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Insolvency Law

Expert guidance on all aspects of corporate and personal insolvency

22 MAY 2013

Putting off the evil day; IVA proposals and adjourning bankruptcy petitions

Paul French

Introduction

1. Two recent cases have illustrated the approach of the Court hearing of a bankruptcy petition in the face of a proposal for an Individual Voluntary Arrangement (IVA). How should the Court exercise its discretion, in particular as regards to the adjournment of the hearing of the petition?

2. In Singh v Singh (ChD, Proudman J, 8 February 2013) it was held that a district judge had erred when making a bankruptcy order when he had failed properly to consider whether the IVA proposal was serious and viable when considering whether to make an interim order. In Re Mirpuri; (1) Bonney (2) Hughes-Holland v (1) Mirpuri (2) Franses [2013] BPIR Issue 3 (ChD, Registrar Jones, 7 March 2013) the hearing of the bankruptcy petition was adjourned to allow a sale of a property, even if the IVA proposal might not have been serious and viable.

Singh; the facts

3. The facts in Singh were not uncommon; after disputed litigation, the victor sought to use bankruptcy proceedings to recover the fruits of the litigation, only to be faced with an IVA proposal in an attempt to stymie the bankruptcy.

3.1     Following a property dispute, the creditor obtained a judgment and costs, and served a statutory demand and bankruptcy petition in respect of the sums due thereunder.

3.2     In response, the debtor proposed an IVA and applied for the usual interim order.

3.3     However there were issues about the validity of various securities granted over the debtor's properties, in that:

3.3.1  the largest creditor held charges over the debtor's properties, but also had some unsecured debt; and

3.3.2  the second largest creditor disputed the validity of the largest creditor's charges which, if they were valid, would significantly reduce his own recovery prospects.

3.4     At the hearing of the bankruptcy petition, the district judge determined that the creditor held more than 25% of the voting rights of the unsecured creditors, and, as he proposed to vote against the proposal, the IVA would not be approved. Further, it was held that a post-bankruptcy IVA could be considered by a trustee in bankruptcy having investigated the validity of the largest creditor's charges.

3.5     The district judge made a bankruptcy order, impliedly dismissing the application for an interim order.

4. The debtor appealed, arguing that the district judge had erroneously concluded that the creditor held more than 25% of the unsecured creditors' votes and that it was appropriate for the trustee in bankruptcy to deal with the validity of the charges. Essentially, it was argued that the district judge failed properly to have regard to the test under s 255 of the Insolvency Act 1986 (‘the Act') when considering whether to grant an interim order, namely whether the proposal was serous and viable.

Proudman J; decision on appeal

5. The Judge recognised that the position with the charges was factually and legally complex, and that there were various possible analyses which would have varying effects on the financial position of the creditors. Some outcomes would mean that the proposal would not be approved, but some that it could. Overall, the position was borderline.

6. The district judge had failed properly to take into account all these possibilities, and thus had failed to engage in the test as to whether the Court should exercise its discretion to make an interim order, on the basis that the proposal was serous and viable. In automatically considering that the IVA was doomed to fail, meant that the district judge did not properly consider the test and the exercise of the discretion at all.

7. Basically, it was for the creditors to determine how they wanted to have the validity of the charges investigated. If they wanted it to be done by a trustee in bankruptcy, they could vote against the proposal. But, by making the bankruptcy order, the district judge has excluded the creditors from being able to make that decision for themselves, possibly causing them prejudice.

8. Accordingly, the appeal was allowed, an interim order granted, and the case remitted to the County Court for consideration of the nominee's report.

Mirpuri; the facts

9. Whilst it is common for a bankruptcy petition to be responded to with an IVA proposal, it is not so common for a supervisor's default petition to be faced with a proposal for a second IVA. That is what happened in Mirpuri.

9.1     M was subject to an IVA, but a meeting of creditors had determined that the supervisors' should petition for M's bankruptcy by reason of its failure.

9.2     In response, M applied for an interim order under s 252 of the Act pending the approval of a second proposal.

9.3     The interim order was granted and a meeting of creditors took place to consider the proposal, which proposed a payment in full of M's debts totalling just under £3.4m within 8 months by the sale of assets including a property, ownership of which had been recently the subject of a dispute with M's wife, it having been determined that M was approximately 80% the beneficial owner, together with a contribution of further funds.

9.4     In late 2012, the meeting of creditors was adjourned, and there was an issue as to whether it had been further adjourned, it being clear that the proposal had not been approved. Nonetheless, in early 2013 further creditors' meetings were held, at which approval was still not forthcoming.

9.5     The Court then proceeded to hear the bankruptcy petition, after the interim order had expired.

10. The Court had to determine the following issues:

10.1   Whether it should consider a very late objection to the petition relying upon s 276 of the Act and, if so, whether it should conclude that the petition should be dismissed because it is not satisfied either that M failed to comply with the terms of the first IVA or that he failed to do all such things reasonably required of him by the supervisor for its purposes (‘the s 276 Issue').

10.2   Whether the second proposal has been deemed rejected after a final adjournment of the meeting of creditors or, if not, whether:

10.2.1                 a further adjourned meeting should be held with the court extending time for that purpose retrospectively pursuant to s 376 of the Act; and

10.2.2                 the interim order should be extended.

          (‘the s 376 Applications').

10.3   Whether in accordance with the court's discretion under s 276 of the Act the supervisors' petition should be dismissed or adjourned because the creditors can be paid whether through a continuation of the first IVA or under the terms of the second proposal or otherwise (‘the s 276 Discretion Issue').

Registrar Jones; decision

11. On the s 276 Issue, there had been a failure of the first IVA because the property had not been sold, and could not have been sold until the determination of the dispute with M's wife. Whilst under s 276 the Court could not make a bankruptcy order unless satisfied that:

11.1   M had failed to comply with his obligations under the IVA;

11.2   the information in the statement of affairs or laid before the creditors' meeting was false or misleading in any material particular or which contained material omissions; or

11.3   M had failed to do all such things as may for the purposes of the IVA have been reasonably required of him by the supervisors

it was clear that there had been a failure of the IVA and it had concluded prematurely. Accordingly, the prohibition in s 276 of the Act did not apply (see paras 13-14 of judgment).

12. On the s 376 Applications, the general position was that under r 5.24 of the Insolvency Rules 1986 the emphasis was on obtaining the requisite majority within a limited time frame, with there being a deemed rejection of approval were not obtained, with limited scope for adjournments. Nonetheless, under s 376 of the Act, the Court had an unfettered discretion to extend time. But the Court in exercising its discretion had to consider the position of the creditors, and HMRC, holding more than 25% of the value of the unsecured debt, did not support the proposal. In any event, factually, there had been a final meeting in late 2012 and the meetings in early 2013 were not adjourned meetings. It would not be a judicious exercise of the court's discretion to extend time in the hope that matters might change, especially where there had already been a deemed rejection.

13. On the s 276 Discretion Issue, there was little discretion to exercise. The interim order had expired. The first IVA had failed and the second proposal had been rejected. The supervisors were entitled to, and indeed obliged to, petition for M's bankruptcy. Nonetheless, the position was that M was seeking an adjournment effectively under s 271(1) of the Act, on the basis that he proposed to enforce the orders against his wife, achieve a sale of the property and achieve a payment in full of his unconnected creditors (his connected creditors having agreed to defer their debts), even though that jurisdiction applied only to creditors' petitions, not supervisors' default petitions. Further, on this point, M's evidence was unsatisfactory. The question as to whether there should be an adjournment to permit the sale and for M to make proposals for the payment in full of all of his current creditors had to be answered by reaching a decision in the best interests of the creditors. The interests of the unconnected creditors were obvious; they wanted payment as soon as was reasonable practicable. But it could not be concluded from the evidence that a sale of the property would pay them in full, or that they could be paid in full from elsewhere.

14. Nonetheless, jurisdictionally, under s 276 of the Act, in determining whether or not to make a bankruptcy order on a supervisor's petition, the Court still had a discretion, which was to be exercised having regard to what was in the best interests of the creditors and, in particular, as to whether those interests would be best served by a bankruptcy or the retention of the individual voluntary arrangement; see Kaye v Bourne [2004] EWHC 3236 (Ch), [2005] BPIR 590. It was in the best interests of the unconnected creditors to allow the sale of the property to take place without a bankruptcy order being made and to provide further time to allow M to resolve his financial position. At the very least, it would mean that the net proceeds of sale would not have to pay the costs and expenses of a trustee in bankruptcy or the ad valorem fees, thus releasing a larger sum for payment. If the bankruptcy order were not made, the unconnected creditors would benefit by being paid ahead of the connected creditors. The connected creditors would benefit because they did not wish an order to be made and, whilst they might not be paid in full, a substantial sum would have been realised and M would have the opportunity to achieve payment of the balance (plus interest) through the sale of his other assets. While payment in full of the unconnected creditors might prove ultimately to be to the detriment of the connected creditors, they appeared prepared to accept this.

15. It was therefore right to grant an adjournment until the hearing of an application for a validation order in respect of the sale of the property.

Analysis

16. Two very different cases, arising in very different scenarios, but ultimately achieving the same result by very different routes by relying upon a simple principle: on the whole it is for the creditors, not the Court, to decide what is in the best interests of the creditors and, if at all possible, they should be permitted to decide the best route of achieving their interests.

17. In Singh, this was achieved by granting the interim order, and allowing the creditors' meeting to conclude what was in their interests, and how best to go about challenging the validity of the largest creditor's charges. On the surface, a sensible decision, as I am reminded of the views of the senior statesman and doyen of IVAs, Stephen Lawson, when training district judges new to insolvency on the best approach when considering interim order applications: ‘Grant it.'.

18. But, one would be forgiven for having a little sympathy for the chairman of the creditors' meeting, having regard to his role in determining the validity and quantum of the various creditors' votes. How should he go about valuing the largest creditor's security for the purposes of determining the extent to which, if any, it has an entitlement to vote as an unsecured creditor? Does he go through a valuation exercise, or allow it to vote but marked objected to? But how much does it vote for: a small amount, on the basis of its security, or a large amount, on the basis that it is unsecured? How does he go about valuing the extent of the second largest creditor's unsecured vote, faced with an issue as to the validity of prior securities? Could the largest creditor achieve the outcome of the meeting that it wished by artificially reducing the value of its security (thereby creating a large amount of unsecured debt for itself, inflating the value of the second largest creditor's security and minimising its unsecured debt) either to achieve a 25% blocking vote or 75% approval vote? Very tricky. It is easy to see how in those circumstances the interests of the general body of unsecured creditors might be ignored because of the effect of the manoeuvrings of secured creditors, the very sort of creditors who are not supposed to be affected by the approval of an IVA.

19. In Mirpuri, the registrar was faced with the views of connected creditors (on the whole, in favour of the IVA and willing to defer their debts in order to avoid the debtor's bankruptcy) and the unconnected creditors (on the whole, where known, not supportive of the IVA). But, the difficulty was a jurisdictional one. Section 276 of the Act virtually compelled the making of a bankruptcy order, because of the fact of failure and the limited scope of any discretion to adjourn or dismiss a supervisor's default petition. The creditors' meetings were deemed to have not approved the second proposal, so there was no scope to exercise the discretion to extend the interim orders. Section 271(1) of the Act did not allow for an adjournment on the basis of a payment in full, because it was a supervisors' default petition, not a creditors' petition. What to do?

20. I am not entirely sure of the precise basis upon which the decision to adjourn was made. The creditors were faced with a choice: bankruptcy or IVA? They had voted against the continuation of the first IVA, and had been deemed to have rejected the second proposal. Having been given a choice between bankruptcy or IVA, they had plainly not opted for the IVA route. And, on the supervisors' petition, there was almost no scope for exercising a discretion against making the bankruptcy order, given the nature of the failure and the resolution of the creditors directing presentation of the petition. Against that background, it is hard to see on what basis a discretion to adjourn the petition could be exercised.

21. Whilst the Registrar is to be congratulated on fashioning a way ahead, especially one which would involve a saving of costs and expenses, Mr Mirpuri can possibly count himself rather lucky; as at the time of writing, there does not appear to be an adverse entry against him on the Individual Insolvency Register.

 

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