Golstein v Bishop & Anor

This judgment follows on from my judgment handed down on 2 September 2016 in this appeal. It should be read as one with that judgment. I adopt the same definitions and do not repeat any of the matters dealt with in that judgment. This judgment is given to deal with the remedies, if any, to be granted following Mr Golstein’s success on his second ground of appeal. Representation of Mr Golstein and Mr Bishop is as before. Mr Steven Fennell appears for the Supervisor of Mr Bishop’s IVA, Mr Barnett, who did not appear at the previous hearing.

Mr Salis’ submission is that I should revoke the approval of the IVA given at the creditors’ meeting with the result that Mr Bishop’s creditors will be able to petition for Mr Bishop’s bankruptcy. Mr Ascroft’s submission is that this is a case where I should grant no relief at all. Mr Fennell adopts an entirely neutral position on the part of Mr Barnett.

I make some observations in relation to section 262 taking account of counsel’s submissions.

First, it is common ground that I have a discretion whether to grant any relief at all: in this context, see [61] to [63] of my main judgment. There is no reported authority which has been discovered by counsel where relief has been granted after an IVA has terminated according to its terms. Nor is there any reported authority where the court has refused to grant any relief at all once unfair prejudice to creditors or material irregularity has been established.

Secondly, as a matter of fact, Mr Ascroft tells me that, were I to exercise my powers under section 262(4)(b) to direct the summoning of a further meeting to consider a revised proposal, Mr Bishop would not in fact submit one, so that we would, as it were, be back to square one with the court then either revoking or suspending the approval given at the previous creditors’ meeting. Mr Bishop cannot, at this stage, resubmit his original proposal for another vote. Suspension of the approval is not, in practice, an option. Accordingly, I am faced with the choice of revoking the approval or of granting no relief.

Thirdly, section 262(3) provides a strict, and short, time-limit for making an application under section 262. Mr Golstein complied with that requirement. The reasons for the strict time limit appear from [61] and [62] of my main judgment. Although it is, for those reasons, desirable to obtain a speedy resolution of any challenge to the approval of the IVA, a person who brings his challenge in time is not, in my judgment, to be penalised if there is then delay in the challenge being dealt with by the court unless that person has contributed in an inappropriate way to that delay.

Absent any special circumstances, a successful applicant under section 262 can usually expect that the court will exercise its powers under section 262(4). I use the word “usually” because there may be circumstances where the irregularity although “material” within the meaning of the section is not so serious as to warrant any of the remedies provided for in section 262(4). I do not need to say anything about how to identify such circumstances because, in my judgment, the material irregularity in the present case is serious. Further, the special circumstances of a particular case may be such that it would be in the interests of creditors generally (taking an objective assessment of those interests) to uphold the approval of the IVA or such that it would be unfair on the parties to grant any remedy.

The areas of disagreement between the parties can be narrowed, for present purposes, to these:

Mr Salis has taken me through the history of these proceedings and also of the partnership proceedings. I do not propose to rehearse that history in detail in this judgment. I should record, however, that there was an application by Mr Golstein to stay the section 262 application pending the outcome of the trial of the partnership action and to vacate the hearing fixed for 7 September 2012. In this context, Mr Golstein’s solicitors wrote to the County Court on 23 August 2012. The letter included the following:

“In the light of the number of issues in dispute and the volume of evidence serviced and filed by the parties in respect of both applications [Mr Golstein’s application and CBL’s application, also under section 262, which DJ Hart upheld: [see [89] of my main judgment], Leading Counsel considers that the current listing of a half day is no longer sufficient.

Further, the bankruptcy proceedings arose from an unpaid interim costs order in our client’s claim against Mr Bishop under the Partnership Act which is due to be heard in the High Court and is listed in a trial window in the final week of October 2012. In determining our client’s current application, one of the issues which the County Court will be invited to determine will involve assessing whether the supervisor under the IVA was justified in awarding our clients voting rights of only £1 in respect of one of the contingent debts in dispute in the High Court proceedings. We consider it will be an inefficient use of court time to reach a determination on this point, given that the High Court trial is imminent and the merits of our client’s claim and Mr Bishop’s counterclaim will be properly determined by the High Court.

We therefore respectfully suggest that the current listing should accordingly be vacated and the hearing relisted for a full day after judgment has been handed down in the High Court trial.”

The time estimate for the trial was 5 days. In the end, the hearing before Mr Nugee QC took 6 days.

The paper request resulted in an order dated 23 August 2012 from DJ Smart in the Central London County Court, vacating the hearing on 7 September 2012. DJ Smart ordered Mr Golstein’s application, CBL’s application and an application for an interim order by Mr Bishop, to be heard together with a time estimate of 1 day + ½ day reading to be listed “after judgment in the proceedings pending in the High Court between Mr Golstein and Mr Bishop”. The order also contained at paragraph 6 the standard form of provision in orders made without a hearing allowing any party to apply to have the order set aside, varied or stayed.

Mr Bishop did not apply to set aside, vary or stay that order. Mr Bishop has exhibited to a recent witness statement prepared for this hearing a letter to him from his solicitor at the time, Deborah Nigh, reporting the receipt by her of a sealed copy of the order made by DJ Smart on 23 August 2012. She explains the effect of the parts of the order concerning stay and adjournment. She writes:

“Unfortunately the enclosed Order means that the Application Hearing will not go ahead until sometime next year. In the circumstances I doubt that it is worthwhile making an Application to set aside or vary the enclosed Order and there is the risk that you will be subject to an adverse Costs Order if your application fails.”

It is fair to say, on the one hand, that it could not have been anticipated by Mr Golstein or Mr Bishop that they would not receive a judgment until May 2013. But it is also fair to say, on the other hand, that the preliminary issues which were to be dealt with in the High Court action were designed to produce answers to outstanding issues, the resolution of which would enable the partnership accounts to be finalised without the need to pursue the account and inquiry in further hearings. As Mr Salis says, the list of issues was discussed between the parties and I am entitled to conclude that the purpose identified by Mr Salis was shared by both parties.

Although he did not apply to vary or set aside DJ Smart’s order pursuant to the liberty to apply, what Mr Bishop did do was to apply for the hearing of the High Court action to be adjourned pending determination of the section 262 application. Newey J dismissed that application on 16 October 2012 after hearing from counsel on both sides (Mr Salis but not Mr Ascroft). Mr Salis describes this as a collateral attack on DJ Smart’s order. In a sense it was. But what Mr Bishop presumably wanted to achieve was a situation under which the section 262 application went ahead but the High Court action was stayed. Newey J no doubt had jurisdiction to bring that state of affairs about. In jurisdictional terms, he could have done so by himself lifting the stay granted by DJ Smart and staying the High Court action. In contrast, DJ Smart could not have achieved that result since he had no jurisdiction to stay the High Court proceedings. I do not think that anything turns on this since it cannot be said that Mr Bishop acted improperly or that Newey J should have dismissed the application because it was somehow an abuse of process rather than for the reasons which he did. The fact is that both DJ Smart (without a hearing) and Newey J (after a hearing) considered that the appropriate course was for the High Court action to be heard before the section 262 application. I add for completeness that, entirely unsurprisingly, there was no attempt to seek to appeal Newey J’s order.

Following Mr Nugee QC’s judgment, matters did not proceed as Mr Golstein had expected. Instead of a swift resolution of the account and inquiry in the light of the rulings made by Mr Nugee QC, little if anything was agreed. The account and inquiry proceeded. It had not been resolved by the time of the hearing before DJ Hart following which she dismissed Mr Golstein’s application (although by the time of the hearing before me, Mr Golstein had obtained judgment for over £500,000 and a costs order in his favour of over £300,000).

Mr Ascroft submits that Mr Golstein’s conduct has resulted in significant delay in the resolution of the section 262 application and that, as a result of that conduct and delay, the court should now decline to grant him any remedy. The thrust of his argument is that Mr Golstein’s whole approach has been to delay the hearing of the section 262 application until he had established a claim which would give him substantial voting rights by the time that application came to be heard. He, Mr Golstein, would clearly have been in a strong position before DJ Hart if, by then, he had obtained judgment in the partnership action even if quantum had not been determined; his position would have been stronger still if he had obtained judgment for a sum of money since his claim would then have been liquidated. Mr Ascroft submits that this strategy, and the tactics adopted to achieve it, are antithetical to the policy that applications under section 262 should be dealt with promptly.

I do not accept Mr Ascroft’s submissions in the context of the facts of the present case. DJ Smart, albeit without an oral hearing, clearly accepted the sense of adjourning the section 262 application. Newey J also accepted, after oral argument, that the partnership action should be dealt with first. In those circumstances it cannot be said that Mr Golstein was acting unreasonably or that his conduct was an abuse of process. More importantly for present purposes, his conduct cannot be categorised as an attempt to subvert the policy which I have just mentioned.

There are five other factors (as well as the question of prejudice which I deal with separately) which are relevant on the facts of the present case:

I therefore conclude not only that Mr Golstein was not attempting to subvert the policy of section 262 which I have identified, but also that no significant criticism can be levelled against him in respect of the failure to re-list his application soon after Mr Nugee QC’s judgment.

Mr Bishop would have had a stronger argument on this aspect of the case if he could show any prejudice which he has suffered as a result of the delay. Apart from the matters expressly dealt with below, I can detect no prejudice to him. This is particularly so given that the alleged strategy to establish a liquidated debt by the time of the hearing of the section 262 application had failed.

I have already mentioned Mr Ascroft’s argument based on the impossibility of reverting to the status quo prior to the IVA. This is, of course, a factor to be taken into account, but it rings slightly hollow for a person whose conduct has given rise to material irregularity to complain, that those adversely affected should have no remedy because he cannot be put back into the position in which he would have been, if approval had never been given to the IVA in the first place. However, ignoring that point, Mr Bishop’s most serious complaint relates to the cost and expense incurred by Mr Barnett in dealing with Mr Golstein’s allegations against Mr Bishop.

Before coming to that, I deal briefly with change of position. The only change of position which Mr Bishop can realistically rely on is the fact (and amount) of his contribution to the IVA: this is not a case where he has been making periodic payments. In my judgment, this is a factor which, in the present case, carries very little weight indeed. It is not, I think, that the one-off payment of itself results in a relevant change of position (if it were, that would be so in every case of challenge under section 262); rather, it is the manner in which it is alleged that the payment has been spent by Mr Barnett. This is the cost and expense argument to which I now turn.

The allegation here is that Mr Golstein is responsible for the position Mr Barnett finds himself in with no assets available for creditors. I do not consider that Mr Bishop’s case is made out. It is clear that Mr Bishop cannot begin to establish that the costs generated in dealing with Mr Golstein account for the whole of the assets contributed by Mr Bishop. There were heads of cost which had nothing to do with Mr Golstein, for instance the costs of CBL’s section 262 application.

I accept, of course, that some, perhaps significant, costs were incurred by Mr Barnett in dealing with Mr Golstein and his concerns. It seems to me, however, that Mr Golstein was raising a number of issues which he was entitled to raise and about which complaint cannot be made by Mr Bishop. For instance, there was correspondence concerning the payment by Mrs Owen: although DJ Hart said she saw no reason why Mrs Owen’s payment should not have been accepted, I reached rather different conclusions from her and consider that Mr Golstein’s concerns were vindicated. Further, Mr Bishop should in any case have been providing information and corresponding with Mr Barnett on the very issues which Mr Golstein raised. It is fair to say that, but for Mr Golstein’s persistence, the matters which featured in the Notice of Breach which Mr Barnett served on Mr Bishop might never have been taken up by Mr Barnett.

Mr Barnett did, it is true, complain to Mr Golstein’s lawyers that he, Mr Barnett, was running up costs dealing with Mr Golstein’s concerns which he did not consider was in the interests of creditors. The response to that, however, was that Mr Golstein and his advisers ceased corresponding until an appeal by Mr Bishop to the Court of Appeal had been dealt with. There is no evidence that Mr Barnett incurred any costs unreasonably or that Mr Golstein himself was acting unreasonably in expressing the concerns which he did, or in generating the correspondence which was generated. In any event, there is no breakdown from Mr Barnett of the total costs incurred to show what proportion of them were related to dealings with Mr Golstein.

In these circumstances, I do not consider that it is established that Mr Golstein has acted in a way in relation to the incurring of costs and expense by Mr Barnett which has any impact on the way in which I should exercise my discretion as to the remedy to grant.

Mr Salis relies on the seriousness of the matters which gave rise to the material irregularity. I do not need to rehearse what I said in my main judgment about Mr Bishop’s conduct. This conduct leads to justifiable circumspection about Mr Bishop’s disclosure of his assets. Aspects of Mr Bishop’s conduct since the approval of the IVA can only increase suspicion. In particular, Mr Barnett became sufficiently concerned to serve the Notice of Breach. It is also appropriate to note that, apart from the matters actually relied on before DJ Hart, Mr Golstein sought to raise before her two other matters. She did not allow him to do so in the context of the application before her. That decision does not, however, mean that Mr Golstein cannot rely on them in the context of how I should exercise my discretion concerning remedies under section 262. The two matters are these:

Mr Salis submits that this shows quite clearly that Mr Bishop was far from confident of success and that the statement in his IVA proposal was wrong and known to be wrong. Not only was it wrong, it was highly material. Creditors would take a very different view about an IVA under which they might expect a dividend of some 38 p in the £ as compared with one where they might only obtain 8p in the £. Mr Ascroft submits that this is reading far too much into what Mr and Mrs Bishop wrote. As already noted, it is not known precisely what this is a response to. In any case, Mr Bishop might have been confident at the date of the IVA proposal but not at the date of the letter; and he has never been examined on this letter or even been asked to explain it.

I recognise the force of what Mr Ascroft says. However, it seems highly unlikely to me that Mr Bishop’s views of his own prospect of success can have moved radically from being confident of success in April to the lack of confidence displayed in the letter, to the extent that he had never “consistently maintained” that he had even a “good arguable defence”. I say April because that was the date of the proposal. The vote, however, took place at the end of May and if Mr Bishop had changed his assessment by then, he should have said so. For the purposes of the present exercise (that is to say how I should exercise my discretion) I do not decide that Mr Bishop made a deliberate misrepresentation in his IVA proposal. Nonetheless, I consider that I am entitled to proceed, which I do, on the basis that an objective assessment of Mr Bishop’s prospects of success was rather worse than the confidence which he expressed. Had creditors been aware of that, they would have been likely to have been influenced in their approach to voting.

If I make no order as Mr Ascroft submits is the correct course, then matters continue unaffected. Mr Barnett will have a number of decisions to make, including whether to continue with his own appeal from the decision of DJ Hart that the certificate of termination of the IVA was too late, whether to petition for Mr Bishop’s bankruptcy or whether to issue a certificate of completion. The difficulty in relation to the first two options is funding (unless third party funding, for instance from Mr Golstein is available). The difficulty with the third option is that Mr Barnett’s professional judgment had been to serve the Notice of Breach which might be thought to be inconsistent with the issue of a certificate.

If I make the order sought by Mr Salis revoking the approval of the IVA, then all creditors will be in the position in which they were before the IVA was approved. They can take such steps as are open to them to recover their debts from Mr Bishop. In practice, the likely result will be the presentation by Mr Golstein of a bankruptcy petition. If a bankruptcy order is made and a trustee appointed, the full investigatory powers available to a trustee can be invoked, powers which are not available to a supervisor of an IVA.

By way of comment – this is not a factor in the exercise of my discretion – I note that one further effect of revocation is that Mr Barnett’s appeal against the decision of DJ Hart falls away.

I have no doubt that I should exercise my discretion, in the light of all of the factors discussed above, by making an order under section 262(4)(a) revoking the approval of the IVA. It would be a great injustice to Mr Golstein if no remedy were available to him particularly given the seriousness of Mr Bishop’s conduct and the need for a proper investigation of his financial position. The starting point, in my view, is that ordinarily an order should be made under section 262(4) where material irregularity is established although special circumstances may be enough to dissuade the court from making an order. Mr Bishop has not established special circumstances sufficient to persuade me to exercise my discretion differently. So far as concerns the position of other IVA creditors, there is certainly no detriment to them in revoking the approval since they stand to recover very little, if anything, from the IVA. I incline to the view that revocation would actually be in their interests since their rights as creditors will revert to them.

Mr Fennell asks that any order revoking the approval should contain provisions dealing with the three matters set out in the following paragraphs.

Mr Fennell asks me to validate the acts of the supervisor. He says that Mr Barnett has been in office for some years and it is only right that his acts should be validated. I agree. Mr Fennell does not seek an order which precludes any objection being taken to what Mr Barnett has in fact done: he seeks only an order that none of Mr Barnett’s acts should be attacked by reason only of the revocation of the approval.

I have power to make such provision in my order under section 262(7) and am willing to do so (drawing by analogy on section 282(4)(a)). However, since such an order will be binding on creditors, they are to be served with the order which must include a liberty to apply to vary it or set it aside.

Mr Fennell asks me to include specific reference to the validation of Mr Barnett’s fees. Subject to the same caveats as set out in the preceding two paragraphs, I am willing to include such provision.

The IVA contains at Clause 5(3) provision for Mr Golstein’s costs of the bankruptcy petition which he had presented. These costs are to be treated as an expense of the Arrangement to rank after the costs of the Nominee but before those of the Supervisor. Mr Barnett holds £4,500 as a reserve for such costs. Mr Fennell asks for an order releasing this sum to Mr Golstein. Mr Ascroft objects, saying that £4,500 seems a high figure for the costs of the petition. In my view, the correct amount to allow should be a matter for agreement between Mr Golstein and Mr Barnett but, if they cannot agree, then the amount should be subject to assessment by a tax judge. I propose to order that Mr Barnett be at liberty to pay to Mr Golstein such sum as he agrees as Mr Golstein’s costs of the petition but in default of agreement Mr Golstein is to be entitled to recover such sum as is ascertained on an assessment.

The final point on the order relates to Mr Barnett’s appeal from the order of DJ Hart. The appeal will no longer serve any purpose. Mr Fennell suggests that the appeal be dismissed with no order as to costs. I am willing to make such an order subject to one point. The point is that if there is an appeal from my decision it is undesirable to dismiss Mr Barnett’s appeal from DJ Hart rather than stay it, pending the outcome of the appeal since there may be procedural difficulties and issues about time limits if it needs to be revived. I propose simply to stay further proceedings in the appeal. If no appeal is sought to be made from my decision, either I or the County Court can in due course be asked to dismiss the appeal from DJ Hart.