Insolvency - Voluntary arrangement - Approval by creditors

Kapoor v National Westminster Bank and another: Court of Appeal, Civil Division (Lords Justice Pill, Etherton, Sir Mark Potter): 5 October 2011

The debtor was indebted to the bank as a result of guarantees which he gave in respect of the liabilities owed to the bank by certain companies of which he was a director. The bank served a statutory demand on the debtor for the sum of £1.8m. The debtor’s application to set aside the statutory demand was dismissed. 

The debtor made an application to the court for an interim order in connection with a proposed individual voluntary arrangement (IVA). The IVA proposal identified four creditors, the bank for about £1.8m, the Revenue and Customs (the revenue) for £35,000, Crosswood Ltd (Crosswood) for £4.5m, and an individual, SC, for £4m. Crosswood was an associate of the debtor for the purposes of rule 5.23(4)(c) of the Insolvency Rules 1986, SI 1986/1925 (the rules), being a company owned by a family trust. 

SC was not an associate of the debtor. The bank and the revenue completed proxies to vote against the IVA proposal. The proxies submitted by Crosswood and SC included a copy of a deed of assignment. That was made in order to circumvent the consequences of Crosswood being an associate of the debtor, and so having the entirety of its claim being disallowed for voting purposes at a creditors’ meeting: it was always the intention of SC to vote in favour of the IVA, and that was the basis on which the assignment was executed, there was no other commercial reason for SC to enter into the arrangement, as the arrangement was wholly uncommercial, and the arrangement with SC was promoted by the debtor.

The effect of the assignment was to leave Crosswood with the overwhelming economic or financial benefit of the assigned debt. At a subsequent creditors’ meeting, the nominee was satisfied with the IVA proposal and recommended its approval. He valued Crosswood’s claim at £4.5m, and SC’s claim at £4m. The revenue and the bank each voted against the IVA proposal.

Crosswood and SC each voted in favour of it. Crosswood was treated as an associate of the debtor for the purposes of rule 5.23(4)(c) of the Rules. SC was not. On that basis, the resolution to approve the proposal was passed. Had the vote of SC been left out of account, the resolution approving the IVA would have been invalid under rule 5.23(4) of the rules since more than half in value of the creditors who were not associates of the debtor would have voted against it.

The bank applied by an ordinary application dated 17 December 2009 for an order pursuant to section 262(1)(b) of the Insolvency Act 1986 (the act) that, inter alia, the approval given at the creditors’ meeting on 27 October 2009 to the IVA be revoked on the ground that there was a material irregularity; further or alternatively, an order pursuant to rule 5.22(3) of the rules that the nominee’s decision to admit the claim of SC be set aside; and that the bank be at liberty to present a petition for the debtor’s bankruptcy. The judge granted the bank’s application.

It was common ground that the assignment of part of a legal debt could only take effect in equity. The judge rejected the debtor’s argument that SC, as the equitable assignee of the assigned debt, was the creditor entitled to vote in respect of that debt rather than Crosswood as the assignor, which retained the legal title to the chose in action. The judge took the view that in promoting the arrangement, the debtor and SC had lacked good faith. The judge was satisfied that in the absence of good faith, there had been a material irregularity so that the vote at the meeting in favour of the IVA proposal should be set aside. The debtor appealed.

The issues were whether: (i) where there had been an assignment of part of a debt, which could only take effect in equity, the person entitled to vote at the creditors’ meeting called to approve the IVA was the assignor or the assignee; and (ii) there had been a material irregularity at or in relation to such a meeting within section 262(1)(b) of the act, if account had been taken of the vote of a creditor who had taken an assignment of part of a debt from an associate of the debtor, the assignment was for no commercial purpose and on uncommercial terms, and was solely for the purpose of enabling the assignee to vote in favour of the individual voluntary arrangement, and, had the vote been left out of account, the arrangement would not have secured the majority of vote required under rule 5.23(4) of the rules.

The court ruled:

(1) It was settled law that an equitable assignee of debt was entitled in its own right and name to bring proceedings for the debt. The equitable assignee would usually be required to join the assignor to the proceedings in order to ensure that the debtor was not exposed to double recovery, but that was a purely procedural requirement and could be dispensed with by the court. By contrast, the assignor could not bring proceedings to recover the assigned debt in the assignor’s own name for the assignor’s own account. 

The assignor could sue as trustee for the assignee if the assignee agreed, and, in that event the claim had to disclose the assignor’s representative capacity. In any other case, the assignor had to join the assignee, not because of a mere procedural rule but as a matter of substantive law in view of the insufficiency of the assignor’s title. A nominee chairing a creditors’ meeting called to consider the approval of an IVA should recognise the undisputed assignee of part of a debt as the creditor owed the assigned debt, at least in circumstances in which it was clear that the debtor had been informed of the assignment and the assignor agreed to the equitable assignee being so treated and exercising the right to vote as such creditor (see [30], [43], [44] of the judgment).

In the instant case, where Crosswood, SC and the debtor had all intended and agreed that SC alone should have the right to vote in respect of the assigned debt; they had communicated that intention and consensus to the nominee, as chairman of the creditors’ meeting; and the nominee had been at no risk of any legal challenge or recrimination from any of them by permitting SC to vote, the claim of SC as a creditor should have been admitted (see [44] of the judgment).

Accordingly, the paragraph by which the judge set aside the decision of the nominee to admit the claim of SC as a creditor would be set aside (see [45] of the judgment). Steel Wing Co Ltd, Re [1920] All ER Rep 292 explained; Central Insurance Co Ltd v Seacalf Shipping Corpn, The Aiolos [1983] 2 Lloyd's Rep 25 applied; Three Rivers District Council v Bank of England (Governor and Co) [1996] QB 292 applied.

(2) It was settled law that the good faith principle encapsulated the fundamental rule that there should be complete good faith between the debtor and his creditors, and between the creditors inter se (see [65] of the judgment). Interpreting section 262 of the act against the background of the good faith principle and the legislative policy reflected in the rules, it was a 'material irregularity' at the meeting to take into account SC's vote for the purposes of rule 5.23(4) of the rules when to do so would give effect to an arrangement solely, patently and irrefutably designed to subvert the legislative policy underlying that provision and without any commercial benefit intended or claimed for SC.

It was an uncommercial arrangement inconsistent with any notion of good faith between the debtor and his independent creditors, or between SC and Crosswood and the independent creditors, and was designed solely to subvert a critical principle of legislative policy as to the conditions for approval of an IVA. That was a perfectly apposite example of 'irregularity', giving the word one of its normal meanings as something which was lacking in conformity to rule, law or principle (see [69] of the judgment). Save that SC’s claim as a creditor would be admitted, the appeal would otherwise be dismissed (see [74] of the judgment.

Somji v Cadbury Schweppes plc [2000] All ER (D) 1019 explained; Debtor, a (No 784 of 1991), Re, ex p Debtor v IRC [1992] 3 All ER 376 considered; Norglen Ltd (in liquidation) v Reeds Rains Prudential Ltd [1998] 1 All ER 218 considered. Decision of Judge Hodge QC [2011] All ER (D) 81 (Mar) reversed in part.

Gwilym Harbottle (instructed by Magrath LLP Solicitors) for the debtor. Tom Smith (instructed by DLA Piper UK LLP) for the bank. The nominee did not appear and was not represented.