In a recent case where an insolvency practitioner (IP) had valued a creditor’s claim at £1 , the decision was challenged as a material irregularity within section 262(1) of the Insolvency Act 1986 (IA 1986).
Background
Company “A” supplied goods on credit to Company “B”. From the outset, “A” required the Director of “B” to personally guarantee (pg) the liabilities. In April 2015, “B” went into administration, owing in excess of £470,000 to “A”.
Subsequently “A” served a statutory demand on the Director, inevitably followed by a bankruptcy petition. The Director proposed 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.
At the creditors’ meeting to consider the IVA proposal, the Insolvency Practitioner acted as Chairman of the meeting. “A” voted against the IVA, but it was admitted to vote for only £1. The IVA was approved, but if “A” had been admitted for the full value of its claim the IVA would have been rejected. Consequently “A” challenged the IVA pursuant to IA 1986, s 262—on the grounds of material irregularity.
Matters for the Judge to consider
In the bankruptcy proceedings the Director made a witness statement in which he alleged that before giving the guarantee, he had been told by an unknown employee of “A” that it would not be relied upon if “B”’s finances improved, and that some time later he had been told by another unknown employee that the guarantee would be released. “A” filed evidence that denied these conversations.
The first issue was factual—whether the guarantee had been released as alleged. The second was a question of law—whether the Insolvency Practitioner had acted properly in admitting “A” to vote for only £1. The IP asserted that he had exercised his discretion to reject “A”‘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 decided that on the Director’s evidence the guarantee had never been released. In the second issue, the judge decided that the IP ought to have permitted “A” 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 “A”‘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 the Director’s 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 the IP that “A”‘s claim was not bound to fail when he saw the witness statements filed on its behalf. He therefore ought to have admitted “A” 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. In addition, the judge concluded that the IP’s conduct fell below the standard to be expected of an IP, and so he was ordered to pay 50{06aeb1921e0b802d2bd9c766bc98fb11cc6a46c2b0593ed9c88a0e29cf417a34} of the costs.
What practical lessons can those advising 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.
Source: LexisPSL
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