IN THE MATTER OF MOISES GERTNER
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Rolls Building, 7 Rolls Buildings
Fetter Lane, London, EC4A 1NL
B e f o r e :
sitting as a Judge of the High Court
| CFL FINANCE LIMITED
|- and -
|(1) DAVID RUBIN
(2) DAVID BUCHLER
(as joint supervisors of Moises
gertner's voluntary arrangement)
(3) MOISES GERTNER
Tiran Nersessian (instructed by Edwin Coe LLP) for the First Respondent
Orlando Fraser QC and James Knott (instructed by Teacher Stern LLP) for the Third Respondent
Hearing dates: 29 and 30 November, 1 and 2 December 2016
Crown Copyright ©
H.H. Judge Keyser Q.C. :
"(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.
(2) A creditor's entitlement to vote is calculated as follows-
(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; ...
(3) A creditor may vote in respect of a debt for an unliquidated amount or any debt 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."
"(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.
(2) The chairman may admit or reject a claim in whole or in part.
(3) The chairman's decision on any matter under this Rule or under paragraph (3) of Rule 5.21 is subject to appeal to the court by any creditor or by the debtor.
(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) 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."
"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."
Accordingly, when approved, the IVA operates by analogy with a contract between the debtor and all his creditors: see Lloyds Bank plc v Ellicott  EWCA Civ 1333,  BPIR 632, per Chadwick LJ at ; and Narandas-Girdhar v Bradstock  EWCA Civ 88,  1 WLR 2366, per Briggs LJ at .
"(1) Subject to this section, an application to the court may be made, by any of the persons specified below, on one or both of the following grounds, namely—(a) that a voluntary arrangement approved by a creditors' meeting summoned under section 257 unfairly prejudices the interests of a creditor of the debtor; (b) that there has been some material irregularity at or in relation to such a meeting.
(2) The persons who may apply under this section are—(a) the debtor; (b) a person who—(i) was entitled, in accordance with the rules, to vote at the creditors' meeting ...
(4) 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.
(7) 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 an interim order had been in force in relation to the debtor when they were done.
(8) 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."
(a) There was a material irregularity at or in relation to the creditors' meeting in that Kaupthing ought not to have been admitted to vote at the meeting (i) at all, as the KSA had compromised its claim or made it unenforceable by Kaupthing, or alternatively (ii) for anything other than £1, as the KSA made the debt owed to Kaupthing a contingent debt and unascertained for the purposes of rule 5.21(3).
(b) Alternatively, even if Kaupthing remained a creditor to the extent of its claim and was technically qualified to vote in that amount at the creditors' meeting, the KSA amounted to vote rigging in breach of the obligation of good faith among the creditors, and the exercise of Kaupthing's vote thereby constituted a material irregularity at or in relation to the creditors' meeting.
(c) Further or alternatively, by reason of the KSA, the IVA was unfairly prejudicial to CFL: CFL is prejudiced because it is prevented from pursuing its bankruptcy petition; that prejudice is unfair because Kaupthing did not exercise its vote in good faith by reference to the rights and interests of the body of creditors but acted for extraneous reasons involving obtaining a secret benefit.
The Kaupthing debt
The Bank Leumi debt
The CFL debt
The Proposal and the IVA
"I have been involved in the property development sector for a number of years and am currently a property consultant and a director of Fordgate Management Limited.
My previous business activities included the property and mining sectors and as a director of several companies I have provided a number of personal guarantees to financial institutions as a condition for them providing finance to the companies concerned. A number of companies that I gave guarantees for have entered into insolvent liquidation or administration in recent years resulting in the crystallisation of these liabilities.
The major liability is in connection with a shortfall on a loan with Kaupthing Bank which was secured on my personal guarantee and some mining assets and I have been in negotiations with them for some time.
My proposals are as follows:
1. A third party will make a one-off lump sum payment to the Supervisors of £487,500 which will be used to make a distribution to creditors and meet the costs of the Arrangement. ... This should be sufficient to pay a dividend of approximately 0.07p in the £ to unsecured creditors.
2. The claim of HM Revenue and Customs which is estimated at £32,678 will be paid in full from the one-off lump sum received by the Supervisors."
It is unnecessary to set out the more detailed provisions of the proposals, but some of the other contents of the document may be noted. In explaining why an IVA would be preferable to bankruptcy, Mr Gertner said: "If I were to be made bankrupt I would be unable to continue as a director of Fordgate Management Limited and may jeopardize my future earning capacity." (Mr Rubin explained that the level of income derived from the directorship was, in the context of the statement of affairs and the terms of the Proposal, such as to be wholly immaterial to the IVA; that was why he did not include mention of the salary in the Proposal.) Mr Gertner's declared assets, as set out in the Estimated Statement of Affairs comprising Appendix A to the Proposal, were "Nil". The list of creditors in Appendix A showed Mr Gertner's father as a Connected Creditor for £28,666,666; the Proposal recorded that his father had agreed to subordinate his claim for dividend purposes in favour of the claims of the other unsecured creditors. Those other creditors were shown in a total sum of £582,809,270; far the largest debt was that owed to Kaupthing, shown as £547,261,182, and the next largest was that owed to CFL, shown as £11,128,611. Among the other creditors I may mention Mr Leib Levison, who was shown as holding a debt of £900,000. Mr Levison was the "third party" who according to the proposal would make the one-off lump sum payment of £487,500 to the Supervisors. (He is also, as I understand it, funding Mr Gertner's and Mr Rubin's conduct of these proceedings.) On page 7 of the Proposal Mr Gertner declared: "I am unaware of any transactions or claims against me under either section 339 (transactions at undervalue), section 340 (preferences) or section 343 (extortionate credit transactions) of the Insolvency Act 1986."
"Mr Gertner has stated that he has no assets. I agree with you that it is difficult to reconcile the huge quantum of the liabilities amounting to over £600 million with the fact that the debtor has no assets to show for all of that money. Many of the liabilities are personal guarantees. In any event, I have requested substantive comments on the points you raise regarding trusts and asset dissipation generally ..."
"We have received a proof of debt; copies of all of the original loan documentation and a detailed schedule of precisely how the Kaupthing debt is made up. The total debt amounts to £557,467,416.37. I have not investigated the claim in substantial detail for a number of reasons. Firstly, the debtor acknowledges that the debt is due; secondly, the Bank has confirmed that the debt is due; thirdly, the Bank's advisors, Messrs Simmons & Simmons, have also confirmed that the debt is due and indeed I believe that a representative from that firm may well be attending the creditors' meeting tomorrow, so they will again be able to provide you with more information than I can. I confirm that I have received sufficient documentation to admit the claim by Kaupthing to vote in the full amount thereof. ...
I refer to [the suggestion that Kaupthing had come to an arrangement regarding Mr Gerstner's debt] and I have to say here that I am unaware of any deals being done by Kaupthing and others. I shall leave you to ask those questions of the representatives of Kaupthing who will be attending the creditors' meeting tomorrow. I would imagine that it is for Kaupthing to offer this information, or not as the case may be; but it is certainly not for the Joint Nominees to interfere with any arrangements that the creditors have with parties other than the debtor."
The letter concluded:
"... I have made it clear to the debtor and his advisors that I require substantial answers to all of the questions you raise, together with some of the questions I have raised during the course of this process. I am sorry that I am unable to provide all of this information prior to the creditors' meeting."
"[W]hat you say ignores the fact (of which you are well aware) that Kaupthing's lending relationship is with Crosslet Vale. There is no deal with Mr Gertner in the way you wrongly seek to suggest. Kaupthing's arrangements in relation to Crosslet Vale do give rise to additional value to Kaupthing, but that value forms no part of Mr Moises Gertner's assets."
In his oral evidence Mr Rubin confirmed that he had seen that letter before the creditors' meeting.
"Under the IVA Proposal as they stand Kaupthing will receive just £394,000 being 0.07% of Kaupthing's debt. However ... it is now clear that Kaupthing have entered into a collateral arrangement with a third party in relation to this debt."
Ms Blom-Cooper went on to say that, despite her enquiries, she had not succeeded in ascertaining the details of the arrangement with the third party. She continued:
"I believe that the only reasonable inference is that Kaupthing has been induced to accept the objectively meagre terms of the IVA Proposal in exchange for entering into a collateral arrangement with the Debtor and/or his associates which has not been disclosed in the IVA Proposal."
"I can confirm for the avoidance of doubt that I have not (nor has any entity in which I am interested, nor anyone on my behalf) entered into any agreement with Kaupthing by which it is entitled or will be entitled to any of my assets over and above the portion to which they will be entitled under the IVA.
What Kaupthing does have ... is an understanding with the primary debtor/borrower, Crosslet Vale Limited, which was another family-Trust-owned company. ... In relation to the arrangement with Crosslet Vale I am not sure I can improve on what Kaupthing, through its solicitors Messrs Simmons & Simmons, has explained to the supervisors in their letter dated 16 March 2016 ..."
"Kaupthing is seeking to resolve and recover value in respect of its claims against Crosslet Vale. That is not a straightforward matter and Kaupthing is constrained by confidentiality in what it is able to say regarding the steps and actions it has taken and is taking in looking to secure such value. Until (and if) a resolution is achieved, the Kaupthing Proceedings remain current. Those proceedings may yet be prosecuted to judgment.
It will come as no surprise that on conclusion of any settlement Kaupthing is looking for delivery of value for the benefit of its creditors in exchange for whole or partial release of its claims. However, it is clear to, and important to, Kaupthing that such value comes from sources outside the parameters of assets properly available to Mr Gertner's creditors in the event of bankruptcy."
The letter went on to say that no arrangement had been made whereby Kaupthing would receive any additional value by way of a payment from Mr Gertner or from his assets and repeated the position as set out in Simmons & Simmons' letter of 16 December 2015: "Kaupthing's arrangements with Crosslet Vale do give rise to additional value to Kaupthing, but that value forms no part of Mr Moises Gertner's assets."
The Kaupthing Settlement Agreement (KSA)
"'Potential Claims' means all and/or any actions, claims, rights, demands and set-offs, whether in this jurisdiction or any other, whether or not presently known to the parties or to the law, and whether in law or equity, that it, its Related Parties or any of them ever had, may have or hereafter can, shall or may have against the other party or any of its Related Parties arising out of or connected with the matters set out at (A) to (C) below, save that nothing in this definition or in this agreement shall be construed as either (i) preventing the parties enforcing the rights and obligations arising pursuant to this agreement, or (ii) constituting a release or discharge of the rights or obligations of the parties under the Facility Agreement:
(A) the Dispute (including the Proceedings);
(B) any previous agreement between or act by the parties or their Related Parties or any of them; and
(C) any other matter arising out of or connected with the relationship between the parties up to and including the date on which this agreement becomes binding on the parties pursuant to clause 2.1."
The definition of "Related Parties" is also relevant:
"'Related Parties' means a party's subsidiaries, parent (including ultimate parent), any subsidiary of any such parent, assigns, transferees, representatives, principals, agents, employees, officers, directors or family members (including former representatives, principals, agents, employees, officers, directors or family members) or any other associated entity or person; and any entity or person associated with any trust or similar structure established for the benefit of any of the foregoing, including for the avoidance of doubt the Moises Gertner Trust, the Mendl Gertner Trust or the Gertner No 1 Settlement and, prior to its dissolution, Orgate."
"The parties have settled their differences and have agreed terms for the full and final settlement of the Dispute and wish to record those terms of settlement, on a binding basis, in this agreement."
"This agreement shall not be binding on the parties as a settlement of the Dispute and/or the Proceedings until:
(A) Kaupthing has received in full and without deduction the payment set out in clause 3.1 by the time specified; and
(B) the relevant parties have executed each of the agreements or declarations envisaged in clauses 3.1 to 3.8 herein."
"Laser Trust shall pay Kaupthing the total sum of US$6 million by close of business on 15 December 2015. The parties agree that it is a fundamental term of this agreement that Kaupthing be in receipt of the payment of US$6 million by close of business on 15 December 2015 and that Kaupthing may in its absolute discretion, treat this agreement and any related agreements as having been repudiated in the event that payment is not received by close of business on 15 December 2015."
Clause 3.5 contained provision regarding the manner in which payment was to be made. Clauses 3.2 and 3.3 provided for interest to accrue in the event of late payment. Clause 3.4 provided:
"The obligation on Laser Trust to pay Kaupthing the sums set out in clause 3.1 and the interest in clause 3.2 is absolute."
It is common ground that Laser Trust made the payment of US$6 million in accordance with clause 3.1.
"On or before execution of this agreement the parties shall enter into or procure that the relevant parties enter into and adhere to the profit sharing agreements in substantially the form of the draft agreements in Appendices 2, 10 and 11 regarding the future profits of Indus Trading Limited, Maskelyn Limited and Readinse Limited respectively."
Appendices 2, 10 and 11 were in materially similar terms mutatis mutandis. Each of the three companies mentioned in clause 3.6 is a claimant in the Gertler Arbitration, and the principal effect of the profit-sharing agreements is to give Kaupthing a share in any recoveries made in the Gertler Arbitration in exchange for release of the respective companies from liabilities said to have been owed to Crosslet Vale, the Moises Gertner Trust and the Mendi Gertner Trust. In each of the profit-sharing agreements the recitals mentioned the Dispute and the Proceedings and the parties to them and recorded:
"Those parties have settled their differences on a binding basis by way of a settlement agreement dated 11 December 2015."
The profit-sharing agreements were duly executed no later than the KSA.
"The parties shall use their best endeavours or procure that the relevant parties use their best endeavours to facilitate the enforcement of the security (by way of share transfer) granted over the land in Úherce u Nýran and Nýrany charged to Kaupthing pursuant to the mortgage agreement dated 4 December 2006 between Kaupthing (as security agent) and Mayfield Plzeň sro (as security provider) including by entering into, within 7 days of the execution of this agreement, an agreement in substantially the form of the draft agreement at Appendix 3."
"The parties shall use their best endeavours or procure that the relevant parties use their best endeavours to facilitate (i) the enforcement of the security granted over or (ii) transfer to Kaupthing of the shares in Katanga Mining Limited charged to Kaupthing pursuant to the security agreement dated 11 January 2008 between Pitchley Properties Limited (as charger) and Kaupthing (as security agent)."
"The parties shall, within 90 days of:
(A) the receipt by Kaupthing of all payments due under clause 3.1;
(B) the registration of Kaupthing as a shareholder in Mayfield Plzeň sro and confirmation from the land registry in the Czech Republic of of (sic) the release of the mortgages over the relevant land in the Czech Republic as envisaged by clause 3.7; and
(C) the registration of Kaupthing as the legal owner of the relevant shares in Katanga Mining Limited as envisaged by clause 3.8
enter into an agreement in substantially the form of the draft agreement in Appendix 6 which transfers the benefit of the Facility Agreement [i.e. the agreement by which the loan to Crosslet was made] and the Guarantees [i.e. the guarantees given by Mr Gertner, Mendi and Orgate in respect of Crosslet's liabilities] from Kaupthing to Laser Trust ..."
"2.1 The Assignor [i.e. Kaupthing], with effect from the date of this Deed, irrevocably assigns to the Assignee [i.e. Laser Trust] absolutely all of the Assigned Assets and the Assignee hereby accepts the assignment.
2.2 With effect from the date of the Deed, the Assignee agrees to assume, perform and comply with the Obligations under the Assigned Assets as if originally named as an original party in the Assigned Assets."
"Assigned Assets" was defined to mean all of Kaupthing's rights and benefits under or in respect of the Facility Agreement and the Guarantees, save that Kaupthing's security rights were expressly excluded. (Clause 3 of the KSA itself made provision in respect of the enforcement of Kaupthing's security.) "Obligations" was defined to mean all of Kaupthing's obligations "(if any)" under or in respect of the Assigned Assets. Other provisions of the Assignment of Debt and Security purported to release Kaupthing from all liability and obligations in respect of the Assigned Assets. Clause 5 of the Assignment of Debt and Security contained a very wide exclusion and waiver of warranties or representations by Kaupthing in respect of the assignment.
"6.1 Each Gertner Party, Laser Trust and Crosslet Vale agree, on their own behalf and on behalf of each of their Related Parties, not to sue, commence, voluntarily aid in any way, prosecute or cause to be commenced or prosecuted against Kaupthing or its Related Parties any action, suit or other proceeding concerning the Potential Claims, in this jurisdiction or any other.
6.2 Kaupthing agrees, on behalf of itself and on behalf of its Related Parties not to sue, commence, voluntarily aid in any way, prosecute or cause to be commenced or prosecuted against the Gertner Parties, or any of them, or Crosslet Vale any action, suit or other proceeding concerning the Potential Claims, in this jurisdiction or any other, save that nothing in this clause shall be construed as either (i) preventing Kaupthing enforcing its rights under this agreement or (ii) constituting a release or discharge of the rights and obligations of the parties under the Facility Agreement.
7.1 With effect from the date of this agreement, each party hereby releases and forever discharges, all and/or any actions, claims, rights, demands and set-offs, whether in this jurisdiction or in any other, whether or not presently known to the parties or to the law, and whether or not (sic) in law or equity, that it, its Related Parties or any of them ever had, may have or hereafter can, shall or may have against the other parties or any Related Parties arising out of or in connection with the Dispute or Potential Claims, save that nothing in this clause shall be construed as either (i) preventing Kaupthing enforcing its rights under this agreement, or (ii) constituting a release or discharge of the rights and obligations of the parties under the Facility Agreement, any and all related guarantees and, for the avoidance of doubt, the rights and obligations arising out of the arrangements referred to at clauses 5.2(A) to (C) of this agreement."
"The contract should be given the meaning it would convey to a reasonable person having all the background knowledge which is reasonably available to the person or class of persons to whom the document is addressed."
The ramifications of these basic principles have been discussed in detail in many cases; I refer for example to Rainy Sky S.A. v Kookmin Bank  UKSC 50,  1 WLR 2900, at  – , and to the judgment of Lord Neuberger PSC in Arnold v Britton at  – .
63.1 The principal difficulty in construing the KSA arises from its effort, on the one hand, to preserve in existence an obligation under the Facility Agreement and the guarantees and, on the other hand, to effect a binding agreement that will take the place of the Kaupthing Proceedings. This dual object of the KSA and the reason for it are, in my judgment, accurately stated in the written submissions of Mr Atherton QC and Ms Leahy: "The true position is that the KSA was designed to (try to) simultaneously preserve and compromise the Kaupthing claim for the sole purpose of voting through the IVA."
63.2 The attempt to preserve the debt in existence is most apparent from clause 2.1 and from the saving provisions at the ends of clause 6.2 and clause 7.1 and the definition of "Potential Claims" in clause 1. Mr Gertner places considerable weight on these provisions as showing that Kaupthing remained a creditor and entitled to vote at the creditors' meeting. Clause 2.1 is the provision most strongly in Kaupthing's favour, because it states in terms that the KSA "shall not be binding on the parties as a settlement of the Dispute and/or the Proceedings" until the specified conditions have been satisfied. However, a written contract has to be construed as a whole. The precise meaning to be given to clause 2.1 has to be ascertained in the context of all the other provisions of the KSA. The exercise of construction of the whole agreement involves not only ascertaining the meaning of the particular words in clause 2.1 but also answering the question whether the words as so construed are true or, perhaps better, efficacious. (That question cannot entirely be bypassed. As a contractual statement that an arrangement shall not create a tenancy may be of no avail in the light of the other provisions of the contract, so it might be that an agreement effects a binding settlement of a dispute while purporting not to do so.)
63.3 It is obvious that the opening words of clause 2.1 cannot mean that the KSA was not with immediate effect a valid and binding contract. Clearly it was indeed immediately binding on the parties: this appears from the scheme of the KSA taken as a whole and, more particularly, from the fourth recital, the imposition of immediate contractual obligations (for example, in clause 3.6), the terms of clause 3.1 making the time of payment a condition of the agreement, the obligation to file a Tomlin Order, and the provisions of clause 6 (unconditional covenants not to sue) and clause 7 (releases and discharges "[w]ith effect from the date of this agreement"). The question accordingly concerns the effect of this binding contract on the debt owed to Kaupthing by the Gertner parties.
63.4 The saving provision that is repeated in materially similar terms at the end of the definition of "Potential Claims" in clause 1 and at the end of clause 6.2 and clause 7.1 shows both aspects of the dual object sought to be achieved in the KSA: first, it provides that the parties are not prevented from enforcing their rights under the KSA; second, it provides that the parties' rights and obligations under the Facility Agreement are not released or discharged. However, it is striking how carefully the saving provision is drafted. The very broad definition of "Potential Claims" covers any claims asserted by Kaupthing in the Kaupthing Proceedings and any matter capable of being raised by set-off or cross-claim by the Gertner Parties in defence of or response to such claims. It would, without more, also cover any claim to enforce the terms of the KSA. But whereas the first part of the saving provision expressly preserves the right to enforce the terms of the KSA itself, the second part of the saving provision, which deals with the rights and obligations under the Facility Agreement is very differently drafted; it does not, for example, say, "(ii) preventing Kaupthing enforcing its rights under the Facility Agreement" whether by prosecuting the Kaupthing Proceedings or otherwise, but merely provides that the rights and obligations under the Facility Agreement are not released or discharged. This difference is clearly deliberate and reflects the attempt to preserve an underlying contractual right while at the same time restricting rights of enforcement to those arising under the KSA.
63.5 In my judgment, this conclusion cannot properly be avoided by supposing that, though all other Potential Claims are unenforceable, the claims actually made by Kaupthing in the Kaupthing Proceedings continue to be enforceable. My reasons are as follows.
(a) As mentioned, that is not what the saving provision says. Indeed, it carefully avoids saying any such thing.
(b) Clause 6.1, which is not subject to the saving provision, prevents the other parties from raising against Kaupthing or any assignee of Kaupthing any matter that could have been raised by set-off or cross-claim in the Kaupthing Proceedings. This alone makes it unlikely that the KSA means that Kaupthing or, after assignment, Laser Trust, can enforce the Kaupthing Debt. This consideration supports the view that the careful drafting of the saving provision is deliberate.
(c) Clause 6.2, on this construction, would mean that Kaupthing and any assignee could not sue for the Kaupthing Debt, though the debt would ostensibly remain in existence.
(d) The obligation in clause 4 to file a Tomlin Order is not expressed to be conditional and there is no reason to construe it as conditional. The clause expressly says that the parties "hereby consent to … an Order" in substantially the form of the draft annexed. If it had been meant that, in certain events, the parties would consent to such an order, different language would have been used. This means that the parties had an immediate obligation to stay the Kaupthing Proceedings on terms. Despite the language of clause 2.1, that is consistent with the tenor of the KSA as a whole, by which the terms of the KSA would be enforceable (most obviously, under the Tomlin Order), the parties' claims against each other could not be pursued, but the underlying rights being asserted in the Kaupthing Proceedings would (at least purportedly) be preserved in existence.
(e) Even if (contrary to my view) the obligation to file the Tomlin Order were conditional upon future performance of conditions in clause 3 of the KSA, it would make no sense to suppose that Kaupthing could in the meantime seek to enforce the Kaupthing Debt, because the parties had agreed that they would stay the proceedings and that the rights under the Facility Agreement would be assigned to Laser Trust, and because the effect of clauses 6.1 and 7 was to render the Gertner Parties entirely defenceless if a claim to enforce the Kaupthing Debt were permissible.
(f) I reject Mr Fraser's submission that it would be commercially absurd to construe the "No Sue" provision in clause 6.2 and the general release in clause 7.1 as having immediate effect, because it would remove any incentive for the Gertner parties and Laser Trust to perform their obligations under the KSA. Upon execution of the KSA, the one significant obligation remaining to be performed was the payment by Laser Trust, and the obligation to make payment was unconditional and capable of being enforced. The remaining matters to be performed under clause 3 concerned only the realisation of pre-existing security and the execution of the profit-share agreements; these too, if of value, were capable of enforcement.
63.6 The resulting position may be summarised as follows. There was an immediate binding agreement between the parties to the KSA. Laser Trust had an unconditional obligation to make payment to Kaupthing. The parties had an unconditional obligation to stay the Kaupthing Proceedings by Tomlin Order. Kaupthing had the right against the defendants in the Kaupthing Proceedings to enforce the KSA as being the terms on which those proceedings were stayed; that enforcement might be by way of specific enforcement or by way of the secondary remedy of damages. However, Kaupthing could not pursue the Kaupthing Debt against the Gertner Parties. Correspondingly, the Gertner Parties were precluded from asserting any right of claim or counterclaim against Kaupthing; their rights, too, lay only in enforcement of the terms of the KSA under the Tomlin Order. The Kaupthing Debt itself, though not capable of being pursued in the Kaupthing Proceedings, purportedly remained in existence until such time if any as it could be assigned to Laser Trust. (In the light of clause 5 of the KSA and the Assignment of Debt and Security to be executed under it, the Kaupthing Debt must for these purposes include Mr Gertner's liability under his personal guarantee.) Clause 2.1, when read in the context of the KSA as a whole, can mean no more than that Kaupthing's rights under the KSA and in respect of ownership of the Kaupthing Debt are not discharged until the Gertner Parties have fully performed their obligations under the KSA. It cannot have the effect that the KSA was anything other than an immediate and binding compromise of the Kaupthing Proceedings.
63.7 This raises the question of the status or real existence of the Kaupthing Debt as at the date of the creditors' meeting. I shall consider that question in the context of the particular grounds on which the application is put.
Ground 1: Material Irregularity—Kaupthing's vote wrongly admitted
The primary argument: Kaupthing not a creditor
1) The stronger form of the argument is that there was no subsisting debt at all. This relies on the analysis put pithily in the written submissions of Mr Atherton and Ms Leahy: "Th[e] desired aim, to both compromise a claim and keep it alive, is conceptually impossible, with the result that the KSA is really nothing more than a legal sleight of hand." Where a decision at a creditors' meeting to approve a proposal for an IVA is made on the strength of purported debts that did not in fact exist, there is a material irregularity for the purposes of section 262 and rule 5.22; cf., in the context of company voluntary arrangements, In re Gatnom Capital and Finance Limited  EWHC 3353 (Ch), per Roth J at .
2) The weaker form of the argument is that if any debt subsisted it was unenforceable. This rests principally on clause 6.2: Kaupthing's inability to enforce the debt meant that it could not be considered a creditor in respect of it, the position being analogous to that of a person whose debt is statute-barred by limitation of time.
The secondary argument: debt of nominal value
"The fair construction of the clause seems to me this: 'a contingent debt' refers to a case where there is a doubt if there will be any debt at all; 'a debt, the value of which is not ascertained,' means a debt the amount of which cannot be estimated until the happening of some future event; and 'an unliquidated debt' includes not only all cases of damages to be ascertained by a jury, but beyond that, extends to any debt where the creditor fairly admits that he cannot state the amount. In that case there must be some further enquiry before he can vote."
"Just how clearly quantified a debt has to be before it is liquidated and ascertained is not a question which it is easy to answer. [And after citing Mellish LJ's definition of an unliquidated debt in the dictum in In re Dummelow, set out above, he continued:] However, there is little subsequent authority which takes matters much further. A claim for damages and a contingent claim have (unsurprisingly) been held to be unliquidated or unascertained claims—see Re Cranley Mansions Ltd; Saigol v Goldstein  1 WLR 1610; Doorbar v Alltime Securities (Nos 1 and 2) [ 1 WLR 456; and Re Newlands (Seaford) Educational Trust; Chittenden v Pepper  EWHC 1511 (Ch)."
The debt in Saigol v Goldstein (an unliquidated damages claim in a construction case) was not contingent in the sense explained in In re Sutherland decd. However, the debt in Doorbar v Alltime Securities (Nos 1 and 2) (liability for future rent during the remainder of the lease) was strictly contingent. Similarly, in Chittenden v Pepper a claim for dilapidations was both unliquidated and unascertained but not contingent, while a claim for future rent was contingent, as it "depend[ed] on whether the lease [was] forfeit in the future and remain[ed] unlet for a period of 2 years" (per Sir Andrew Morritt C at ), and was therefore "by definition both unliquidated and unascertained" (at ).
Ground 2: Material Irregularity—breach of the principle of good faith
"Now I take it to be thoroughly settled, both in Courts of Law and Equity, that where there is a bankruptcy, or an arrangement with creditors by composition or insolvency, when insolvency exists as contradistinguished from bankruptcy, it is the duty of all creditors who have once taken part in the proceedings of bankruptcy or composition to stand to share and share alike. Equality is the only principle that can be applied, and if one creditor, unknown to the other creditors—not unknown to one or two, but to the general body—enters into an arrangement by which he gets for himself from the debtor, or from any one on behalf of the debtor, any collateral advantage whatever, that is a fraud upon the other creditors …"
Mr Boswood QC summarised the ramifications of that principle, as they emerged from the cases, in six propositions at  in his judgment. I need not set them out. It suffices here to refer to Robert Walker LJ's remarks at  – in the Court of Appeal:
"21. … [The deputy judge] extracted from the old cases six principles, set out in para 23 of the judgment, of which the fifth was that in addition to the need for equality between creditors in the distribution of the debtor's assets, there was a further basic requirement for complete good faith between a debtor and his creditors, and between the creditors as between themselves; and that it was therefore irrelevant that an inducement to a creditor might come from a third party, and not out of a debtor's estate.
22. The deputy judge then asked himself whether the principles continued to apply under the new insolvency regime brought in by the Act, and he decided that it did. It was on that basis that, while dismissing Cadbury's application based on s. 262(1)(a) (and in the absence of any reliance on s. 262(1)(b)) he nevertheless reached the conclusion, embodied in para 4 of his order, that the approval of the IVA given on 20 December 1999 was void. He also made a bankruptcy order under s. 276(1)(b)."
In concluding that the approval of the IVA was void, the deputy judge had, said the Court of Appeal, relied too greatly on the old law and insufficiently on the terms and policy of the relevant provisions in the 1986 Act, especially sections 262(3) and 262(8); the importance of attaching certainty to the approval of an IVA at a creditors' meeting was reflected in the fact that the only routes of challenge to such approval were directly under section 262(1) or indirectly by petition under section 276(1); the approval could not simply be disregarded as void: see per Robert Walker LJ at  – . That reasoning led the Court to reject the applicant's submission that "the secret deal found by the deputy judge was more than an 'irregularity at or in relation to the meeting'": ibid.
"The deputy judge's impressive survey of the old law shows that in relation to compositions and arrangements with creditors the court did impose a strict requirement of good faith as between competing unsecured creditors, and prohibited any secret inducement to one creditor even if that inducement did not come from the debtor's own estate. There is no strong presumption that a similar principle must be found in the new regime set out in Part VIII of the Act, but (to put it at its lowest) it would be no great surprise to find it there in one form or another."
The particular way in which the Court in Somji found the principle to survive under Part VIII of the 1986 Act was via the power in section 276 to make a bankruptcy order under section 264 where the information given to the creditors was "false or misleading in any material particular or … contained material omissions": see per Robert Walker LJ at  – , per Sir Christopher Staughton at , and per Judge LJ at  – . The reasoning at  –  opened the door to the possible availability of section 262(1)(b) as a route of challenge in such a case, though it did not decide the point.
"64. … I have … reached the conclusion that the good faith principle applies to the facts of the present case and, by virtue of its application, there was a material irregularity within section 262(1)(b) of the Insolvency Act 1986 at or in relation to the creditors' meeting which approved Mr Kapoor's IVA. The irregularity was in treating the resolution approving Mr Kapoor's IVA as passed when, for the purposes of rule 5.23(4) of the Insolvency Rules 1986, more than half in value of Mr Kapoor's creditors voted against it, if Mr Chouhen's vote was excluded as it should have been.
65. The good faith principle articulated in the authorities considered by the deputy judge in Somji's case, and acknowledged by the Court of Appeal in that case, is not restricted to the non-disclosure of secret deals benefiting one or some of the creditors. Although the facts in all those authorities did concern such a situation, the good faith principle, as articulated by the deputy judge and approved by the Court of Appeal, encapsulated 'the fundamental rule that there should be complete good faith between the debtor and his creditors, and between the creditors inter se'. In Dauglish v Tennent (1866) LR 2 QB 49, for example, in which the court declared void a deed by which the defendant assigned all his estate to trustees on trust for distribution equally amongst all his creditors, Cockburn CJ said (at 53-54): 'In order that such a deed should be binding on the creditors, it is essential that there should be the most perfect good faith between the debtor and all his creditors.'
66. In Mare v Sandford (1859) 1 Giff 288 at 294 Stuart V-C said:
'The principles of this Court, which stamp a transaction of this kind with illegality, are not of a very refined kind. They are consistent with the ordinary principles of morality recognised by all mankind. And, moreover, where the court has interfered to set aside such a transaction, it has done so on the ground of public policy, and of the transaction being such as the law should, in the highest degree, discountenance. The object of the bankrupt laws is to secure an equal distribution of property among the creditors, so that none shall have any advantage over another.'
67. That reference to public policy is significant. An IVA is a means by which an insolvent debtor can escape the full and rigorous consequences of a bankruptcy order, including the right of the creditors to select the trustee in bankruptcy, the supervision of the trustee by the creditors and the court, the ascertainment, collection and distribution of bankruptcy estate by the trustee, and the possibility of holding a public or private examination of the bankrupt on oath. In cases, such as the present, where independent creditors have doubts as to whether the debtor has been full and frank in the information he has provided, and, in particular, as to the full extent of his assets, an IVA has potentially severe disadvantages for those creditors. That is no doubt the reason why, when the new statutory scheme for IVAs was introduced by the Insolvency Act 1986, it was expressly provided in rule 5.23(4) of the Insolvency Rules 1986 that the resolution approving the IVA would be invalid if more than half in value of the independent creditors, that is non-associates of the debtor, voted against the resolution.
68. The arrangement given effect by the assignment in the present case was patently intended, and intended only, for the purpose of subverting that legislative policy. The contrary is not asserted on behalf of Mr Kapoor. It is at one extreme end of a spectrum of transactions of questionable legitimacy, that is to say consistency with the legislative policy underlying rule 5.23(4) . The assignment was not a sham, but it does not fall far short of it. Not only was the arrangement wholly uncommercial, from Mr Chouhen's perspective, in that it inevitably involved him paying more for the assignment than he would ever realise and retain in respect of the assigned debt, but, as Mr Smith forcibly submitted, the obligation to return to Crosswood 80% of the distributions received by Mr Chouhen under the IVA meant that in reality Crosswood only ever parted with a small part of its economic interest in the assigned debt. The assignment was designed to confer voting rights on Mr Chouhen with a value of £4m, but to part with only a fraction of the true financial value of the assigned debt.
69. The expression 'material irregularity' is not defined. I agree with Mr Smith that the well-established good faith principle applicable to agreements between a debtor and creditors is capable of colouring, and should colour, the meaning of that expression. That reflects the approach of the Court of Appeal in Somji's case. In my judgment, interpreting section 262(1)(b) against the background of the good faith principle and the legislative policy reflected in rule 5.23(4), it was a 'material irregularity at or in relation to … [the] meeting' approving Mr Kapoor's IVA to take into account Mr Chouhen's vote for the purposes of rule 5.23(4) when to do so would give effect to an arrangement solely, patently and irrefutably designed to subvert the legislative policy underlying that provision and without any commercial benefit intended or claimed for Mr Chouhen. It was an uncommercial arrangement inconsistent with any notion of good faith between Mr Kapoor and his independent creditors, or between Mr Chouhen and Crosswood, on the one hand, and the independent creditors, on the other, and was designed solely to subvert a critical principle of legislative policy as to the conditions for approval of an IVA. That is a perfectly apposite example of 'irregularity', giving the word one of its normal meanings as something which is lacking in conformity to rule, law or principle: see the Shorter Oxford English Dictionary."
84.1 The Court of Appeal in Kapoor held that "the well-established good-faith principle", namely the requirement of complete good faith between a debtor and his creditors and between competing unsecured creditors, should colour the meaning of "irregularity" in section 262(1)(b). It was by reason of the application of the principle that there was a material irregularity in that case: per Etherton LJ at .
84.2 I see no justification for seeking to limit the application of the relevant principle to the cases exemplified by Somji (the failure to disclose to the creditors' meeting an arrangement that, if known, might have affected the voting) and Kapoor (counting a debt that was only admissible by reason of an arrangement that was a device to subvert a critical principle of legislative policy as to the conditions for approval of an IVA). There is also no justification for taking Etherton LJ's words at  in Kapoor, namely "an arrangement solely, patently and irrefutably designed to subvert the legislative policy …", as laying down some legal test. Etherton LJ was talking about the facts of that case. The narrow ratio of the decision was that those facts were "a perfectly apposite example of 'irregularity'" for the purposes of section 262(1)(b). The question for me is whether the same can be said of the facts of the present case.
84.3 Inland Revenue Commissioners v The Wimbledon Football Club Ltd does not answer that question. I am prepared to accept that the mere fact that a creditor has arranged to take a benefit from a third party does not in itself necessarily constitute a material irregularity. However, as is clear from the analysis of the case-law at first instance in Somji, it may do so. The third-party benefit has always to be considered in the context in which it was given and received.
84.4 I accept that the KSA did not give Kaupthing the status of creditor; it was (on the present hypothesis) already a creditor. But the real question, in my judgment, is whether the KSA constituted an arrangement by one creditor in breach of the requirement of complete good faith. And this seems to me to come down to the question whether the KSA constituted either (a) an inducement to Kaupthing to exercise its vote in favour of the IVA or (b) a matter that materially affected Kaupthing's commercial interest in the IVA.
84.5 In this connection there are two main points in Mr Gertner's favour. The KSA does not contain any provision obliging Kaupthing to vote for the IVA. Further, Kaupthing's interest in the outcome of the creditors' meeting was ostensibly unaffected by the KSA, in that it did not purport to affect the distribution of his assets and would therefore apparently not alter the balance of benefits as between an IVA and bankruptcy. However, in my judgment those points are not persuasive.
84.6 First, the KSA radically alters the commercial significance of the Proposal for Kaupthing as compared with the other creditors. For CFL and others, the opportunity offered by a bankruptcy was to be replaced by a return that might be regarded as de minimis. Upon the approval of the Proposal, those creditors would, for example, lose any chance to investigate whether potential benefits of the Gertler Arbitration would be the beneficial property of Mr Gertner. Instead they would have a share in what was left of the £487,500 after HMRC had been paid off and the costs of the IVA had been discharged. Kaupthing, by contrast, was to receive a share of whatever proceeds were recovered in the Gertler Arbitration. In his cross-examination (day 2, pp. 89 - 90) Mr Gertner confirmed his expectation as to the scale of the benefit that Kaupthing would receive: "The offers to settle [in the Gertler Arbitration] are into the hundreds of millions that have been made, so therefore what I say to you is that any amount that the bank will receive is a substantial amount. It's not a small amount that the bank is keeping. … How much will be out of litigation, I have no idea, but I do not think that it will be whole [i.e. full payment of the amount claimed by Kaupthing], but it will be substantially more than other creditors who borrowed at such a time of very high assets would have repaid the bank, so I hope and I pray that it will be a substantial amount." The consequence seems to me inevitably to be that Kaupthing's commercial interests in the outcome of the creditors' meeting were quite different from those of the other creditors. Indeed, the fact that approval of the Proposal would tend to put investigation of the beneficial interest in the Gertler Arbitration out of the reach of the other creditors indicates the clear conflict that arose between Kaupthing's interests and those of the general body of creditors. I regard this as a breach of the principle of good faith.
84.7 Second, and intimately related to the first point, the KSA is reasonably to be considered an inducement to Kaupthing to vote in favour of the Proposal; its appearance is that of a price extracted to ensure that the Proposal would be approved. I have regard to the absence of any provision requiring Kaupthing to support the Proposal, but the question whether there was a material irregularity by reason of contravention of the good-faith principle must be answered with regard to the realities of the situation as they emerge from all the facts. Various factors indicate that the KSA was an inducement:
a) the matters mentioned in the last preceding sub-paragraph;
b) the timing of the KSA itself, relative to the progress of the Proposal;
c) the timing of the obligations under the KSA (for example, the payment obligation in clause 3.1) relative to the timing of the creditors' meeting;
d) the clear effort that the KSA makes, by means of leaving the more technical obligations unperformed, to achieve a position whereby Kaupthing can indeed vote at the creditors' meeting (as to which, see above);
e) the apparent needlessness of entering into the KSA, at the cost of the obligations in clause 3, if Kaupthing would anyway vote in favour of the Proposal. This point has to be viewed with caution, because it can be said that the KSA was concerned to settle the position not only of Mr Gertner but also those of Mendi and Crosslet Vale. However, it seems to me to have some force when viewed in the context of the other matters;
f) the risk that, if the Proposal were defeated and Mr Gertner became bankrupt, Laser Trust might argue that Kaupthing had frustrated the commercial purpose of the KSA;
g) Mr Gertner's own evidence in cross-examination, where he frankly accepted that the benefits under the KSA were Kaupthing's price for agreeing to the Proposal: see day 2, pp. 53 – 57 and, in that context, the answer at p. 56: "Sir, at this moment, I do not know what they will require for, as a final agreement at this point, it's a question of … They wanted the percentage of the litigation, which is a major part of their agreement."
Ground 3—IVA Unfairly Prejudicial
"It seems to me that as a matter of construction section 262 is talking about unfairness brought about by the terms of the voluntary arrangement. This conclusion, as Miss Agnello for the debtor pointed out, is supported by the scheme of the Act, and in particular by the provisions of sections 264(1)(c) and 276. A creditor who is bound by a voluntary arrangement can nevertheless present a petition for bankruptcy under section 264(1)(c). However, section 276 provides that in such a case the court shall not make a bankruptcy order unless it is satisfied of one or other of various matters, of which one is:
'(b) that information which was false or misleading in any material particular or which contained material omissions — (i) was contained in any statement of affairs or other document supplied by the debtor under Part VIII to any person, or (ii) was otherwise made available by the debtor to his creditors at or in connection with a meeting summoned under that Part …'
That shows that if Mr. Kee is right in his claim that the statement of creditors in the debtor's statement of affairs is a fabrication, he is not without remedy. It is a ground upon which he can, notwithstanding the voluntary arrangement, present a petition for bankruptcy.
That conclusion is I think also supported by the provisions of the Insolvency Rules 1986 dealing with the question of the admission of creditors to vote at the meeting. Under rule 5.17(4) the chairman is given the power to admit or reject a creditor's claim for the purpose of his entitlement to vote. But under sub-rule (5) the chairman's decision on entitlement to vote is subject to appeal to the court by any creditor or by the debtor, and under sub-rule (8) such an appeal must be made within the period of 28 days beginning with the day on which the chairman's report to the court is made."
"It is sufficient to say that there is a fairly strong line of first-instance authority, starting with the decision of Hoffmann J in In re A Debtor (No 259 of 1990)  1 WLR 226, which is uniformly in favour of limiting the effect of the provision to unfairness brought about by the terms of the IVA itself. As Hoffmann J pointed out in that case, at p. 229, section 276(1) provides an alternative remedy in many cases of unfairness brought about by other causes. I am by no means convinced by Mr Phillips's arguments that this line of authority is wrong. I am doubtful whether cases on section 459 of the Companies Act 1985 are of much help as a guide to the construction of section 262(1)(a) since, although the statutory language is similar, the notion of the interests of members of a company (as such) is a good deal more complex: see In re A Company (No 00709 of 1992)  1 WLR 1092."
"68. It is for an applicant for relief under s. 6 of IA 1986 to show that the voluntary arrangement which he challenges unfairly prejudices his interests.
69. To constitute a good ground of challenge, any unfair prejudice must have been caused by the terms of the arrangement itself: Inland Revenue Commissioners v The Wimbledon Football Club Ltd  B.C.C. 638. That proposition (and some other useful conclusions) appear in the passage from the judgment of Lightman J at para. 18:
'Section 6 provides that a creditor may apply to the court for an order to revoke or suspend a decision approving a voluntary arrangement on the ground that the "voluntary arrangement unfairly prejudices the interest of [the] creditor". The authorities establish that: (1) to constitute a good ground of challenge the unfair prejudice complained of must be caused by the terms of the arrangement itself; (2) the existence of unequal or differential treatment of creditors of the same class will not of itself constitute unfairness, but may give cause to inquire and require an explanation; (3) in determining whether or not there is unfairness, it is necessary to consider all the circumstances including, as alternatives to the arrangement proposed, not only liquidation but the possibility of a different fairer scheme; (4) depending on the circumstances, differential treatment may be necessary to ensure fairness (see Re Cancol Ltd  BCC 1133 at 1147G–1148B and Sea Voyager Maritime Inc v Bielecki  BCC 924 at 936F–937C and 941C–E); and (I would add) (5) differential treatment may be necessary to secure the continuation of the company's business which underlies the arrangement: (consider Re Business City Express Ltd  BCC 826).'
70. See also to the same effect, Doorbar v Alltime Securities Ltd (No.2)  B.C.C. 728 at 730H; and Re a Debtor (No.259 of 1990)  1 W.L.R. 226 at 228–229. It is probably worth mentioning what is probably implicit but which was made explicit by Mr Richard McCombe Q.C. sitting as a deputy judge of this division in Sea Voyager Maritime Inc v Bielecki  B.C.C. 924 that the prejudice to the applicant must be prejudice as a creditor of the debtor and not in some other capacity: see at 934–936. The only occasion on which the Court of Appeal appears to have considered this test is in Cadbury Schweppes plc v Somji  1 W.L.R. 615 where Robert Walker LJ identified the 'fairly strong line of first-instance authority' which is 'uniformly in favour of limiting the effect of the provisions to unfairness brought about by the terms of the [CVA] itself'. I propose to follow the same line.
71. In determining whether or not there is unfairness, it is necessary to consider all the circumstances and, in particular, the alternatives available and the practical consequences of a decision to confirm or reject the arrangement: IRC v Wimbledon  B.C.C. 638 per Lightman J at para. 23:
'The question of fairness of the arrangement requires consideration of all the circumstances and in particular the alternatives available and the practical consequences of a decision to confirm or reject the arrangement. In my judgment the only practicable course available to the administrators was to enter into the agreement and proceed with the scheme. The alternative advocated by the Revenue, in their single-minded pursuit of their principled objection to the payment in full of the priority debts, can only bring down the whole edifice and secure a nil return for all concerned.'"
"(a) Any CVA which leaves a creditor in a less advantageous position than before the CVA will be prejudicial to the creditor. The real issue is generally whether the prejudice is 'unfair'.
(b) There is no single and universal test for judging unfairness in this context, and the question must depend on all the circumstances of the case, including in particular the alternatives available and the practical consequences of a decision to confirm or reject the arrangement.
(c) In assessing the question of unfairness, a number of techniques may be used, including what may be described as 'vertical' and 'horizontal' comparisons. A vertical comparison is a comparison between the position that a creditor would occupy and the benefits it would enjoy in a hypothetical liquidation, as compared with its position under the CVA. The importance of this comparison is that it generally identifies the irreducible minimum below which the return in the CVA cannot go. As David Richards J said in Re T & N Limited  EWHC 2361 (Ch),  2 BCLC 488, at paragraph 82 of his judgment:
'I find it very difficult to envisage a case where the court would sanction a scheme of arrangement, or not interfere with a CVA, which was an alternative to a winding up but which was likely to result in creditors, or some of them, receiving less than they would in a winding up of the company, assuming that the return in a winding up would in reality be achieved and within an acceptable time-scale: see Re English, Scottish and Australian Chartered Bank  3 Ch 385.'
(d) A horizontal comparison, on the other hand, is a comparison between the position of the applicant and the position of other creditors, or classes of creditors. The fact that a CVA involves differential treatment of creditors is a relevant factor which calls for careful scrutiny, although it will not automatically render a CVA unfairly prejudicial: see Re a Debtor (No.101 of 1999)  1 BCLC 54 (Ferris J). In considering the question of differential treatment, it is necessary to ask whether the imbalance in treatment is disproportionate, and also whether the differential treatment may be justified, for example by the need to secure the continuation of the company's business by paying essential suppliers or service providers."
"[The underlying test of fairness] is deliberately a broad test to be applied on a case by case basis, and courts have struggled to do better than the approach adopted by the Court of Appeal in Re Alabama, New Orleans, Texas and Pacific Junction Railway Co  Ch 213 and summarised in the often-cited passage from a leading textbook, Buckley on the Companies Acts:
'In exercising its power of sanction the court will see, first, that the provisions of the statute have been complied with, second that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promise interests adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve. …'
… In considering unfair prejudice [in the context of a CVA], the court will have regard to the different position of different groups of creditor."
In the SISU case, Warren J said at :
"[W]here a creditor or group of creditors are looking at their wider interests (i.e. not simply as creditors of the company under consideration) they may judge it to be in their interests to vote in favour of a proposal which is favourable to them notwithstanding that, as creditors of that company only, they would have voted against it. If such a course results in unfair prejudice to another creditor, s. 6 is there to provide a remedy."
Note 1 One effect of the present proceedings is that the appointment of Mr Rubin and Mr Blucher as Joint Supervisors of the IVA has not yet come into effect; strictly, Mr Rubin is still the Nominee named in the Proposal. Nevertheless, as Mr Rubin and Mr Buchler were made parties to this application as Supervisors, I shall refer to them as such. [Back]
Note 1 One effect of the present proceedings is that the appointment of Mr Rubin and Mr Blucher as Joint Supervisors of the IVA has not yet come into effect; strictly, Mr Rubin is still the Nominee named in the Proposal. Nevertheless, as Mr Rubin and Mr Buchler were made parties to this application as Supervisors, I shall refer to them as such. [Back]