Davis & Anor v Price & Anor

These are appeals from orders dated 23 April 2012 made by Deputy Judge Winslett, sitting in the Brighton County Court, by which two statutory demands were set aside. The statutory demands had been served by the Appellants, Richard and Dilys Price, on the Respondents, Stuart and Karen Davis (the debtors). The appeal is brought with the permission of Arnold J. The statutory demands were each for an amount of £7,010.52, being the amount of an order dated 17 November 2011 for costs made jointly and severally against the debtors. There is no dispute as to that order. The issue is whether the debt created by the costs order was subject to the terms of individual voluntary arrangements (IVAs) proposed by the debtors and approved by creditors at meetings held on 13 January 2012.

The debtors had carried on business together as The Alchemy Partnership LLP. Mr and Mrs Price had provided funds to the debtors for investment in a company which later failed. They subsequently had grounds for considering that not all the funds provided by them had been applied in the investment. In December 2009 Mr and Mrs Price issued proceedings to recover the balance of such funds from the debtors. The debtors denied liability. The details of the claim are not material to the issue on this appeal. In March 2009 HMRC presented a bankruptcy petition against Mr Davis but no bankruptcy order was made.

On 28 April 2010 the debtors obtained interim orders under section 252 of the Insolvency Act 1986 (the Act) to enable them to put forward proposals for IVAs under Part VIII of the Act. On the same day, the proposals were sent to creditors. They provided for the matrimonial home to be sold, which it was hoped would release £80,000 for distribution among the unsecured creditors. If that sum was not paid within six months, the nominee was to petition for the debtors’ bankruptcy. It was stated that this would be sufficient to pay creditors 97.70p in the pound, as opposed to an estimated 4.7p in the pound if they were adjudged bankrupt.

This return was calculated on the basis that Mr and Mrs Price’s claim was not established. For the purposes of voting at the meetings of creditors, Mr and Mrs Price lodged proofs of debt, both in the sum of £82,150, being the sums claimed in the proceedings together with costs and interest. The chairman of the meetings held on 8 June 2010 treated Mr and Mrs Price’s claims as contingent liabilities and valued them at £1. On that basis, the proposals were approved by a majority of 83.7% in value of creditors voting at the meetings. If Mr and Mrs Price’s claims had been admitted in full or for a substantial sum, the proposals would not have been approved by the statutory 75% in value of creditors.

On 1 July 2010, Mr and Mrs Price issued an application under section 262 of the Act, challenging the value of £1 attributed for voting purposes to their claims. Following a contested hearing before DJ Gamba, sitting in the Brighton County Court, it was held that their claim should have been admitted to voting in the sum of £35,388.54 and marked “objected to”. The District Judge directed that, if the debtors wished to proceed with their proposals, with or without variation, further meetings should be held to consider them. I will return to the precise terms of his order dated 17 November 2010. He ordered the debtors to pay the costs of Mr and Mrs Price assessed in the sum of £7,010.52 9 (the costs).

The debtors put forward revised proposals. The principal variation was that instead of providing, as hoped, £80,000 from the sale of their house, a third-party would provide £40,000 for distribution among creditors. Meetings of creditors were held on 13 January 2011. Mr and Mrs Price voted at each meeting in the sum provided by the order dated 17 November 2010, but did not vote in respect of the costs. If they had done so, the proposals would not have been approved. In fact, however, they were approved.

On 16 September 2011, Mr and Mrs Price served statutory demands on the debtors for the costs. The debtors applied to set aside the statutory demands on the grounds that they were subject to the terms of the IVAs. Following a hearing on 23 April 2012, at which both sides were represented by counsel, the Deputy District Judge set aside the statutory demands and ordered Mr and Mrs Price to pay the debtors’ costs assessed at £10,000. Mr and Mrs Price appeal from that order.

Before turning to the reasons given the Deputy District Judge and the submissions of counsel, I will refer to the relevant statutory provisions and the terms of the order dated 17 November 2011.

Part VIII of the Insolvency Act makes provision for IVAs, in effect as an alternative to bankruptcy. By allowing, for example, time for the realisation of assets or the introduction of third party funds, they permit a significantly better outcome for creditors, as well as avoiding the costs of bankruptcy.

A debtor may apply, as the debtors did in this case, for an interim order which gives protection by way of moratorium on bankruptcy, enforcement and other proceedings in the terms set out in section 262(2) of the Act.

The proposals for an IVA must provide for some person (the nominee) to act in relation to the voluntary arrangement either as trustee or otherwise for the purpose of supervising its implementation and the nominee must be a person qualified to act as an insolvency practitioner or authorised to act as a nominee. It is the duty of the nominee to consider whether the voluntary arrangement which the debtor is proposing has a reasonable prospect of being approved and implemented and whether a meeting of creditors should be summoned to consider the proposal. If the nominee considers that a meeting of creditors should be summoned, section 257 provides that the nominee shall summon the meeting, unless the court otherwise directs. Section 257(2) and (3) provide:

“(2)

The persons to be summoned to the meeting are every creditor of the debtor of whose claim and address the person summoning the meeting is aware.

(3)

For this purpose the creditors of a debtor who is an undischarged bankrupt include –

(a)

every person who is a creditor of the bankrupt in respect of a bankruptcy debt, and

(b)

every person who would be such a creditor if the bankruptcy had commenced on the day on which notice of the meeting is given.”

Section 258(1) provides that a meeting of creditors shall decide whether to approve the proposed voluntary arrangement and section 258(6) provides that the meeting shall be conducted in accordance with the Insolvency Rules.

The effect of approval is set out in section 260(2):

“The approved arrangement –

(a)

takes effect as if made by the debtor at the meeting, and

(b)

binds every person who in accordance with the rules –

(i)

was entitled to vote at the meeting (whether or not he was present or represented at it), or

(ii)

would have been so entitled if he had had notice of it,

as if he were a party to the arrangement.”

Section 262 makes provision for challenges to the decision of a meeting. Creditors, amongst others, may challenge the decision on one or both of two grounds. The grounds are, first, that the arrangement unfairly prejudices the interests of a creditor and, secondly, that there has been some material irregularity at or in relation to the meeting. Section 262(4) provides:

“Where on an application under this section the court is satisfied as to either of the grounds mentioned in subsection (1), it may do one or both of the following, namely—

(a)

revoke or suspend any approval given by the meeting;

(b)

give a direction to any person for the summoning of a further meeting of the debtor’s creditors to consider any revised proposal he may make or, in a case falling within subsection (1)(b), to reconsider his original proposal.”

Section 262(6) provides for the continuation or renewal of an interim order:

“Where the court gives a direction under subsection (4)(b), it may also give a direction continuing or, as the case may require, renewing, for such period as may be specified in the direction, the effect in relation to the debtor of any interim order.”

Section 262(7) makes provision for the court to give supplemental directions:

“In any case where the court, on an application made under this section with respect to a creditors’ meeting, gives a direction under subsection (4)(b) or revokes or suspends an approval under subsection (4)(a) or (5), the court may give such supplemental directions as it thinks fit and, in particular, directions with respect to—

(a)

things done since the meeting under any voluntary arrangement approved by the meeting, and

(b)

such things done since the meeting as could not have been done if any interim order had been in force in relation to the debtor when they were done”

Part V of the Insolvency Rules 1986 contains detailed provisions relating to IVAs. Chapter 5 contains provisions relating to meetings of creditors.

Rule 5.21 deals with the entitlement to vote:

“5.21(1) Subject as follows, every creditor who has notice of the creditors’ meeting is entitled to vote at the meeting or any adjournment of it.

5.21(2) A creditor’s entitlement to vote is calculated as follows-

(a)

where the debtor is not an undischarged bankrupt and an interim order is in force, by reference to the amount of the debt owed to him as at the date of the interim order;

(b)

where the debtor is not an undischarged bankrupt and an interim order is not in force, by reference to the amount of the debt owed to him at the date of the meeting; and

(c)

where the debtor is an undischarged bankrupt, by reference to the amount of the debt owed to him as at the date of the bankruptcy order.

5.3193)

A creditor may vote in respect of a debt for an unliquidated amount or any date whose value is not ascertained, and for the purposes of voting (but not otherwise) his debt shall be valued at £1 unless the chairman agrees to put a higher value on it.”

Rule 5.22 contains the procedure for admission of creditors’ claims for voting purposes:

“5.22(1) Subject as follows, at the creditors’ meeting the chairman shall ascertain the entitlement of persons wishing to vote and shall admit or reject their claims accordingly.

5.22(2) The chairman may admit or reject a claim in whole or in part.

5.22(3) The chairman’s decision on any matter under this Rule or under paragraph (3) of Rule 5.21 is subject o appeal to the court by any creditor or by the debtor.

5.22(4) If the chairman is in doubt whether a claim should be admitted or rejected, he shall mark it as objected to and allow votes to be cast in respect of it, subject to such votes being subsequently declared invalid if the objection to the claim is sustained.

5.22(5) If on an appeal the chairman’s decision is reversed or varied, or votes are declared invalid, the court may order another meeting to be summoned, or make such order as it thinks just.

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

It is unnecessary to set out paragraphs (6) and (7) of rule 5.22.

The application made by Mr and Mrs Price on 1 July 2010 sought an order pursuant to section 262, revoking the approval given by the creditors’ meeting held on 8 June 2010 to the IVAs proposed by the debtors and an order pursuant to rule 5.22(3) reversing the decision of the chairman of the meeting to value their claims in sum of £1 for the purposes of voting. The parties who appeared and were represented before DJ Gamba at the hearing on 17 November 2010 were Mr and Mrs Price, the nominee for the IVAs and the chairman of the meetings. The debtors were not present and were not represented, although they were named as respondents to the application.

Paragraph 1 of DJ Gamba’s order provided for the approval of the IVAs to be suspended. It is common ground that the approval was suspended rather than revoked because it was not appreciated that under section 262(6) the court had power to continue or renew the interim order and it was believed that a suspension, as opposed to a revocation, would preserve the position so far the debtors were concerned. Paragraph 2 of the order provided that the debtors were by 3 December 2010 to give notice whether they proposed either to make any variation to the IVAs or to invite reconsideration of the IVAs. Paragraph 3 provided that if such notice were given, the nominee was to “give notice to the creditors under the IVAs (“the IVA Creditors”)”, convening further meetings and stating that the purpose of the meetings was to reconsider and vote again upon the IVAs or any proposed variation to the IVAs.

Paragraph 4 provided that Mr and Mrs Price were permitted to vote at the meetings in the amount £35,388.54, subject to being marked “objected to”, and further provided:

“(i)

if a proposed variation is put to the vote and approved by the requisite majority in accordance with the Insolvency Rules 1986, the suspension of the approval of the IVAs shall be lifted with immediate effect and the IVA Creditors shall be bound by the IVAs as varied in accordance with section 260 of the Insolvency Act 1986;

(ii)

if a proposed variation is put to the vote and rejected in accordance with the Insolvency Rules 1986, the approval of the IVAs on 8^th June 2010 shall be revoked with immediate effect and the IVA Creditors shall cease to be bound by the IVAs;

(iii)

if the IVAs are reconsidered and approved by the requisite majority in accordance with the Insolvency Rules 1986, the suspension of the approval of the IVAs shall be lifted with immediate effect and the IVA Creditors shall continue to be bound by the IVAs in accordance with section 260 of the Insolvency Act 1986;

(iv)

if the IVAs are reconsidered and rejected in accordance with the Insolvency Rules 1986, the approval of the IVAs on 8^th June 2010 shall be revoked with immediate effect and the IVA Creditors shall cease to be bound by the IVAs;

(v)

for the avoidance of doubt, the provisions of Part 5 Chapters 5 and 6 of the Insolvency Rules 1986 shall apply to the Further Meetings.”

Paragraph 5 of the order provided that if the debtors did not give notice of an intention to proceed with the IVAs, “the approval given to the IVAs shall be revoked as from 4.00pm on 3 December 2010 and the IVA Creditors shall cease to be bound by the IVAs”.

On the application to set aside the statutory demands, Mr and Mrs Price submitted that the liability of the debtors for the costs were not subject to the IVAs on the grounds, in short, that the revised IVAs approved at the meetings held on 13 January 2011 did not extend to any liabilities which were not also subject to the IVAs as originally proposed and voted on in June 2010. By reason of the effect of rule 5.21(2)(a) the relevant debts were those owed as at the date of the interim orders, made on 28 April 2010. There was of course no liability for the costs until the order made by DJ Gamba on 17 November 2010.

The debtors relied on the terms of the revised IVAs circulated to creditors in December 2010 which expressly extended to the costs and submitted that there was no legal reason why the revised IVAs should not bind Mr and Mrs Price in their capacity as creditors not only in respect of their disputed claims but also in respect of the costs.

The Deputy District Judge held that the position was governed by rule 5.21(2)(b). The debtors were not undischarged bankrupts and there was no interim order in force. Accordingly, Mr and Mrs Price were entitled to vote by reference to the amount of the debts owed to them at the date of the meeting in January 2011, which included the costs.

On this appeal, counsel for Mr and Mrs Price relies, as he did below, on a combination of the fact that the approval of the IVAs at the meeting held in June 2010 was suspended, not revoked by DJ Gamba’s order, and on the further terms of that order. He submits that the suspension of the approval necessarily imports that, when the proposals were further considered or reconsidered at a new meeting, it was only those creditors who were affected by the original proposals and entitled to vote on them who could vote on the proposals or revised proposals at the further meeting. There is, he submits, an essential difference between the suspension and the revocation of the approval of an IVA. If the approval is revoked, then the IVA fails and the debtor must start again by seeking to obtain approval for a new IVA from creditors in respect of such debts as exist either at the date of the new meeting or as at the date of a renewed interim order. By contrast, where approval is merely suspended, the IVA proposal will apply only to those creditors covered by the original proposal.

Counsel relied on various provisions of DJ Gamba’s order as being consistent with this approach. Paragraph 3 of the order defines the IVA creditors as “the creditor under the IVAs”. While this formulation is ambiguous as to whether it refers to the creditors affected by the original IVAs or whether it extends to creditors as at the date of the consideration of the revised IVAs, further provisions of the order indicate that it is a reference to the former. Paragraph 4(2) provided that if the proposed variation was put to the vote and rejected, the approval of the IVAs on 8 June 2010 would be revoked with immediate effect “and the IVA Creditors shall ceased to be bound by the IVAs”. Paragraph 4(3) provided that if the IVAs were reconsidered and approved, the suspension of the approval of the IVAs would be lifted with immediate effect and “the IVA Creditors shall continue to be bound by the IVAs in accordance with section 260” of the Act. Paragraph 5 provided that if no notice were given of an intention to put the proposals for approval again “the IVA Creditors shall cease to be bound by the IVAs”. These provisions all appear to proceed on the basis that the creditors affected by any revised or reconsidered IVA would only be those creditors who were subject to the IVAs in June 2010.

It is common ground that an IVA binds every creditor who was entitled to vote at the meeting at which the IVA is approved: section 260(2). For these purposes, neither the Act nor the Rules distinguishes between the original meeting at which the IVA was considered and any subsequent meeting held pursuant to a direction of the court made under section 262(4)(b). Entitlement to vote at a meeting at which an IVA is proposed is governed by the Insolvency Rules. The only rule providing for entitlement to vote is rule 5.21. Every creditor who has notice of the meeting is entitled to vote at it and the calculation of a creditor’s entitlement to vote is undertaken in accordance with rule 5.21(2). Again, no distinction is drawn between an original meeting at which an IVA is considered and a subsequent meeting convened in accordance with an order under section 262(4) or rule 5.22(5). There is no provision in the Act or in the Rules which provides that a revised proposal put to a further meeting of creditors is restricted in its effect to those who were creditors at the date of the original meeting. Nor, which comes to the same thing, is there any provision to the effect that notice of the further meeting shall be given only to those who were entitled to vote at the first meeting. The submissions for Mr and Mrs Price require there to be implied into the Act and the Rules restrictions to that effect, but if it had been intended that consideration of a revised IVA at a further meeting should be restricted to such creditors, one would expect to see such restrictions set out.

Counsel for Mr and Mrs Price submits that such restrictions are a necessary consequence of the distinction drawn in section 262(4)(a) between the revocation and the suspension of approval of the IVA given by the original meeting. He accepts that if the approval is revoked, a revised IVA or even the same IVA will, if approved, bind all creditors as at the time when notice of the meeting was given, subject only to rule 5.21(2)(a) if applicable. On the facts of this case, where the interim order ceased to have effect in June 2010 and was not subsequently renewed, he accepts that if DJ Gamba had revoked the approval of the IVA, the entitlement of Mr and Mrs Price to the costs would have been a liability subject to an IVA put to a further meeting. He submits that the consequence is different where, as here, the order suspended, not revoked, approved of the IVA. The effect of suspension of approval was that the creditors affected by the IVAs continued to be bound by them.

I am unable to accept these submissions. First, I do not think it is right that if the approval of an IVA is suspended, it nonetheless continues to bind creditors. Once approval is suspended, it does not seem to me possible to say that there is an “approved arrangement” within the meaning of section 260(2). If counsel’s submissions were correct, it would be unnecessary to confer upon the court the power under section 262(6) to continue or renew an interim order. The power applies in any case in which the court has given a direction under section 262(4)(b) for the summoning of a further meeting, which in turn applies in the case of both the revocation and a suspension of the approval of an IVA. Without an order under section 262(6) there will be no restriction on the right of creditors to take enforcement action against the debtor. If an order is made under section 262(6), it will have an effect on the identity of those who can be bound by the IVA to be put to a further meeting, by reason of the operation of rule 5.21(2)(a) which determines a creditor’s entitlement to vote by reference to the date of an interim order which is in force.

In my judgment, the distinction between the suspension and revocation of approval of an IVA does not have the effect of determining the creditors to be bound by the IVA to be considered at the further meeting. There would be more force in the point if the Act provided that directions for a further meeting could be given in the case of the suspension of approval but not in the case of revocation of approval. In those circumstances, it would be clear that in the case of revocation, the debtor was required to start to gain from scratch. There would then be more of a basis for suggesting that it was implicit in the concept of suspension that the IVA, once approved by a further meeting, would bind only the original creditors. However, as I have mentioned, section 262(4) empowers the court to give a direction for a further meeting, whether the approval given by the first meeting is revoked or suspended.

As a matter of principle, there is no strong reason why in circumstances where a debtor is putting a proposal for an IVA to a further meeting of creditors, it should not include those who have become creditors since the last meeting. The submissions for the Appellants involve reading far more into the Act and the Rules than can be justified on the basis of necessary implication. The right course, in my judgment, is to apply the relevant provision, rule 5.21, in accordance with its express terms.

Counsel for the debtors pointed out that Mr and Mrs Price were undoubtedly creditors for the purposes of the IVA as originally proposed. There was no evidence of any new creditors between the date of the original meeting and the date of the further meeting held in January 2011. The only change was that Mr and Mrs Price had become entitled to payment of a new liability. I do not base my decision on that distinction. If it were the case that only the original creditors would be bound by the IVA approved at the further meeting, it would be anomalous if it applied to a new liability to such a creditor but not to a liability to a new creditor. In bankruptcy, the alternative to an IVA, the same creditor may have a debt which is provable and a debt which is not provable.

Counsel for Mr and Mrs Price was right, I think, to suggest that the order of DJ Gamba appeared to proceed on the basis that the relevant creditors for the purposes of a reconsideration of the IVA were the creditors originally bound by it. Although the court is empowered by section 262(7) to give such supplemental directions as it thinks fit where it gives a direction for a further meeting, that power must be read and exercised consistently with the express provisions of the Act and the Rules and cannot, in my judgment, confer on the court power to substitute for rule 5.21 a different scheme to determine the creditors who may vote at the further meeting and the calculation of their votes.

For these reasons, I conclude that the decision under appeal was correct. The liability of the debtors for the costs was a debt subject to the terms of the IVAs approved at the further meetings. Mr and Mrs Price were therefore not entitled to serve statutory demands in respect of the costs. I accordingly dismiss the appeals.