Narandas -Girdhar & Anor v Bradstock

This appeal from the Order of Mr Jonathan Klein sitting as a Deputy Judge of the Chancery Division on 9 May 2014 raises three issues arising from the attempt (unsuccessful thus far) of the Appellant and second Claimant in the proceedings, Mr Atulkumar Parekh, to have set aside an Individual Involuntary Arrangement (“IVA”) purportedly approved by the acceptance of his modified proposal by the requisite majority of his creditors, at a creditors’ meeting held as long ago as 15 December 1999, by proceedings for a declaration to that effect issued on 20 August 2010.

The judge dismissed all the grounds upon which Mr Parekh sought to set aside his IVA. Mr Parekh pursues two of those grounds on this appeal, namely:

The judge found that, as to (i) above, the modified proposal was not conditional upon Mrs Parekh’s IVA being approved by her creditors. That raises a question of construction of the modified proposal. As to (ii) above, the judge found that, although Mr Wootton had not indeed been authorised to cast HMRC’s vote in favour of the modified proposal, HMRC had subsequently ratified that vote. Further, the judge found that Mr Parekh’s challenge based upon Mr Wootton’s want of authority was, at most, a material irregularity at or in relation to the creditors’ meeting, so that his challenge to the validity of the meeting was time-barred by s.262(3) of the Insolvency Act 1986 (“the Act”), and otherwise prohibited by s.262(8) which provides that:

“except in pursuance of the preceding provisions of this section, an approval given at a creditors’ meeting summoned under section 252(7) is not invalidated by any irregularity at or in relation to the meeting.”

I shall refer to the two issues which arise under Mr Parekh’s ground (ii) as “the ratification issue” and “the material irregularity issue”.

Being both in debt and under pressure from their creditors, Mr and Mrs Parekh both approached the Respondent and Defendant in these proceedings, Mr Alan Bradstock, a licenced insolvency practitioner and partner in Langley & Partners, for advice and assistance in mid 1999. On 10 November 1999 the court made interim orders under section 252 of the Act imposing moratoria on creditors’ proceedings against either of them.

In due course Mr Bradstock circulated proposals for each of Mr and Mrs Parekh. Like the judge I shall refer to the proposal circulated for Mr Parekh as “the Proposal”.

The main operative provision in the Proposal was to be found in paragraph 4.3, in the following terms:

“4.3

The acceptance of my Individual Voluntary Arrangement is conditional upon the acceptance of the Arrangement for my wife/husband, following acceptance the estates shall be combined for dividend purposes and treated as one.

I propose that, during the term of Arrangement the Supervisor will be paid a combined contribution for the benefit of the creditors not less than:-

£250 per month for the first year - £3,000 year total

£300 per month for the second year - £3,600 year total

£350 per month for the third year - £4,200 year total

The two other provisions relevant to the construction issue are as follows: Appendix 5 of the Proposal set out a comparison between Mr Parekh’s bankruptcy and his proposed IVA. It suggested that a bankruptcy would yield 4.35p in the pound, whereas the IVA would yield 32.9p in the pound, in each case for his unsecured creditors. At the foot of appendix 5 is the following provision in heavy type:

“A contribution will be made by Mrs Rekha Atulkumar Parekh in accordance with the terms of her proposal. On that basis it is estimated that our joint unsecured creditors will receive a dividend of 70.09p in the £ and my personal creditors will receive a dividend of 32.91p in the £.”

The other provision consists of the last sentence of paragraph 4.14 of the Proposal, as follows:

“I anticipate that a dividend of approximately 32.91 pence in the pound will be paid to unsecured creditors in a Voluntary Arrangement compared to 4.35 pence in the pound in a Bankruptcy Administration. As indicated earlier, I believe the costs of a Voluntary Arrangement will also be less than the costs of a Bankruptcy Administration.

Joint Unsecured Creditors will receive a dividend of approximately 70.09 pence in the £ from myself and my wife.”

I shall refer to those two provisions as “the appendix 5 provision” and “the paragraph 4.14 provision” respectively.

Mr Wootton was a member of Mr Bradstock’s staff and had the conduct of the creditors’ meetings on his behalf. Neither Mr Parekh, Mrs Parekh nor any of the creditors attended the meetings in relation to the two proposed IVAs personally. Mr Wootton cast all the votes by the exercise of proxies for the creditors. Although HMRC themselves proposed some of the modifications, the judge’s decision that Mr Wootton did not have HMRC’s authority to vote in favour of the modified proposal, ie. incorporating all the modifications, is not challenged by Mr Bradstock on this appeal.

The facts relevant to ratification by HMRC are as follows. On 24 November 1999 Mrs Bishop of HMRC’s enforcement office wrote to Mr Bradstock thanking him for notice of the creditors’ meeting, enclosing a proxy form in favour of the chairman of the meeting and concluding:

“Please ensure that a copy of the report of the meeting is sent urgently to this office.”

The attached proxy set out in detail the modifications which, if included, HMRC would support, and in the absence of which the chairman was to vote against the proposal. As I have said, although those small modifications were eventually included, the proxy did not authorise the casting of HMRC’s vote in favour of the proposal with the modifications actually included. On 15 December, Mr Wootton as chairman cast HMRC’s vote in favour of the modified proposal. That vote was necessary for the proposal to achieve a 75.82% majority of the votes (by value) cast, so that it was approved.

By contrast Mrs Parekh’s proposal was rejected by her creditors.

On 21 December 1999 Ms Linda Trimmer of the HMRC enforcement office sent Mr Bradstock a fax, referring to the HMRC’s fax dated 14 December, and asking him to fax by return a copy of the chairman’s report of an earlier meeting of creditors held on 2 December 1999, which had been adjourned.

The trial bundle contains an office copy of a letter from Mr Wootton to all known creditors dated 20 December 1999. It referred to the 15 December creditors’ meeting, included a schedule of proxies showing that HMRC had voted in favour of the modified proposal by Mr Wootton as proxy holder, and included a full list of the modifications which had been approved at the meeting. The judge inferred that, (albeit probably in the post at the time of HMRC’s 21 December fax), a copy of Mr Wootton’s report as described above was received by HMRC.

At paragraph 83 of his judgment, the judge said:

“… to my mind however it would have been clear, from the report to Mr Parekh’s creditors, that, save in the case of National Westminster Bank, the votes of the creditors had been cast in favour of the Modification (and the other small modifications) and it would have been clear to HMRC that its votes were required to and did bring about the IVA. The report included a copy of the list of modifications and voting details. In the absence of evidence to the contrary it is a reasonable inference (which I make) that all the creditors received a copy of the report shortly after 20 December 1999. HMRC appears not to have raised any objection to Mr Wootton’s exercise of its proxy at that stage (or at any time afterwards).”

The judge also found that in 2001 and also in 2002 Mr Bradstock secured a variation of Mr Parekh’s payment obligations under the IVA, and that, by inference, on both occasions HMRC received notification of the proposed variation. Finally he found that in May 2005 Mr Bradstock informed Mr Parekh’s creditors that he intended to petition for Mr Parekh’s bankruptcy because of non-compliance with the IVA, that Mr Bradstock had invited objections from the creditors, and that none had come from HMRC. The judge concluded that, having chased on 21 December, and having had at least four opportunities to object to the IVA between 1999 and 2005, HMRC’s non-objection was a conscious and deliberate decision: see paragraphs 84-87 of the judgment.

This plank of Mr Parekh’s case for having his IVA declared invalid depends upon him showing that, notwithstanding the substitution of paragraph 4.3 of the Proposal by the replacement paragraph 4.3 in the Modification, the modified proposal nonetheless remained conditional upon the approval of Mrs Parekh’s IVA, which did not, of course, occur. Mr Wolman for Mr Parekh submitted that it remained clear from the other provisions of the Proposal (which survived the Modification) and in particular the Appendix 5 provision and the paragraph 4.14 provision that the modified proposal remained conditional upon the approval of Mrs Parekh’s IVA. Only by that means, he submitted, could the assertions in those two additional provisions that Mrs Parekh would make a contribution sufficient to produce a 70.09p in the pound dividend be effective.

The judge reached the opposite conclusion, mainly because he held that it was the purpose of the Modification to break the interdependence of the Proposal and Mrs Parekh’s IVA proposal. He said (at paragraph 63):

“Although, in construing the IVA, I am required to read the Proposal together with the Modification, I am not required to reconstitute the Proposal and the document containing the Modification as one document. Nor am I required or is it appropriate, in my view, to ignore the reality that the Proposal was drafted first and the Modification was drafted later.”

Mr Wolman submitted that this aspect of the judge’s reasoning proceeded on an incorrect assumption that he was entitled to have regard to what was removed by the Modification, in arriving at a conclusion about its purpose. He said that, once the parties to a contractual negotiation agreed to remove certain provisions of a draft and replace them, then those removed provisions fell out of account for the purposes of interpretation.

I disagree. The true position is that summarised by Clarke J (as he then was) in Mopani Copper Mines plc v Millennium Underwriting Ltd [2008] EWHC 1331 (Comm) at paragraph 120-123 as follows:

“120 The diversity of authority, of which Diplock J spoke, renders it difficult for a judge of first instance to recognise when recourse to deleted words may properly be made. The tenor of the authorities appears to be that in general such recourse is illegitimate, save that (a) deleted words in a printed form may resolve the ambiguity of a neighbouring paragraph that remains; and (b) the deletion of words in a contractual document may be taken into account, for what (if anything) it is worth, if the fact of deletion shows what it is the parties agreed that they did not agree and there is ambiguity in the words that remain. This is classically the case in relation to printed forms (Mottram Consultants, Timber Shipping, Jefco Mechanical Services), or clauses derived from printed forms (Team Service), but can also apply where no printed form is involved (Punjab National Bank Ltd).

121 Support for that view may be found in the latest edition of Keating on Building Contracts which contains the following passage:

‘In this confusion the second school is generally to be preferred. Where parties have made a contract in a document that contains deletions, to look at the deletions does not offend the principle discussed above which prevents reference to preliminary negotiations. The deletion is physically contained in the concluded contract. It is submitted that the court should first construe the retained words. If they are unambiguous, reference to the deletions is unnecessary. If they are ambiguous reference to deletions from printed documents should be permitted to see whether objectively they throw light on the meaning of the retained words.’

122 Even if recourse is had to the deleted words, care must be taken as to what inferences, if any, can properly be drawn from them. The parties may have deleted the words because they thought they added nothing to, or were inconsistent with, what was already contained in the document; or because the words that were left were the only common denominator of agreement, or for unfathomable reasons or by mistake. They may have had different ideas as to what the words meant and whether or not the words that remained achieved their respective purposes.

123 Further, as Morgan J pointed out in Berkeley Community Villages Ltd v Pullen [2007] EWHC 1330:

‘Even in the case where the fact of deletion is admissible as an aid to interpretation, there is a great difference between a case where a self contained provision is simply deleted and an another case where the draft is amended and effectively re-cast. It is one thing to say that the deletion of a term which provides for “X” is suggestive that the parties were agreeing on “not X”; it is altogether a different thing where the structure of the draft is changed so that one provision is replaced by another provision. Further, where the first provision contains a number of ingredients, some assisting one party and some assisting the other, and that provision is removed, it by no means follows that the parties intended to agree the converse of each of the ingredients in the earlier provision”

For present purposes, the relevant principle is that if the fact of deletion shows what it is the parties agreed that they did not agree and there is ambiguity in the words that remain, then the deleted provision may be an aid to construction, albeit one that must be used with care.

In my judgment the modified proposal (that is the Proposal and the Modification read together) by no means states beyond ambiguity that it is conditional upon Mrs Parekh’s IVA being approved, even if no regard at all is had to the deleted words of conditionality in the original version of the Proposal. Read in that way, the only relevant provisions would be the Appendix 5 provision and the paragraph 4.14 provision, quoted above. They strike me as thoroughly ambiguous. Read together, they could mean that Mr Parekh was merely expressing the hope and expectation that creditors would receive a combined dividend, if his wife’s IVA went ahead. Alternatively, they could mean that Mr Parekh was warranting that Mrs Parekh would make the stated contribution, either through her IVA or otherwise. Yet further, they could mean Mrs Parekh was herself undertaking some obligation to do so, although she was not a party to her husband’s IVA, either as a joint debtor or as a creditor. Finally, they could perhaps mean, as Mr Wolman submits, that Mr Parekh’s IVA was to be conditional upon the approval of Mrs Parekh’s IVA.

Faced with that level of ambiguity, it is in my view entirely legitimate to have regard to what the Modification removed from the Proposal, by the substitution of a new clause 4.3 for the old. Plainly, the words in the Modification “clause 4.3 is to be substituted with …..” mean that the whole of the old clause 4.3 is substituted. The words of conditionality are removed altogether, whereas the words expressing the rate at which Mr Parekh was to pay his Supervisor by way of contributions are replaced by a substituted, lower, flat rate for the whole of the period of the IVA.

Provided it is clear (as it is) that conditionality was not agreed, it is unnecessary to resolve the residual ambiguities of the other provisions upon which Mr Wolman relies. If Mr Parekh’s IVA was not conditional upon approval of his wife’s IVA, then that basis for having it set aside simply fails.

Nonetheless, Mr Wolman bravely advanced the alternative submission that, even if there was no conditionality, but nonetheless the modified proposal contained a warranty by him that his wife would contribute as stated, or an obligation upon her to do so, then it was vitiated by a fundamental mistake on his part, and for that reason also should be set aside. He had no intention, Mr Wolman submitted, to commit his wife to contributing to his IVA, otherwise than if her IVA were approved, and no intention to give a warranty that she would.

The difficulty with this submission is that it is not founded upon any findings of fact by the judge, or upon any of Mr Parekh’s grounds of appeal. Mr Parekh’s case in the court below (and indeed the primary issue in the proceedings) was that he had not authorised or approved the Modification at all.

The judge found that Mr Parekh was an unreliable witness, and rejected his evidence that he had not consented to the Modification. His main reason for doing so was that, in his view, neither Mr Wootton nor anyone else at Langleys would have put forward the Modification with its precise offer to pay £230 per month as a fixed contribution throughout the period of the IVA, in substitution for the previous variable rate in paragraph 4.3 of the Proposal, unless they had been instructed to do so by Mr Parekh: see paragraph 69 of the judgment. The judge was reinforced in that conclusion by reference to the subsequent conduct of Mr Parekh, and in particular his failure to challenge the Modification for many years thereafter, including by way of opposition to Mr Bradstock’s bankruptcy petition, based as it was upon the validity of the IVA.

Thus the judge did not find that Mr Parekh approved the Modification on the basis of some belief of his as to what it meant, but simply because he must have been the author of the proposal to pay £230 per month in the substituted paragraph 4.3. There is therefore no factual basis upon which Mr Wolman’s submission of fundamental mistake can be mounted. In short, Mr Parekh was found to have agreed to both the Proposal and the Modification, with such consequences for his own legal rights and obligations as those documents created, once approved by his creditors, on their true construction.

It will be recalled that the judge found that Mr Wootton had not been authorised by the terms of HMRC’s proxy to him as chairman of the creditors’ meeting to vote for the modified proposal, but that HMRC had subsequently ratified the casting of that vote. I have set out above the facts which the judge found, relevant to this issue, and the kernel of his reasoning for drawing the inference (based on Mr Wootton’s report) that it was clear to HMRC that their vote had been cast in favour of the modified proposal, including the Modification which HMRC had not authorised Mr Wootton to support. The judge found that this was a case of a conscious and deliberate decision by HMRC not to object to the unauthorised exercise of its proxy, rather than purely passive inaction of the type which, in Blackburn & Benefit Building Society v Cunliffe Brooks & Co (1885) 29 Ch D 902, the Court of Appeal had described as insufficient for ratification.

In Yona International Ltd v La Reunion Francaise SA d’Assurances [1996] 2 Lloyd’s Rep 84 at 106, Moore–Bick J said this:

“The essence of ratification is a decision by the principal to adopt the unauthorized act as his own … It does not therefore depend on communication with or representation to the third party and is thus in principle distinct from estoppel, but since the intention to ratify must be manifested in some way it will in practice often be communicated to and relied upon by the other party to the transaction. Ratification can no doubt be inferred without difficulty from silence or inactivity in cases where the principal, by failing to disown the transaction, allows a state of affairs to come about which is inconsistent with treating the transaction as unauthorized. That is probably no more than a form of ratification by conduct.”

Mr Wolman submitted that the judge was wrong in two respects. First, because there was no basis for an inference that HMRC ever received Mr Wootton’s report of the meeting dated 20 December 1999. Secondly, because there was nothing other than pure silence from HMRC, at least so far as was disclosed by the admittedly incomplete surviving documents.

I consider that the judge’s approach to, and decision upon, this issue cannot be faulted. He began at paragraph (81) with a careful citation of the relevant principles from Bowstead and Reynolds on Agency (19^th edition). He reminded himself (at paragraph 82) that, since HMRC were not party to, or even aware of the proceedings, and because Mr Bradstock’s evidence was limited, he had to proceed with caution. His summary, at paragraphs 83-86, of the four opportunities which HMRC had to disown the IVA (because of the unauthorised use of their proxy) appears to be fully in accordance with the surviving documents which had been included in the trial bundle, and which counsel showed us. The fact that HMRC were a major creditor, that reports, or letters, had on all four relevant occasions been sent to all creditors, and that they drew to the reader’s attention successive occasions upon which Mr Parekh was seeking to detract from, or actually failing to perform, the obligations originally proffered in the Proposal amply justified his inference that HMRC kept a keen eye on the progress of the Proposal, and that they had consciously and deliberately decided not to object to the unauthorised use of their proxy. Finally, the judge’s conclusion that this was a case of a conscious and deliberate decision not to object, rather mere passivity, brought the facts squarely within a recognised category of ratification.

For those reasons, this ground of appeal must fail.

Having concluded that the construction and ratification issues ought to be resolved against the Appellant, that is sufficient to require this appeal to be dismissed. Nonetheless, the material irregularity issue was fully argued and the relevant law (as to the correct interpretation of section 262 of the Insolvency Act), is the subject of a series of first instance decisions which, although not necessarily irreconcilable if treated as limited to their particular facts, nonetheless disclose differences of approach which deserve the attention of this court. The relevant factual hypothesis is that, at a creditors’ meeting, duly summoned under section 257, a person who was the nominated proxy of a creditor whose vote was critical to the outcome, used that proxy in a manner which the creditor had not authorised, and thereby secured the approval of the debtor’s proposal. I call that a factual hypothesis because, as I have concluded, the initial excess of authority was put right, with retrospective effect, by ratification.

Part VIII of the Act gives to a duly summoned creditors’ meeting power by a 75% voting majority by value of the debtor’s creditors, present or represented, to bind all creditors to the debtor’s proposed voluntary arrangement, with such modifications to the original proposal as are approved by the debtor. The requirements for the calling and conduct of a meeting are set out partly in the Act, at ss. 257-9, but mainly in the Insolvency Rules; see s.258(6) and IR 5.13-19 (as they were at the relevant time). An IVA which has been approved in that manner operates by analogy with a contract between the debtor and all his or her creditors: see Lloyds Bank v Ellicott [2002] EWCA Civ 1333, per Chadwick LJ at para 51.

This statutory magic (that is, binding a whole class to a contractual arrangement by the vote of only part of it) is achieved without the requirement for a court order to that effect: see s.260(2)(b). But the court has specific statutory powers under s.262 to intervene, which in some respects augment and in one respect cut down the inherent jurisdiction which the court would otherwise have to declare whether the statutory magic had been validly triggered: i.e. whether a binding IVA had come into force so as to displace the creditors’ former rights against the debtor.

S.262 confers wider powers than the inherent jurisdiction because the court is not limited to declaring whether there is a valid IVA in force. It can both revoke or suspend any approval given at the meeting, and it can direct the summoning of a further creditors’ meeting, to reconsider the proposal, or to consider a revised proposal: see s.262(4). Further, the court’s statutory powers arise not merely where the IVA is shown to be invalid due to some material irregularity at or in relation to the meeting, but also where the approved IVA unfairly prejudices the interests of one or more creditors: see s.262(1).

The one respect in which the court’s inherent powers may be said to be cut down is to be found in the combined effect s.262(3) and (8). The first imposes a 28 day time limit for applications under s.262, subject to the court’s general power to extend time under s.376: see Tager v Westpac Banking Corporation [1998] BCC 73. The second provides that:

“except in pursuance of the preceding provisions of this section, an approval given at a creditors’ meeting summoned under section 257 is not invalidated by any irregularity at or in relation to the meeting.”

The obvious purpose of these two subsections, read together, is to ensure that all challenges to the validity of an IVA based upon an alleged irregularity at or in relation to a creditors’ meeting are resolved within a very tight time limit (subject to the court’s power to extend) and dealt with by more flexible court powers than the blunt weapon of a declaration of invalidity. It both prevents such challenges being made long after the event, and avoids what would otherwise be the automatic consequence of invalidity, namely the debtor and the creditors always having to re-start the IVA process again, from scratch. In particular the court’s powers under s.262 are discretionary, so that a minor irregularity which might at common law invalidate the process could nonetheless leave the statutory outcome intact, where for example the irregularity caused no sensible prejudice to a complainant creditor (or debtor) wishing to wreck the IVA for wholly collateral reasons.

Less obvious is the dividing line between defects in the IVA process which lie inside, and outside, the description in s.262(8). Two rival interpretations have emerged from the mainly first instance decisions. The first, narrower interpretation is that nothing in s.262 applies to anything short of an IVA which has actually (i.e. validly) been approved at a creditors’ meeting summoned under s.257. Thus the phrase “material irregularity” in subsections (1)(b) and (8) means some irregularity which does not of itself render the approval of the IVA a nullity. The second broader interpretation is that 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 s.257. Unsurprisingly Mr Wolman contended for the first, and Mr Christopher Brougham QC, for the Respondent, supported the second.

With those contentions in mind I shall briefly review the reported decisions. The first, Fletcher v Vooght [2000] BPIR 435 concerned a purported IVA approved at a creditors’ meeting, and fully performed by the debtor for four years, before its validity was challenged on the ground that there had been no prior interim order. Lloyd J (as he then was) decided that since the making of an interim order was an essential prerequisite to the summoning of a creditors’ meeting for the purpose of approving a debtor’s proposal, the IVA was incurably void. This was not a material irregularity within s.262. At paragraph 37 he said this:

“Of course, the section presupposes that there may have been material irregularities, which might indeed be such as to invalidate the meeting under the general law as regards meetings. So it may be that the section limits (by time) the raising of objections to what might otherwise be found to be a completely invalid meeting. In such a case one may have to understand the words ‘such a meeting’ in s.262(1)(b), referring across to a ‘a creditors’ meeting summoned under s.257’ in s.262(1)(a), as including reference to a meeting purportedly (albeit irregularly) summoned under that section. But where there has not been a hearing to consider the report at all, under ss.256 and 257, I do not see how the meeting can be considered to have been even purportedly summoned under s.257. Accordingly, it does not seem to me that the individual voluntary arrangement is to be regarded as beyond challenge by virtue of s.262 (8).”

On the whole I consider that this decision supports the second broader interpretation. Lloyd J appeared content to assume that a wholly invalidating event occurring at a creditors’ meeting summoned under s.257 would fall within the language of s.262(8), as well as an invalidating irregularity in the process by which it was summoned. But in that case, the failure to obtain an interim order meant that the meeting actually summoned had not been summoned under s.257 at all.

Vlieland Boddy v Dexter Ltd [2003] EWHC 2592 (Ch) was another case where the creditors’ meeting took place before there was an interim order or a direction to summon a meeting. The matter came before the court on the application of the nominee under s.262, in effect, to validate the meeting nonetheless. Following Fletcher v Vooght HHJ Kaye refused to do so, on the basis that, until there was an interim order and a direction from the court to call a creditors’ meeting under s.257, the essential prerequisite for the exercise of jurisdiction under s.262 had not been satisfied.

In IRC v Bland and Sargent [2003] EWHC 1068 (Ch) the vitiating defect was that the debtor’s original proposal did not provide for any payment at all to his unsecured creditors. An attempt to correct this by a modification was followed by approval at a creditors’ meeting. Lloyd J refused to put this right under s.262, because it was so fundamental an error that it invalidated the whole process: see paras 52-54. The language used by Lloyd J, out of context, might be interpreted as meaning that some vitiating errors in the process were too fundamental to be capable of amounting to irregularities within s.262, but the error in that case occurred at the very start of the process, before a creditors’ meeting had even been summoned. Had Lloyd J intended to depart from his analysis in Fletcher v Vooght, of which he was if necessary reminded by citation, I am sure that he would have said so.

A much narrower view of the ambit of s.262 was taken by Registrar Baister in Re Plummer [2004] BPIR 767, in which the debtor’s proposal was modified and then approved at a creditors’ meeting which the debtor did not attend. But the debtor did approve the modification three weeks later. After she later defaulted, she opposed a bankruptcy petition by her supervisor three years later on the ground that the statutory scheme did not permit an approval to a modification by the debtor after the creditors’ meeting, but only before or at it. The Registrar agreed, notwithstanding that the time limit for a challenge under s.262 had long since expired, and despite the debtor’s acts of approbation of the IVA by her subsequent agreement to the modification, and her compliance with its terms for two years thereafter. The structural similarities with the present case are obvious.

The Registrar’s reasoning may be discerned from the following two paragraphs of his careful reserved judgment:

“[27] In my view, there is a difference between circumstances which give rise to something which may be described as a material irregularity and something which invalidates approval or means that approval was simply never achieved. I put this example to Ms Jordan. Take a case where the chairman wrongly calculates the votes and believes that 78% of creditors voted to approve an arrangement and reports to the court and the creditors and the debtor to that effect but in fact only 68% of creditors voted to approve. In one sense that is indeed a material irregularity. But it goes further, since as a matter of fact and of law the requisite majority was not attained such that in reality there never was approval. It cannot be that in those circumstances s.262(8) could be said to overcome the problem by making real that which simply never was. The reason it cannot is because of its wording, which presupposes approval: it is ‘an approval given at a creditors’ meeting’ which ‘is not invalidated’. Non-approval cannot, however, be transformed into approval.

[28] For the reasons I have given I conclude that Ms Plummer’s proposal for an individual voluntary arrangement was not approved and that it is … a nullity and void. It follows that Mr Penn had no locus to present the petition that is before me and that it must be dismissed.”

Here for the first time is to be found a trenchant expression of the narrower interpretation of the meaning of “irregularity” in s.262, namely some failure to comply with the rules (or law) about the creditors’ meeting which does not of itself vitiate the apparently approved debtor’s proposal as a binding IVA. In response to the court’s invitation to Mr Wolman to suggest a relevant example of a non-vitiating irregularity which did fall within s.262, he suggested starting the meeting earlier than at the advertised time.

The next in the line of relevant cases is Smith-Evans v Smailes [2014] 1WLR 1548, a decision of HHJ Purle QC sitting as a High Court Judge. There the debtor’s proposal had, as in the present case, only been approved at the creditors’ meeting by the chairman casting votes on behalf of creditors outwith the terms of the authority given to him as their proxy. After default, the debtor challenged the validity of the IVA two years later in opposition to the supervisor’s bankruptcy petition. The judge was unsurprisingly pressed by the debtor with Re Plummer.

Using what has since been described as “a robust purposive construction” of the statutory scheme, (per Registrar Barber in her article “Involuntary Arrangements” in Insolvency Intelligence Oct/Nov 2014 (no.8)) Judge Purle decided that excess of authority by a proxy at a creditors’ meeting fell squarely within the class of material irregularity for which s.262 provided the only remedy. The gist of his reasoning may be found in the following extracts from his judgment:

“23 I have considerable doubts as to the correctness of In re Plummer [2004] BPIR 767. It seems to me that the statutory framework with which I am concerned permits a challenge to be made under section 262, within a limited time, and that that procedure is meant to be exhaustive, precluding other forms of challenge, as subsection (8) confirms expressly. Section 262 in terms applies to a case where there has been “some material irregularity at or in relation to” the creditors’ meeting. The words could hardly be wider. The time for making a challenge runs from the making of the report to the court or (in the case of a person who was not given notice of the meeting) when he becomes aware that the meeting has taken place. If there is some error or inaccuracy in reporting the outcome of the meeting that is properly described as an irregularity “in relation to” the meeting, to which section 262 is meant to apply, even if the error or inaccuracy occurs after, and not at, the meeting.

24 The argument against that is that, on a literal reading of section 260, the approved arrangement only takes effect “where the meeting summoned under section 257 approves the proposed voluntary arrangement (with or without modifications)” and that section 262(8) is similarly limited. It is said that in cases such as In re Plummer and the present case the meeting itself did not approve the IVA, because there was in fact no 75% majority in favour of the proposals as purportedly approved.

25 In my judgment, it is necessary to look at the structure of this part of the 1986 Act as a whole. The critical stage is the report of the decision to the court under section 259. The result of the meeting as stated in that report is obviously meant to be taken at face value and accepted subject to any challenge brought timeously under section 262 or the 1986 rules. That is why section 262 is there and why the Rules make separate provision for the conduct of meetings, with a similar time limit.”

Later, referring to para 27 of the judgment in Re Plummer (quoted above), he continued:

“29 I respectfully differ from what Mr Registrar Baister says in that paragraph. The example he gives is a powerful one, but is no different in substance to another common example, where a creditor is allowed to vote at the relevant meeting and his debt is marked as objected to because it is disputed. Let us suppose that that creditor’s vote is decisive in defeating the IVA The debtor can challenge the admission of that debt under section 262 and rule 5.22, and would be expected to do so, if he wished to challenge the outcome of the meeting at all. If it is the other way round and a proposal is carried on a wrongly admitted vote, any aggrieved creditor can also challenge the decision or appeal under the same statutory provisions. But let us suppose that no creditor in fact challenges the result. We are left with an IVA which has been approved on a disputed debt, which turns out later never to have been owed. Then, just as much in that case as in the example given by Mr Registrar Baister, it can be said that there never was, as a matter of fact and law, the requisite majority. It would follow that the debtor could, when in breach of the IVA, let us say two years later, turn round and say: “There was no IVA and I cannot be made bankrupt for being in breach of its terms”, thus making the time limited right of challenge or appeal redundant. It seems to me that that is such a startling result that it cannot possibly have been intended by Parliament and the draftsman of the Rules. For my part, I would not and do not construe this part of the 1986 Act or the rules as giving rise to those consequences. I would on the contrary construe section 262(8) and rule 5.22(6) as precluding that result.

30 Other examples highlight the startling consequences which would follow if the appellant’s submissions are correct. Thus, under section 258(4) a secured creditor’s rights are not to be affected except with the concurrence of that creditor. Let us suppose that an IVA is passed affecting the rights of a secured creditor who has not consented. The secured creditor could clearly complain. But, if he does not complain, it is, in my judgment, manifestly absurd that the debtor could challenge his own IVA two years or more later on the grounds that the concurrence was not obtained. Likewise, subsection (5) protects preferential creditors: the meeting may only approve proposals affecting them adversely with their concurrence. Again, if one preferential creditor is overlooked, the whole IVA may be automatically invalidated if this reasoning is correct. These are pertinent examples as they come from the same section as was under consideration in In re Plummer [2004] BPIR 767, and one would expect the lack of consent from the debtor, the secured creditor and any preferential creditor to carry the same consequences, and be subject to the time limit prescribed for any challenge under section 262(3).

31 In my judgment, although I readily accept that my construction does some violence to the literal language, it seems to me that it is necessary to adopt a more purposive construction in order to avoid potential chaos. Shortly after the Insolvency Act 1986 came into force, the Court of Appeal in a case called In re Debtor (No 1 of 1987) [1989] 1 WLR 271, approved the statement of Vinelott J in In re Debtor (No 190 of 1987) The Times, 21 May 1988, that “it would be unfortunate if the new provisions were to become enmeshed in the technical objections which disfigured the old law”. That concerned a supposedly defective statutory demand. The same must, in my judgment, apply to individual voluntary arrangements.

32 Unfortunately, the distinction between nullities and irregularities seems to have gained credence in the field of out of court appointments of administrators: see the decisions summarised in In re Euromaster Ltd [2013] Bs LR 466. There is, however, no need to extend tortuous reasoning of that kind into the area of individual voluntary arrangements, where both the statue and the 1986 Rules contain a code for challenging decisions at an early stage. If those decisions are not challenged, in my judgment, they should stand once the relevant report has been made. The time limits, which are tight, set out in both the Act and the Rules, should be applied and not subverted by a collateral attack months or even years down the line.”

In Davis v Price [2014] 1WLR 2129, this court had to consider a question about the interpretation of the almost adjacent s.260. At paras 39-40 Arden LJ gave as her reason for preferring a purposive rather than literal interpretation the court’s readiness to avoid a literal interpretation producing anomalies which Parliament could not have intended. In the present case the judge relied on that dictum as reinforcing Judge Purle’s purposive analysis in Re Plummer.

It will by now be apparent from the foregoing that, in the present case, the judge preferred the more purposive approach in the Smailes case to the more limited view of the ambit of s.262 in Re Plummer. In my view he was right to do so, but I would prefer to explain why in my own words than to review at length his careful reasoning. The starting point is to recognise that both the narrow and the broad view of the ambit of s.262 have much to commend them, viewed in the abstract. The notion that s. 262 is necessary to enable someone to challenge an IVA on the ground of material irregularity at or in connection with a creditors’ meeting because the mere irregularity would not render it void is a perfectly reasonable one, and lies comfortably side by side with the undoubted need for a statutory jurisdiction to relieve for unfair prejudice in the same section. So is the contrasting notion that, to maximise certainty as to the validity of an IVA, s.262 sensibly imposes a strict statutory regime designed to ensure that all challenges to validity of the approval at the meeting are raised and resolved as soon as possible.

To my mind the factors which point convincingly to the broader view as to the ambit of s.262 are two in number. The first is the steer to be derived from the clear language of s.262(8) which (as Lloyd J said in Fletcher v Vooght) clearly 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 which sub-section (8) imposes, coupled with the time limit in subsection (3). This is in my view completely inconsistent with the notion that material irregularity means only some mere irregularity which does not have an invalidating effect.

The second factor is that the narrower view would deprive the court of the flexible jurisdiction under subsection (4) to make sensible provision in an appropriate case for suspending approval, or summoning a further meeting to consider a revised proposal. It would also remove the discretion given to the court as to how if at all to respond to the challenge, in every case where the irregularity was of the invalidating kind. All that the court could do would be to strike down the IVA as void, leaving the debtor and creditor to start all over again. This would be so even if (as here) the invalidity was raised by someone who had supported the approval of the IVA from start to finish, and adhered to it for many years, where the invalidating event has caused him no prejudice at all. This seems to me so greatly to emasculate the obvious purpose of s.262 in its context as to conflict with Parliament’s intention, purposively viewed.

A third but less persuasive reason for preferring the broader view coincides with Judge Purle’s analysis, namely that the narrower view would in every case require it to be determined whether the irregularity was or was not of the invalidating kind, an exercise likely to be fraught with arcane and old fashioned distinctions derived from the common law about meetings.

That is not to say that 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 (which I suppose means more than de minimis or irrelevant) and that it should have occurred at or in connection with a creditors meeting summoned under s.257. Thus I mean to cast no doubt on the outcome of Fletcher v Vooght, Vlieland-Boddy v Dexter Ltd or IRC v Sargent. In each of those cases the invalidity of the IVA arose because there never had been a meeting summoned under s.257, because there had been defects in compliance with the statutory scheme antecedent or extraneous to the summoning or conduct of the meeting. But I do consider that Re Plummer was wrongly decided.

As a postscript to this analysis I must briefly mention IR Rule 5.17 (which later became 5.22, after the events with which we are concerned). It deals with voting rights at creditors’ meetings. So far as relevant it provides as follows:

“(4)

the chairman has power to admit or reject a creditor’s claim for the purpose of his entitlement to vote, and the power is exercisable with respect to the whole or any part of the claim.

(5)

The chairman’s decision on entitlement to vote is subject to appeal to the court by any creditor, or by the debtor.

(6)

If the chairman is in doubt whether a claim should be admitted or rejected, he shall mark it as objected to and allow the creditor to vote, subject to his vote being subsequently declared invalid if the objection to the claim is sustained.

(7)

If on an appeal the chairman’s decision is reversed or varied, or a creditor’s vote is declared invalid, the court may order another meeting to be summoned, or make such other order as it thinks just.

The court’s power to make an order under this paragraph is exercisable only if it considers that the matter is such as to give rise to unfair prejudice or a material irregularity.

(8)

An application to the court by way of appeal under this Rule against the chairman’s decision shall not be made after the end of the period of 28 days beginning with the day on which the chairman’s report to the court is made under section 259.”

This appears to provide for, or assume, an ‘appeal’ route for challenging decisions by the chairman at the creditors’ meeting about entitlement to vote, separate from s.262. It is noteworthy that this route, if formally separate from the s.262 route, has the same incidents, in terms of the conditions (material irregularity or unfair prejudice, and a 28 day time limit) and gives the court the same powers, as does s.262. But it is confined to decisions made by the chairman at the meeting rather than, as here, a mistake about the extent of a proxy held by him.

Read on its own, Rule 5.17 does appear to contemplate a route of appeal separate from s.262, rather than just a clumsy reference to a challenge under s.262. But this would appear to detract from the otherwise plain effect of s.262(8), prohibiting any other form of challenge to a material irregularity at or in connection with a meeting. If Rule 5.17 does provide an alternative route than under s.262 it would be made by an ordinary application, but it would not differ in substance from an application under s.262, for the reasons given above. Perhaps unsurprisingly, counsel made no reference to this point. Plainly the misuse of HMRC’s proxy in this case is not a Rule 5.17 decision from which an appeal would lie. The apparent tension between s.262(8) and Rule 5.17 may be a drafting error to which there is no solution. But it will never have any real consequences.

For those reasons as well I would dismiss this appeal. I do so with some relief. This is a case where the debtor had, as the judge found, approved and supported the modified proposal, where the modification for which HMRC had not given voting authority was entirely for the debtor’s benefit, where the debtor gained a large advantage from the IVA, by avoiding the loss of his authorisation as an IFA, and where he only sought to challenge it after a default led not merely to his bankruptcy (which he did not oppose on this ground) but to the adverse outcome of a dispute with his trustee about the extent of his interest in the matrimonial home. His challenge was mounted more than ten years after his IVA was approved. It strikes me as falling squarely within the mischief which the time limit in s.262(3) was designed to avoid.

I agree

I also agree