), [2016] All ER (D) 162 (Nov)

The Chancery Division made an order, under section 262(4)(a) of the Insolvency Act 1986 (IA 1986), revoking the approval of an IVA where material irregularity had been established. The IVA had been approved following the termination of a professional partnership between solicitors, the appellant (G) and the first respondent (B). In earlier proceedings, the court had granted (in part) G's appeal against a district judge's refusal to revoke the decision approving the IVA on the ground that B, who had proposed the IVA, had failed to disclose the fact that he had been the subject of disciplinary proceedings before the Solicitors Disciplinary Tribunal. In granting the order under IA 1986, s 264(4)(a), the court held that there was no detriment to the IVA creditors in revoking the approval since they stood to recover very little, if anything, from it.

What was the background to the case?

The appellant and the first respondent were both solicitors. Between October 2007 and June 2010, they carried on business in partnership. Following the dissolution of the partnership, the appellant began proceedings in the High Court seeking various forms of relief in relation to the partnership.

The first respondent proposed the IVA in response to a bankruptcy petition presented against him by the appellant. The petition debt was about £19,000, reflecting an unpaid costs order obtained by the appellant in the partnership proceedings.

The relevant meeting of creditors took place in May 2012. Shortly before the meeting, a friend and neighbour of the first respondent tendered to the appellant a sum sufficient to discharge the petition debt but the appellant refused to accept it. At the meeting the nominee rejected the appellant’s claim to be a liquidated creditor in respect of:

  • the amount of the petition debt, and
  • a sum said to represent guaranteed salary due under the relevant partnership agreement

The relevant voting thresholds were met and the IVA was approved.

In June 2012, the appellant issued his application under IA 1986, s 262(1) challenging the meeting’s decision. This was, however, adjourned (on the appellant’s application) while the partnership proceedings were prosecuted. In the meantime, the first respondent complied with his obligations relating to realisation of assets (the IVA was not income-based). At the end of August 2014, the IVA expired by effluxion of time.

In November 2015, the district judge heard the appellant’s adjourned application under IA 1986, s 262(1). The appellant advanced various alleged material irregularities but, the district judge concluded, insofar as they were irregularities, they were not material.

The appellant appealed to the Chancery Division. What was unusual was that the application, though issued within the 28-day time limit specified in IA 1986, s 262(3), had been first heard more than three years after the relevant creditors’ meeting at which the IVA was approved and, perhaps more importantly, after expiration of the IVA by effluxion of time.

What were the main issues arising?

At the merits hearing before the Chancery Division, the appellant had relied on two grounds of appeal:

  • the first challenged the district judge’s treatment of the alleged guaranteed salary as unliquidated for voting purposes
  • the second challenged the district judge’s conclusion that the first respondent’s failure to disclose to his creditors the fact of pending disciplinary proceedings in the Solicitors Disciplinary Tribunal was not material

What were the legal arguments?

Whether or not the alleged entitlement to guaranteed salary was a liquidated debt turned on the proper construction of the underlying partnership agreement. The appellant contended that the entitlement was a pre-ascertained liability and that the first respondent was a primary debtor. The first respondent rejected this analysis, arguing that the agreement gave rise to a right of indemnity, enforceable by way of an action for unliquidated damages not a claim in debt.

As to the materiality of the first respondent’s non-disclosure of the tribunal proceedings, the appellant’s argument had three strands:

  • the established test of materiality should be extended to include the potential effect on the debtor’s nominee of any proven irregularity
  • when applying the established test of materiality, the district judge erred in placing insufficient weight on the nature and seriousness of the disciplinary proceedings pending against the first respondent
  • the district judge erred in her calculation of the hypothetical voting outcome assuming disclosure to the creditors of the disciplinary proceedings

The first respondent argued that the proposed widening of the test was misconceived, unnecessary, too vague and unworkable in practice. He relied on the district judge’s assessment of materiality and challenged the appellant’s hypothetical voting outcome. As a further argument, the first respondent also contended that the granting of relief under IA 1986, s 262 was discretionary and should be refused having regard to the delay (for which it was alleged the appellant was responsible) and the change of position suffered by the first respondent.

What did the Chancery Division decide?

In the merits judgment, the court rejected the first ground of appeal relating to characterisation of the unpaid salary as a liquidated debt. In so doing, it undertook a careful and impressive survey of authority, noting that this area of the law was ‘bedevilled with imprecise terminology’.

The second ground of appeal was upheld by the court that, though recognising the force in the argument that the nominee was also owed a duty of full and frank disclosure, concluded it did not assist the appellant on the facts. The court did, however, agree with the district judge that the pending tribunal proceedings should have been disclosed by the first respondent to his creditors. Where the court differed from the district judge was in her assessment as to materiality. The court concluded that had the truth been told, it would be likely to have made a material difference to the way in which creditors would have considered and assessed the terms of the IVA. It then went on to consider how the creditors would or might have voted if the first respondent had made proper disclosure. In the result, the court’s treatment of minor apathetic creditors proved determinative and the relevant threshold of 75% was missed by less than three percentage points.

In the subsequent remedies judgment, the court rejected the first respondent’s argument that, as a matter of discretion, relief should be refused and it made an order revoking the creditors’ approval of the IVA.

What are the practical implications for challenging an IVA?

The decision reinforces the importance that debtors and those acting for them should be careful to ensure disclosure of all matters that could possibly be relevant to how creditors might assess proposals for an IVA, including an assessment of the debtor’s honesty or integrity.

The decision also serves as a reminder of the importance of early determination of challenges under IA 1986, s 262 in the interests of both the debtor and his or her creditors.

Richard Ascroft appeared for the first respondent in this case.

Interviewed by Robert Matthews.

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

Further Reading

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What is an individual voluntary arrangement and what does it seek to achieve?

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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