Zelouf v Khanna & Anor

These are appeals by Mr Michael Zelouf against two decisions made by District Judge Bishop in the Croydon County Court on 17 December 2014 and 30 June 2015 respectively. Permission to appeal was granted by Asplin J on 13 November 2015. Before turning to the nature of the appeals themselves, it is necessary to set out in some detail the somewhat tortuous and protracted background to them.

On 14 November 2013, a meeting of the creditors of the 1^st respondent, Mr Vipin Khanna, took place at which Mr Khanna's IVA proposals were, with some modifications, approved by 76.15% of the creditors.

The IVA incorporated the Standard Conditions for Individual Voluntary Arrangements produced by the Association of Business Recovery Professionals (version 3, January 2013) (“the R3 Standard Conditions”). Condition 4(3) of the R3 Standard Conditions provided that, after the commencement of the arrangement no creditor would, in respect of any debt subject thereto, have any remedy against the property or person of the debtor or commence or continue any action or other legal proceeding against the debtor. Condition 5(1) provided that legal proceedings against the debtor in existence at the commencement of the arrangement in respect of debts subject thereto must be discontinued by the creditor with no order as to costs unless inter alia“the Supervisor otherwise directs".

Mr Zelouf, with whom Mr Khanna had been in partnership and who had issued county court proceedings against Mr Khanna on 13 November 2013, voted against approving the IVA. He had a liquidated claim against Mr Khanna which, by the time of the IVA, was in a sum of £58,032.31 and in respect of which he was allowed to vote in full. He also had an unliquidated claim for costs in respect of which he was allowed by the chairman of the meeting to vote in the sum of £1, on the basis that the chairman was unable to place a higher estimated minimum value on it.

Mr Zelouf s position throughout has been that Mr Khanna owns substantial property in India of which the existence has not been disclosed but this is emphatically denied by Mr Khanna.

The 2^nd Respondent, Mr Christopher Herron, is the joint supervisor of the IVA and was the chairman of the creditors' meeting on 14 November 2013. At the meeting, he pointed out to Mr Zelouf inter alia his entitlement under section 262 of the Insolvency Act 1986 (“section 262” and “the IA” respectively) to challenge the IVA on the grounds that it unfairly prejudiced his interests and that there had been some material irregularity at or in relation to the meeting.

On 15 November 2013, Mr Zelouf emailed Mr Herron to seek confirmation of what had been agreed at the creditors' meeting. The email stated that:

Mr Herron replied by email the same day to the effect that he could not support Mr Zelouf as such but would not stand in his way. The email stated that “it is for the Court to decide whether to consider your application but I would expect them to do so, as the quantum of the debt due to you could not have been known at the time of the meeting or, indeed, until you obtained judgement.... ”

On 18 November 2013, Mr Herron sent to Mr Zelouf a copy of the chairman’s report on the creditors’ meeting under cover of a letter which confirmed that the IVA proposals had been approved with modifications and were now binding on all creditors. The only modifications were those attached to the report, to which Mr Khanna had agreed, The report included a statement that:

On 18 December 2013, Mr Zelouf obtained judgment against Mr Khanna in the county court proceedings. By a consent order dated 7 May 2014, Mr Khanna agreed to pay Mr Zelouf a total sum of £77,836.51 in respect of liability and costs.

Also on 7 May 2014, Mr Zelouf applied, in reliance inter alia on the statement in the report quoted in paragraph 9 above, to set aside the IVA (“the Application”). The Application was not expressed in the application notice to be founded on either of the grounds set out in section 262; and the notice expressly stated that the Application was not to challenge the IVA,

On 20 May 2014, a directions hearing took place before District Judge Major. According to a letter of 22 May 2014 from Mr Herron’s solicitors, Pitmans, to Mr Zelouf, the District Judge said at that hearing that she was at a loss to understand the basis of Mr Zelouf s application. Pitmans went on to point out that it was for Mr Zelouf to identify the provisions of the IA or of the Insolvency Rules 1986 on which the application was based and to support the application with clear evidence. Mr Zelouf took issue with Pitmans in letters in reply dated 28 and 30 May 2014.

Nevertheless, on 23 September 2014, Mr Zelouf applied for permission to amend the Application in the form attached to the application notice, for the reasons set out in a witness statement (not an affidavit as stated in the notice) of Mr Zelouf dated 19 September 2014 (“the Amendment Application”). The proposed amendment which is material for present purposes was to seek an order “pursuant to section 262(1)(a) and (b) of the Insolvency Act 1986 that the Court revokes the decision of the creditors‘ meeting convened on 14 November 2013 and setting aside” the IVA.

In paragraph 6 of the witness statement, Mr Zelouf stated that the reasons for the Amendment Application were that, at the directions hearing, when District Judge Major indicated that she was unable to understand the legal basis for the Application, he had been acting in person but had now instructed solicitors and counsel and received their advice and that the purpose of the Amendment Application was “to make clear the legal basis upon which I am seeking the Court’s relief".

On receipt of the application to amend, Pitmans wrote to Mr Zelouf's solicitors, Simons Rodkin, on 15 September 2014 to request full particulars of the matters being relied on to establish unfair prejudice to Mr Zelouf and some material irregularity at or in relation to the creditors’ meeting.

The Amendment Application came before District Judge Bishop on 17 December 2014. Mr Zelouf and Mr Herron were represented by solicitors and counsel and Mr Khanna was represented by counsel instructed through the Bar Pro Bono Scheme. Mr Zelouf submitted before the District Judge that the amendments should be allowed in application of the principles set out in CPR Rule 17.1 because they would allow the real dispute between the parties to be adjudicated upon and that they had a real prospect of success. He submitted inter alia that Mr Herron should be bound by his statements that he would not oppose an application by Mr Zelouf to challenge the decision of the creditors’ meeting; that Mr Herron should be held strictly to what he had promised and agreed on; that there had been a material irregularity in respect of the rules regarding the admissibility of claims and incorrect application of the rules regarding voting rights; and that there would be unfair prejudice if he was not allowed to challenge the decision. Mr Herron submitted inter alia that the proposed amendments amounted to a challenge under section 262 and that, if they were to be allowed, Mr Zelouf should be required to properly and coherently particularise the allegations of unfair prejudice and material irregularity.

The District Judge accepted that the Amendment Application was not entirely hopeless and gave permission to amend. However, she made it clear that the grounds on which the amendment could be made had to be as set out by Mr Zelouf's counsel, Mr Arumugam, who has also appeared at the hearing of the appeals. She requested a one page statement of case drafted by Mr Arumugam. Following the District Judge’s judgment, a discussion took place between the District Judge and counsel on various consequential matters, including the form of the order to be drawn up.

When it came to drawing up the order from the 17 December 2014 hearing, the parties were unable to agree its terms. The particular area of disagreement which is relevant to the appeals relates to the scope of the amendment which was allowed. Mr Zelouf considered that the amendment was a blanket amendment not confined to a challenge under section 262; Mr Herron considered that the amendment was limited to a challenge under section 262. The parties were, however, in agreement that Mr Zelouf should serve Points of Claim with particulars of his grounds “which shall be limited to matters raised in the Applicant’s skeleton argument dated 16 December 2014, excluding references to the Joint Supervisor having been wrong to value the Applicant’s costs claim at £1 at the meeting of creditors on 14 November 2013. The Points of Claim shall thereafter stand as the Applicant’s amended Substantive Application”.

On 9 January 2015, Mr Zelouf served Points of Claim. Paragraph 1 of the Points of Claim states that he applies to set aside the IVA on the bases stated in sub-paragraphs (a) to (g). Paragraph 2 thereof states that he applies pursuant to section 262(1)(b) to challenge the decision of the creditors’ meeting on 14 November 2013 on the ground of material irregularity at or in relation to the meeting. In that regard, he relies on the matters in paragraph 1(a) to (g) and on the provision by Mr Khanna of allegedly false and misleading information about his assets. (The allegation of unfair prejudice is not pursued).

On 18 December 2014, the District Judge made an amended approved order (not sealed by the court office until 12 February 2015) which confined the amendment to a challenge under section 262 as contended for by Mr Herron. Mr Arumugam emailed the District Judge on 19 February 2015 to point out that there was an inconsistency between the first and second paragraphs of paragraph 1 of the order and to invite her to correct the order:

The question of the scope of the permitted amendment did not come back to District Judge Bishop for resolution until 30 June 2015, due apparently to a delay in obtaining the approved judgment from the 17 December 2014 hearing. Counsel for Mr Khanna and Mr Herron did not agree with Mr Arumugam's position. Having considered the matter, the District Judge decided that the order as sealed should stand, with the exception of one point which is not material. She observed that although she did not mention the section 262 point in her judgment on 17 December 2014, that was remedied immediately afterwards, By an order dated 30 June 2015, she ordered that, with the immaterial exception, the order of 17 December 2014 “shall stand as correct and no further revisions or corrections are required”. She further ordered inter alia that Mr Zelouf should pay Mr Herron’s costs of the application to correct the order in the sum of £3,000.

On 17 July 2015, Mr Zelouf filed notices of appeal against the 17 December 2014 and 30 June 2015 orders.

On 13 November 2015, Asplin J granted Mr Zelouf permission to appeal on a renewed oral application, despite the fact that she still considered that "this is a very unusual type of appeal and that it could be said that the order as it stands in any event reflects the form of the judgment itself and that no more is necessary”.

Against that background, I turn to consider the appeals themselves. The principal ground of appeal is that District Judge Bishop was wrong to have limited the permission to amend to claims arising under section 262 because (1) that contradicted the terms of her judgment, in which she said that permission to amend was being granted to enable Mr Zelouf to bring his case into line with the way the case had been argued on his behalf by Mr Arumugam; (2) it contradicted the second paragraph of paragraph 1 of the order dated 17 December 2014; (3) the judge wrongly proceeded on the basis that Mr Zelouf had no arguable claim outside section 262; and (4) she wrongly relied on passages from the post-judgment transcript as giving clarity to what she had in fact ordered. It strikes me that Mr Arumugam’s email of 19 February 2015 was in substance an application for the rectification of the 17 December 2014 order so as to make it accord with the court’s true intention and that the present appeals are, strictly, appeals against the judge’s refusal to rectify the order. However, for present purposes nothing turns on the precise nature of the appeals.

I reject Mr Arumugam’s submissions that the 17 December 2014 order does not reflect what the judge decided in her judgment of that date and is inconsistent with the post-judgment discussion that took place. The passages from the judgment relied on in paragraph 27 of Mr Zelouf s skeleton argument for the hearing of the appeals cannot be viewed in isolation and have to be seen in the context of the procedural history and the correspondence between the parties from 21 May 2014 summarised above. Indeed, each of the parties’ skeleton arguments for the 17 December 2014 hearing and, in particular, that of Mr Zelouf himself (at paragraphs 14 and 16), proceeded on the basis that the proposed amendments were referable to section 262.

Similarly, the passages from the post-judgment discussion have to be seen in context. In my judgment, it is tolerably clear from the transcript of the post-judgment proceedings that, leaving aside an issue concerning the valuation of Mr Zelouf s costs claim - a matter which is no longer in issue - the District Judge was not envisaging that the amendment would extend beyond a challenge under section 262. In particular, at page 12F et seq of the transcript, Mr Gunaratna, Mr Herron’s counsel who has also appeared at the hearing of the appeals, clarified that that is what he understood the scope of the amendment to be and the District Judge indicated that, leaving aside the issue concerning the valuation of Mr Zelouf s costs claim there could be no other amendment. That was not contradicted by Mr Arumugam. Like District Judge Bishop herself, I do not consider that her comments to the effect that Mr Zelouf should have permission to amend in accordance with the submissions made by Mr Arumugam were intended to permit the bringing of a claim outside the scope of section 262. As Mr Gunaratna put it, Mr Zelouf has wrongly conflated the legal grounds on which his substantive application for relief is brought with the particularisation of those grounds. The real dispute between the parties in respect of which permission to amend was given was the claim under section 262.

I also reject Mr Arumugam’s submission that the first paragraph of paragraph 1 of the 17 December 2014 order is inconsistent with the second paragraph of paragraph 1 of that order. That submission proceeds on the same false premise as his earlier submissions that the reference in the latter to “matters raised in the Applicant’s skeleton argument dated 16 December 2014 ...” shows that the judge intended to permit the bringing of a claim outside the scope of section 262.

In granting permission to amend, the judge was only concerned with a claim under section 262. I reject Mr Arumugam’s submission that the judge wrongly proceeded on the basis that Mr Zelouf had no arguable claim outside section 262: she was not considering such a claim. In so far as the matters relied on in Mr Zelouf s skeleton argument for the 17 December 2014 hearing were directed at such a claim, the judge was, in my judgment, right not to entertain them. She did not regard them as a legitimate “hook” on which to hang such a claim. Mr Herron’s statements to the effect that if Mr Zelouf subsequently established in court that the amount owed to him would have been enough to reject the proposal (if he had been able to vote for this amount) he might apply to set the arrangement aside and that the chairman would not unreasonably contest this do not give rise to a free-standing cause of action founded on breach of contract, misrepresentation or estoppel as suggested by Mr Arumugam. As pointed out by Mr Fennell, who appeared on Mr Khanna’s behalf, Mr Herron has merely sought to clarify the grounds of Mr Zelouf's application and has not unreasonably contested it; and the matters relied on by Mr Zelouf do not constitute a modification of the IVA in accordance with section 258(2) of the IA.

It follows that there was also no serious irregularity in the 30 June 2015 order by reason of the judge’s maintenance of the 17 December 2014 order in the terms in which it was issued.

Mr Zelouf also appeals District Judge Bishop’s order that he should pay the costs of the 30 June 2015 hearing. In the light of my conclusion that the 30 June 2015 order was correctly made, there is no basis for interfering with that order in so far as it determined that he should pay those costs. There is also no basis for interfering with the amount of the costs ordered to be paid. That was a matter within the judge’s broad discretion and with which an appellate court should be slow to interfere. In my judgment, the order was reasonable and proportionate and one which the District Judge was clearly entitled to make.

Finally, Mr Zelouf appeals District Judge Bishop’s order to debar him from making further applications without first paying the costs of the 30 June 2015 hearing. Mr Zelouf relies on the facts that he was not in breach of any court orders and had not failed to meet any other outstanding costs orders in the present proceedings; and that it was an improper exercise of the court’s discretion. In my judgment, irrespective of what I might have done in the circumstances, it cannot be said that the judge’s order - which does not preclude Mr Zelouf from pursuing his application under section 262 - was made outside the generous ambit of the discretion afforded to her having regard to the course of the proceedings summarised above.

For the above reasons, the appeals must be dismissed.