Peoples Phone Ltd v Nicolaou

Introduction

This is an appeal against the decision of DJ Ellington made on 7^th December 2010 whereby he rejected an application by Peoples Phone Limited (“PPL”) (Footnote: ¹) to vary or reverse a decision of the Supervisor of an IVA of Theophilos Nicolaou (“the Debtor”) which had been made on 18^th August 2010. PPL had submitted a proof of debt in the sum of £63,604 in respect of rent due as at the date of the IVA from the Debtor under a commercial lease of premises at 8 to 9 Commercial Street Leeds. The Supervisor rejected the proof on the basis that the Debtor’s liability for the rent had been released by PPL in a Deed of Surrender dated 6^th November 2009. PPL contended that the release of the Debtor’s liabilities was a mistake and PPL was entitled, as against the Debtor, to an order for rectification of the Deed. On 6^th December 2010 rectification proceedings had been commenced against the Debtor.

Accordingly when the matter came before DJ Ellington PPL requested an adjournment pending the conclusion of the rectification proceedings. The application was opposed by the Supervisor who had been notified of the proceedings and served with the notice of appeal. DJ Ellington rejected the application for an adjournment and dismissed the application.

On 24^th January 2011 I granted permission to appeal on the ground that it was arguable that it was wrong for DJ Ellington not to have granted the adjournment.

The facts

There is very little dispute as to the underlying facts but it is necessary to set them out in a little more detail than contained in the very brief summary contained in the Introduction.

The lease was, in fact, an Underlease dated 11^th January 2002 made between PPL as landlord and the Debtor and his son Nicholas Nicolaou (“NN”) as tenant. It was a lease for a term of 18 years and 3 months from 1^st February 2001. It contained provisions for payment of rent and other covenants. The lease was not in evidence before DJ Ellington or on appeal. The above details are taken from the Particulars of Claim in the rectification proceedings. They are not controversial.

In September 2008 the Debtor made a proposal for an IVA. As is made clear in the proposal (which was on the court file before DJ Ellington) he had traded as a sole trader as Bistro Fiori in Leeds for 25 years. He had ceased trading on 2^nd August 2008. The proposal provided that the debtor would sell his residential property and introduce the equity into the arrangement to provide a payment to creditors. It was estimated that the return to creditors would be 100p/£ in the arrangement as opposed to 86.9p/£ in a bankruptcy. The proposed duration of the arrangement was 18 months.

Between 1989 and 2006 the Debtor had traded in partnership with his son NN. The partnership was dissolved in December 2006

The Nominee’s report refers to the restaurant being subject to 2 leases one of which was in favour of PPL. Until the leases are assigned the proposal catered for rent to be payable up to 31^st October 2009.

The Statement of Affairs showed that unsecured creditors totalled £246,008.85 and that liability to Vodafone/PPL was in the sum of £63,800. It will be seen therefore that the debt to PPL was in excess of 25% of the debt due to unsecured creditors.

The IVA was approved by creditors on 16^th October 2008.

On 6^th November 2009 PPL agreed with the Debtor and NN a surrender of the lease. The surrender was effected by a Deed of Surrender of that date. PPL was represented by an in-house solicitor; the Debtor and NN were represented by Bury & Walker, solicitors of Leeds. The Deed was not before DJ Ellington but has been exhibited to a witness statement for the purpose of the appeal.

By Clause 3 the Tenant surrendered all his estate, interest and rights in the Premises in consideration of the release in clause 4. Clause 4 was in the following terms:

It is PPL’s contention that there was a mistake in the Deed in that it was never intended to prevent PPL from claiming the rent arrears due to it and recoverable as a dividend in the IVA.

On 16^th February 2010 Vodafone/PPL submitted a proof of debt form to Mr Ferguson, the Supervisor of the IVA. The proof was in the sum of £63,604. The supporting documentation makes it clear that the proof was in respect of rent from 18^th January 2008 to 6^th November 2009.

In a letter dated 18^th August 2010 the Supervisor formally rejected in full the proof of debt. The sole reason for the rejection was clause 4 of the Deed of Surrender. The letter drew attention to section 37 of the Conditions of the IVA which gave PPL the right to apply to Court within 21 days for the decision to be reversed or varied.

Any application to Court is governed by Part 7 of the Insolvency Rules 1986. Under rule 7.3(3) any application is required to be signed by the solicitor for the applicant. Under rule 7.8(1)(a) if the applicant intends to rely at the first hearing on evidence he is required to file and serve that evidence at least 14 days before the date fixed for the hearing. Under rule 7.8(1)(b) if a Respondent intends to oppose the application and rely on evidence he must serve and file evidence at least 7 days before the hearing. Under rule 7.10 the Court has power to adjourn the hearing on such terms as it thinks fit and power to give directions as to evidence and pleadings.

The application was made on 7^th September 2010. It was on Form 7.1A. It correctly named the Debtor and the Supervisor as the persons to be served with the application although (possibly incorrectly) it did not name the Supervisor as a Respondent. It set out the grounds of the application in clear terms:

The application was not dated and was not signed as required under rule 7.3(3).

The application was considered on the papers by DDJ Furniss on 15^th October 2010 who directed that it be heard on 15^th November 2010. On that date it was adjourned by consent to be heard on 7^th December 2010.

Neither side filed any evidence in accordance with rule 7.8 although the Court file contained material relating to the IVA.

On 6^th December 2010 PPL instituted proceedings in the Leeds County Court claiming rectification of the Deed of Surrender by amending the release in clause 4 so that it does not extend to the Debtor.

The application came before DJ Ellington on 7^th December 2010. At the hearing PPL was represented by counsel – Helen Gardiner who also appeared in the appeal, the Supervisor was represented by Andrew Laycock, a partner in the firm of Carrick Read; the Debtor did not appear and was not represented.

Miss Gardiner applied for a 3 month stay or adjournment to allow for a resolution of the rectification proceedings. The application was opposed by Mr Laycock and refused by DJ Ellington. In a short judgment he made a number of points. There was no supporting evidence; he had not seen the deed that was alleged to be wrong. There had been delay between the date of the rejection and the date when the rectification proceedings commenced and the Supervisor wanted to get on with dealing with the estate. He accordingly decided to dismiss the application on the basis that it was not supported by evidence and the decision not to accept the debt was properly made.

He refused permission to appeal and ordered PPL to pay the Supervisor’s costs assessed in the sum of £500. He gave 4 grounds for refusing permission to appeal:

The Application was unsigned, undated and not supported by evidence

It was agreed by PPL that the Supervisor had been right to refuse the claim as it had been released by a Deed of Surrender

PPL had applied for rectification of the Deed in Leeds District Registry but only very recently; the Supervisor’s decision had been made on 18/8/10.

The Supervisor wished to distribute funds available for creditors. It was wrong to delay him further.

The Appeal

Notice of appeal was given on 4^th January 2011. I granted permission on the papers on 17^th January 2011. It seemed to me that it was arguable that DJ Ellington was wrong not to accede to the adjournment. I expressed the provisional view that if the rectification proceedings succeeded PPL would be a creditor for £63,604.94 which was a significant portion of the overall creditors. It was, therefore arguable that PPL would be prejudiced if the available assets were distributed prior to the determination of the claim.

The appeal came on for hearing on 20^th April 2011. PPL was again represented by Miss Gardiner; the Supervisor was represented by Miss Temple. I immediately acknowledge with thanks the assistance I have received from both Counsel. Particular thanks are due to Miss Temple who obtained and collated in a very short space of time the relevant authorities on the question of whether PPL might be “a contingent creditor”. There is no doubt that the argument before me was considerably more extensive and more wide ranging than before DJ Ellington. Furthermore I had the benefit of evidence from the Supervisor which exhibited relevant documents including the Deed of Surrender and the Particulars of Claim in the rectification proceedings.

During the course of the appeal I was informed that the Supervisor had declared an interim dividend of 50p/£ which had been paid to creditors – though not, of course, to PPL. He was holding further funds. Indeed there would be a surplus of about £22,000 if he was right to exclude PPL from the distribution. If it was necessary to include PPL in the distribution there would still be a further distribution but no surplus. He estimated that creditors would receive of the order of 89p/£. The rectification proceedings are being contested by the Debtor and NN. It was estimated that they would be tried in September 2011.

Miss Temple sought to uphold the decision of DJ Ellington on two grounds. First, she submitted that the decision was within the generous ambit of discretion afforded to judges and that this court should not interfere. She pointed out that the IVA was intended to be concluded in 18 months and it had been running for over 2 years. She suggested that if supervisors of IVAs had to wait for claims such as this to be determined it would give rise to many spurious claims and this would affect the orderly conduct of IVAs.

Secondly she submitted that DJ Ellington was correct to refuse the adjournment because the application was bound to fail. Her argument may be summarised in this way:

The application was an application to reverse the decision of the Supervisor made on 18^th August 2010 to reject PPL’s proof for rent. It followed that the question for the Court was whether PPL was a creditor on 18^th August 2010.

PPL was not a creditor on 18^th August 2010. It was not an actual creditor because it had released the right to rent in clause 4 of the Deed of Surrender. It was not a contingent creditor because an order for rectification was a discretionary order of the court. She referred me to a number of authorities on the point. She suggested I was bound by R (Steele) v Birmingham City Council [2007] 1 AER 73, Glenister v Rowe [1999] 3 AER 452 and County Bookshops v Grove [2002] BPIR 770 to hold that PPL was not a contingent creditor. In so doing she sought to distinguish a decision of David Richards J in Re T & N (No 3) [2007] 1 BCLC 563.

She accepted that it was not open to her to submit that the rectification proceedings were bound to fail though she suggested that they were likely to fail. If the rectification proceedings succeed she submitted that PPL would become a creditor outside the IVA and would have to recover payment for the rent by separate proceedings outside the IVA against any assets that the Debtor might have. She reminded me that there was a predicted surplus of some £22,000.

Miss Gardiner did not accept either argument. She submitted that the exercise of the discretion was plainly wrong and that, if the rectification argument succeeded PPL would be a creditor within the IVA. In those circumstances the only and proper course was for DJ Ellington to have adjourned the application pending the decision in the rectification proceedings. There was, of course, nothing to prevent the Supervisor from declaring a further interim dividend to creditors pending the decision in the rectification proceedings.

Subject to Miss Temple’s second submission which will be dealt with later in this judgment I cannot accept that it was open to DJ Ellington to dismiss this application on its first hearing.

It is true, as DJ Ellington pointed out, that the application was not signed by PPL and not supported by evidence. To my mind these were relatively trivial breaches of the rules and could easily have been cured. No doubt it would have been preferable for the relevant documents to have been exhibited before DJ Ellington. However there was little dispute as to the primary facts. PPL was a creditor at the time of the IVA; it was only much later that Deed of Surrender was entered into. The question was whether this Deed could and should be rectified so as to alter clause 4. These points were clearly and concisely set out in the application form and were not disputed by the Supervisor. Thus this was not a case where there were substantial disputes of fact or where anyone was prejudiced by the lack of the documents. In my view those breaches were plainly capable of remedy and did not justify the striking out of the application.

Equally I cannot take the view that there has been any substantial delay by PPL. There is no evidence that they were aware of the “mistake” until the decision of the Supervisor on 18^th August 2010. Before launching rectification proceedings they cannot in my view be criticised for contacting the Debtor and NN and attempting to negotiate a solution without resort to legal proceedings. Proceedings were in fact issued on 6^th December 2010 some 3½ months after the discovery of the mistake.

Whilst I accept that the Supervisor may wish to conclude the IVA, that does not mean he is entitled to disregard genuine claims by creditors or potential creditors. It has to be borne in mind that if the rectification proceedings succeed he would have distributed moneys which should have been paid to PPL. There is nothing to prevent him from distributing moneys which would otherwise have been payable to the other creditors. Any further payment to the other creditors must be regarded as a windfall. It is, to my mind, not a major hardship to them to have to wait until the outcome of the rectification proceedings to see whether they are entitled to the windfall.

In my view the balancing exercise between the Supervisor wishing to conclude the IVA and the fair determination of PPL’s claim to be a creditor in the rectification proceedings comes down heavily in favour of awaiting the outcome of the rectification proceedings.

In those circumstances I would, subject to Miss Temple’s second argument, hold that DJ Ellington was wrong to dismiss the application and not to adjourn it. I do, however, repeat that I suspect that I had considerably more argument on this point than was presented to DJ Ellington.

I have set out the three strands to Miss Temple’s argument that the application was bound to fail. It is convenient to discuss the first and third strand before venturing into the difficult question of whether PPL was or was not a “contingent creditor” within the meaning of s 382 of the Insolvency Act 1986.

As already noted Miss Temple has submitted that 18^th August 2010 is the critical date for the purpose of the application. She submits that PPL have to show that the Supervisor was wrong to reject the proof on that date.

This is an unusual case so far as dates are concerned. In the normal case the Supervisor has to determine whether a debt was in existence as at the date of the IVA. In this case there is no doubt that PPL had a valid debt in respect of rent as at that date. There is equally no doubt that PPL was entitled to be treated as a creditor until 6^th November 2009 when the Deed of Surrender was executed. PPL contends that that Deed contained a mistake and that PPL is entitled to have it rectified. If it is rectified PPL will not have released the debt.

In those circumstances it is difficult to see why 18^th August 2010 is a significant date for the purpose of an application to Court under section 37 of the Conditions to reverse or vary the decision. The application is not an appeal against the Supervisor’s decision limited to the material before the Supervisor. It is, in my view, open to the Court to hear evidence not before the Supervisor. Suppose, for example, that on 20^th August 2010 the Debtor and NN had executed a Deed of Rectification which made it clear that the debt was not released can it really be suggested that the Court in an application under section 37 would have been bound to dismiss the claim?

Thus I do not accept the first strand of Miss Temple’s argument. I do not accept that an application under section 37 is an appeal in the sense she submits it to be. It is an application for the Court to determine whether the proof should be admitted or varied. The sensible way to do that is to await the result of the rectification proceedings. If they succeed the proof ought in principle to be admitted.

I have to confess I found this a surprising submission. As already noted there can be no doubt that the rent due as at the date of the IVA was a debt within the IVA until 6^th November 2009. If Miss Temple is right and if the rectification proceedings succeed it would mean that the mistake destroyed the debt and that a new debt was created as a result of the successful proceedings.

If PPL are not within the IVA they would be entitled to enforce their debt by, for example, bankruptcy proceedings which, of course, is precisely what the Debtor sought to avoid by the IVA.

Miss Gardiner did not accept the submission. She submitted that if rectification was granted it would date back to the date of the Deed of Surrender (i.e. 6^th November 2009).

Neither Counsel cited any authority for their submission. Since reserving judgment the results of my researches support Miss Gardiner’s submission. Thus in paragraph 67 of the section on Mistake in Halsbury Laws Vol 77 (2010) 5^th Edition there appears:

This seems to me to be in accordance with both principle and common sense and would not lead to the highly unsatisfactory results envisaged by Miss Temple.

In the light of my views on the first and third strands of Miss Temple’s submission it does not matter whether PPL was a contingent creditor or not. If the rectification proceedings succeed PPL will not have released the debt at all and will have been a creditor within the IVA and entitled to their share of the dividend. It follows in my view the appropriate course would have been to await the result of the rectification proceedings to see whether they were a creditor rather than to distribute what would have PPL’s share to the other creditors and/or the Debtor in the event of a surplus.

As the question whether PPL is a “contingent creditor” is academic I propose to deal with it relatively briefly:

There is no definition of contingent debt or liability in section 382 of the Insolvency Act 1986.

In Glenister v Rowe the Court of Appeal held that a party to litigation against the bankrupt prior to the bankruptcy where the order for costs was made after the bankruptcy. The discretionary nature of the Court’s power to order costs indicated that there was no liability contingent or otherwise in the absence a Court order. Similarly in the Birmingham City Council case a liability to repay benefit which was determined to have been a recoverable overpayment subsequent to the bankruptcy was not a contingent liability as at the date of the bankruptcy. This was because the liability only arose when a determination of misrepresentation which took place after the bankruptcy. This determination was not a mere formality so there could not be said to be a contingent liability as at the date of the bankruptcy.

On the other hand in the T & N case David Richards J held that potential claimants for asbestos related injuries who had been exposed to asbestos but had not suffered compensatable loss as at the date of the creditors’ meeting were contingent creditors. In those cases the contingency was whether the claim in tort was completed by the development of the relevant condition.

Miss Temple submitted that this case was analogous to the two Court of Appeal authorities referred to above. She pointed out that rectification was a discretionary remedy and thus covered by those two decisions. In the T & N case there was no discretionary element. Either the claimants developed the relevant condition or they did not. It was on that basis they were contingent creditors.

To my mind there is force in Miss Temple’s submissions. I agree that PPL was not a contingent creditor within the meaning section 382 of the Act. As at the date of the IVA it was an actual creditor. Whether it remained an actual creditor after the date of the Deed of Surrender depends on the outcome of the rectification proceedings. If the rectification proceedings succeed it remains an actual creditor throughout.

Conclusion

In my view, therefore PPL’s application was not bound to fail. It would only fail if the rectification proceedings failed. In my view DJ Ellington ought not to have dismissed the application. He ought to have adjourned it to await the outcome of the rectification proceedings.

I would allow the appeal.