England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(CHANCERY DIVISION)
(Mr Justice Lightman)
3771 of 2003

		Royal Courts of Justice Strand, London, WC2A 2LL
		28th May 2004

Lord Justice Neuberger:

1. This is an appeal from a decision of Lightman J, rejecting an application by the Inland Revenue ("the Revenue") under s6 of the Insolvency Act 1986 ("the 1986 Act") for an order revoking, or suspending, a voluntary arrangement made in relation to the affairs of The Wimbledon Football Club Ltd ("the Company"). Although other grounds were raised, the sole ground now relied on by the Revenue is that the approval of the voluntary arrangement infringed the provisions of s4(4)(a) of the 1986 Act, which is the Act containing all the sections referred to in this judgment.

The facts

2. The Company's business is that of a professional football club and it is the holder of a Share ("the Share") in the Football League Limited ("the League"). Membership of the League, and hence ownership of the Share, is a precondition of participation by the Club owned by the Company ("the Club") in the League's competitions. The Company is heavily insolvent and went into administration on 5^th June 2003. The effect of the Company going into administration entitled the League, under paragraph 4 of its Articles, to serve a notice ("the Notice") withdrawing the Company's membership of the League and requiring the Company to transfer the Share away for 5p, which the League duly did, albeit that it suspended the operation of the Notice for a period.
3. The estimated statement of affairs of the Club as at 5^th June 2003 suggested that the only real value in the Club's assets was in the player transfer values, which, in the event of a liquidation, had no value at all. The balance of the assets, which consisted of stock, fixtures, fittings, and debtors, amounted to £230,000. Unsecured creditors amounted to some £24m, of which a loan by the shareholders amounted to £20m.
4. The Company's administrators, Mr Andrew Hosking and Mr Nick Wood of Grant Thornton, continued trading until the end of the football season, 9^th May 2004, latterly with the assistance of a loan of £1.5m advanced by a company called Inter MK Limited ("IMKL").
5. On 4^th March 2004, the Company, the administrators, IMKL, and a company called Milton Keynes Dons Limited ("the Buyer") entered into an Agreement ("the Sale Agreement"). The recitals to the Sale Agreement recorded:

i) The Buyer was a wholly-owned subsidiary of the Company.

ii) The Buyer had agreed to purchase "the undertaking and assets of [the Company] as a going concern and to assume certain of its liabilities and obligations"; and

iii) IMKL proposed to purchase the share capital of the Buyer from the Company.

6. The Sale Agreement was expressed to be subject to eight conditions. Three of those conditions were as follows:

i) the voluntary arrangement, then in the process of being proposed to creditors of the Company "being approved … and taking effect";

ii) "the transfer of the Share (or its beneficial ownership) being approved by the … League and the … League deciding not to exercise its right to compel the transfer of the Share by reason of [the Company] having gone into administration";

iii) IMKL being satisfied that no less than £1,280,000 was "receivable (subject to any deductions by the … League to satisfy Football Creditors [under the provisions of paragraphs 54-70 of the League's Articles of Association])".

7. The consideration for the sale of the undertaking and assets of the Company to the Buyer was recorded as being:

i) the sum of £400,000;

ii) a further £400,000 if a particular planning condition was satisfied;

iii) the sum of £1.5m lent by IMKL to enable the Company to continue trading;

iv) the assumption by the Buyer of the obligation to pay and discharge (subject to an aggregate maximum of £642,096.32):

a) all debts transferred to the Buyer under the Transfer of Undertakings (Protection Of Employment) Regulations 1981 ("the TUPE debts"), amounting to approximately 245,000; and

b) all Football Creditors and other debts, non-payment of which would result in the League refusing to withdraw the Notice;

v) certain additional considerations if the Club was promoted to the Premier League by the end of the 2006/7 season.

8. On the same day as the Sale Agreement, the Company, as a sole shareholder in the Buyer, agreed to sell its entire shareholding to IMKL for £1, on completion of the Sale Agreement.
9. The reference to the Football Creditors in the Sale Agreement arises from the League's Articles of Association. As already mentioned, the League was entitled to serve a Notice, as it did, on the Company going into administration, and was further entitled to suspend such a Notice for a period, as it did. That entitlement arose out of paragraph 4.7.4.2 of the League's Articles. By virtue of paragraph 4.7.4.3, the League would also be entitled to serve such a notice on the Company going into liquidation.
10. It is right to refer to some other provisions of the League's Articles. First, under paragraph 6.1, the League is entitled, in its absolute discretion, and without giving any reasons, to refuse to register any share transfer.
11. Secondly, the provisions of paragraphs 54-70 of the League's Articles are concerned with "Accounts". They provide for a pooling, and redistribution, of receipts by clubs in the First, Second and Third Divisions of the Football League of certain types of payment received by clubs, in particular from television. Paragraph 70 requires each member of the League to repay debts owing to certain types of creditor (and in particular employees, including their pensions, and organisations concerned with playing or managing League football), ie Football Creditors, failing which "a Member shall be subject to such penalty as [the League] may decide". Furthermore, by paragraph 70.2, the League is entitled to "apply any sums standing to the credit of the Pool Account which would otherwise be payable to a Defaulting Club, in discharging Football Creditors".
12. The League has a published "Current Insolvency Policy" which explains the circumstances in which it can serve a Notice. This document ("the Policy") also provides that the League is entitled to withdraw a Notice, so that the member concerned can retain its membership of the League, in certain circumstances. Paragraph 3.1 of the Policy entitles the League to withdraw a Notice if certain conditions are satisfied. So far as relevant, it provides:

"The Board will only withdraw the Notice … if:

3.1.1 a member club has completed arrangements satisfactory to the Board for exit from the relevant insolvency proceedings;

3.1.2 all Football Creditors (as defined in Paragraph 70.1) are paid in full or payment in full is secured to the satisfaction of the Board …"

Paragraphs 3.1.3 and 3.1.4 deal with certain other football-related debts which have to be paid in full.

13. Paragraph 3.2 of the Policy is in these terms:

"Where the exit from the relevant insolvency proceedings involves a transfer of assets in the business of the member club to a new or another company, the Board [of the League] will only register that company as a Member of the Football League provided that it complies, performs, observes and satisfies any conditions imposed by the Board. Save for exceptional circumstances, those conditions to be imposed by the Board are set out in Appendix IIA."

14. So far as relevant, Appendix IIA to the Policy contains a requirement that the "new or [other] company" must pay in full all "Football Creditors" and "any other creditors required to be paid in full by the Football Association" who were owed money by the Club involved in the insolvency proceedings.
15. Paragraph 3.3 of the Policy provides that a Notice served on a member's administration will have immediate effect if the member goes into liquidation.
16. Two weeks after the execution of the Sale Agreement the administrators convened a meeting of creditors ("the Meeting") to approve a voluntary arrangement ("the Arrangement") under which all the net assets of the Club were to be applied in payment to the preferential creditors of a dividend of approximately 30p in the pound. This figure was arrived at by deducting some of the costs of the administration from the net proceeds of the Sale Agreement, and apportioning those proceeds pro rata as between the preferential creditors, who included the Revenue, who were owed £525,000.
17. In the proposal for the Administration ("the Proposal"), sent to all creditors in advance of the Meeting, the administrators stated that "the CVA represents the best available alternative to insolvent liquidation and that the outcome for creditors under the CVA is likely to be substantially better than in a liquidation". Part 3 of the Proposal contained the "Outline of the Proposal" which stated that, under the Arrangement, funds would be distributed in the following priority:

"• undischarged administration trading liabilities;

• the Nominee's remuneration and disbursements;

• the Supervisors' remuneration and disbursements;

• a dividend estimated at 30p in the pound to preferential creditors …;

• a further distribution to preferential and unsecured creditors if the Club is promoted to the FA Premier League before the end of the 2006-07 season."

18. Given that the Club has just been relegated to the Second Division, it is, not suprisingly, common ground that the "further distribution" has a vanishingly small possibility of being paid.
19. Part 4 of the Proposal set out the "Details of the Proposal". It included a statement that the only assets of the Company which were considered to have any value are "the benefit of remaining players' contracts of employment with the Club" and that their value "depends on the Club remaining a going concern and preserving its status as a Football League club". Part 4 then went on to summarise the terms and effect of the Sale Agreement. In paragraph 4.9, the administrators explained that their "unbilled time costs currently stand at approximately £660,000 and it is proposed that in the region of £300,000 will have to be written off in respect of these fees, if the Arrangement proceeds. It was also explained that, save in the unlikely event of the "further distribution" being made, the proposal would involve the preferential creditors receiving 30p in the pound, and all other creditors receiving nothing, and that if the "further distribution" was made, the preferential creditors would be paid in full, and the other creditors would receive a dividend of about 4.5p in the pound.
20. In part 9 of the Proposal, Mr Martin Ellis and Mr James Earp ("the Supervisors") of Grant Thornton were put forward as the proposed joint supervisors of the Arrangement, and it was indicated that their fees were likely to be in the region of £60,000.
21. The Meeting took place on 18^th March 2004. At that meeting, the Revenue opposed the Proposal on the basis that it involved unlawful or unfair treatment of the Revenue as a creditor. Despite the opposition of the Revenue, the Arrangement was approved by the creditors, by a substantial majority.
22. The Revenue then issued an application against the Company and the Supervisors as respondents. By that application, the Revenue asked the court to revoke or suspend the approval of the Proposal on the ground inter alia that it infringed s4(4)(a), because the Revenue, as a preferential creditor, was not being paid in full, whereas under the terms of the Sale Agreement, the Football Creditors were being paid in full.
23. It was quite clear from the evidence, which included a witness statement from the League's solicitor, Mr Nicholas Craig, that, unless all the Football Creditors of the Club were paid in full, the League would not approve a transfer of the Share to the Buyer or to IMKL. The unchallenged evidence of Mr Ellis, one of the administrators and the supervisor of the proposed Arrangement, was to this effect:

"Were the Football Creditors not paid in full by [the Buyer]. [the Buyer] would lose the right to continue playing football in the Football League. It is crucially important to note that the payments made to the Football Creditors are payments made by [the Buyer], not by [the Club] …."

24. The contention advanced on behalf of the Revenue is, as I have mentioned, that the Proposal could not properly have been approved by the Meeting, because it infringed the requirements of the 1986 Act, and accordingly that the Proposal cannot therefore properly be implemented by the Administrators. I turn, then, to the relevant provisions of the 1986 Act, as amended from time to time, including by the Enterprise Act 2002 ("the 2002 Act").

The Statutory Provisions

25. Part I of the 1986 is concerned with Company Voluntary Arrangements ("CVA"). Section 1(1) provides:

"The directors of a company (other than one which is in administration or is being wound up) may make a proposal under this Part to the company and to its creditors for a composition in satisfaction of its debts or a scheme of arrangement of its affairs (from here on referred to, in either case, as a 'voluntary arrangement')."

26. Section 1(3) provides:

"Such a proposal may also be made -

(a) where the company is in administration, by the administrator, and

(b) where the company is being wound up, by the liquidator."

27. Section 2 is not in point. Section 3 provides for the summoning of meetings in connection with any proposal for a CVA. Section 3(2) applies in a case such as this, namely "[w]here a nominee is the liquidator or administrator" and requires him to "summon meetings of the company and of its creditors to consider the proposal".
28. Section 4 is headed "Decisions of Meetings" and so far as relevant provides as follows:

"(1) The meetings summoned under section 3 shall decide whether to approve the proposed voluntary arrangement (with or without modifications).

(2) …

(3) A meeting so summoned shall not approve any proposal or modification which affects the right of a secured creditor of the company to enforce his security, except with the concurrence of the creditor concerned.

(4) Subject as follows, a meeting so summoned shall not approve any proposal or modification under which -

(a) any preferential debt of the company is to be paid otherwise than in priority to such of its debts as are not preferential debts, or

(b) a preferential creditor of the company is to be paid an amount in respect of a preferential debt that bears to that debt a smaller proportion than is borne to another preferential debt by the amount that is to be paid in respect of that other debt.

However, the meeting may approve such a proposal or modification with the concurrence of the preferential creditor concerned.

(5) Subject as above, each of the meetings shall be conducted in accordance with the rules.

…"

29. Section 4A, which was added by the 2002 Act, is concerned with "Approval of arrangement", and subsection (2) provides that if the meeting of the company and the meeting of the creditors both approve a proposal, then the proposal is treated as approved. Section 5(2) provides that the CVA takes effect once it has been approved by both meetings.
30. Section 6 is concerned with "Challenges to decisions". In particular, s6(1) provides:

"[A]n 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 … unfairly prejudices the interests of a creditor, member or contributory of the company;

(b) that there has been some material irregularity at or in relation to either of the meetings."

31. Section 6(2) sets out the persons who can make such an application, and s6(3) has a strict time limit within which the application can be made. Section 6(4) provides, so far as relevant:

"Where on such an application 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 decision approving a voluntary arrangement …;

(b) give a direction to any person for the summoning of further meetings …."

Section 7 deals with the implementation of the proposal.

32. Section 27(1), which is in Part II of the 1986 Act, dealing with administration, provides as follows:

"At any time when an administration order is in force, a creditor … may apply to the court … for an order … on the ground -

(a) that the company's affairs, business and property are being or have been managed by the administrator in a manner which is unfairly prejudicial to the interests of its creditors … or some part of its creditors … (including at least himself), or

(b) that any actual or proposed act or omission of the administrators is or would be so prejudicial."

By s27(2), on the making of such an application, the court may, subject to certain exceptions, "make such order as it thinks fit".

33. Section 386, which is in Part XII of the 1986 Act, identifies, by reference to Schedule 6 to the 1986 Act, the categories of preferential debts. It applies to all types of personal and company insolvency regimes under the 1986 Act. Although debts owing to the Revenue are no longer preferential debts following the implementation of the 2002 Act, it is common ground between the parties that the previous law applies in the present case, and consequently the £525,000 owing by the Company to the Revenue is a preferential debt. Section 387 sets out the date by reference to which the existence and amount of a preferential debt is to be determined in the case of an insolvency.
34. Before turning to the argument in this case, it is appropriate to refer briefly to the Insolvency Rules 1986. Part I is concerned with CVAs, and Chapter 2 thereof deals with the "Proposal by directors". Rule 1.3 is concerned with the contents of the proposal, and sub-rule (2)(b) requires a Directors' proposal to include:

"Particulars of any property, other than assets of the company itself, which is proposed to be included in the arrangement, the source of such property and the terms upon which it is to be made available for inclusion."

By virtue of Rule 1.12(3), such information must also be included in a proposal made in a case such as this, namely by an administrator.

The court's power if s4(4)(a) is infringed

35. The Revenue's case is that the Proposal, as put forward to, and approved by, the Meeting on 18^th March 2004, infringes the requirements of s4(4)(a), and consequently the Arrangement which the administrators are proposing to effect should not be implemented. In principle, it appears to me that this argument potentially raises two issues. The first issue is whether the Proposal infringes s4(4)(a), and the second issue, which only arises if there was such an infringement, is whether the proposal must automatically fall.
36. The second issue can, I think, be dealt with comparatively speedily. In my judgment, if it can be shown that the Proposal infringes s4(4)(a), then the court would have no real alternative but to stay its implementation. It is not necessary for the purpose of this case to decide whether that is because the approval of the Proposal would be ineffective as it involved a breach of a clear statutory prohibition, or because the court would be obliged to exercise its power to revoke the approval of the Proposal pursuant to s6.
37. The first of those alternatives might be said to be more consistent with general principle. A proposal which can be shown to be in breach of a clear statutory prohibition, which goes to substance rather than formal procedure, might normally be expected to be invalid, and the fact that it was subsequently approved by a meeting held in accordance with another statutory provision, would not seem to alter that expectation. The language of s6(1) can be said to be neither necessarily, nor naturally, applicable to a case where a proposal involves not merely prejudice to a creditor, but a breach of a substantive statutory prohibition such as that contained in s4(4)(a).
38. On the other hand, it would obviously be inconvenient if a proposal, which was approved, and not challenged within the time limited by s6(3), and thereafter implemented, could nonetheless subsequently be shown to have been invalid, particularly in a case where the invalidity had been understandably overlooked by all concerned at the time. There is therefore obvious merit in the notion that an invalid proposal, at least if bona fide advanced and approved and implemented, without being challenged under s6 within the time prescribed by subsection (3) therefore, should be treated as valid notwithstanding the infringement.
39. Both parties in the present case were disposed to agree that, if the Proposal infringed s4(4)(a), then there was, "a material irregularity" within the meaning of s6(1)(b). If that is right, then it seems to me that if the Proposal does infringe s4(4)(a), the court would have no alternative but to exercise its power to revoke the Approval. It is true that s6(4), with its use of the word "may", gives the court, at least in general, a discretion whether or not to revoke the approval of a proposal where s6(1) is satisfied. However, where s6(1) is satisfied because the proposal which has been approved conflicts with a clear statutory prohibition, which goes to the substance of the proposal and has resulted in clear prejudice, it seems to me that, save (possibly) in the most exceptional circumstances, the court must revoke the approval. This does not involve the word "may" being construed as meaning "must", because there would be many cases where s6(1) is satisfied, but where the court would not think it right to revoke, or in any way interfere with, the approval concerned. However, there are a number of cases in which it has been held that the statutory jurisdiction conferred by the word "may" can nonetheless involve a positive duty to act: see the discussion and conclusion in Da Costa -v- The Queen [1990] 2 AC 389 at 405C-H.

Does s4(4) extend to the Sale Agreement?

40. I turn, then to the main issue between the parties on this appeal, namely whether the Proposal approved at the Meeting infringed s4(4)(a). The Revenue's case is very simple. The Proposal involves the Football Creditors receiving 100p in the pound, whereas the Revenue will only receive 30p in the pound. Accordingly, runs the argument, as the Football Creditors are not preferential creditors, and the Revenue is a preferential creditor, there is a clear breach of s4(4)(a) as, far from the preferential debt being paid in priority to non-preferential debts, there are certain non-preferential debts which are to be paid in priority to the preferential debts.
41. Lightman J rejected that contention. He said that s4(4)(a) did not preclude

"payment of non-preferential creditors by third parties ahead of preferential creditors out of their own free money, and accordingly there can be no objection to payment by the Buyer of the Priority Debts in full. It does not matter that the non-preferential debts are paid (as they are paid in this case) to discharge the debts of the company and accordingly 'on behalf of' or 'at the instance of' or 'for the benefit of' the company by a third party if they are paid out of his free money and at his own cost and not at the cost of the company. It would of course be different if the company put the third party in funds to do so. It would be different if the Sale Agreement were a sham or device adopted to disguise payments by the company to non-preferential creditors ahead of preferential creditors e.g. by agreeing an artificially low purchase price payable to the company for its undertaking in return for the assumption by the purchaser of an obligation to pay non-preferential creditors. That is not the case here nor has it ever been suggested to be so. The provision for payment of the Priority Debts by the Buyer is a commercial necessity for the Buyer as well as a fully disclosed ingredient of the Sale Agreement." (see paragraph 17 of the judgment)

42. The argument advanced on behalf of the Revenue is that Lightman J's analysis involves giving s4(4)(a) too narrow a compass. Mr Guy Newey QC, who appears with Mr Paul Greenwood for the Revenue, contends that the "proposal" referred to in s4(4) must refer to a proposal for the "voluntary arrangement" referred to in s1(1), and that the arrangement in this case includes the Sale Agreement with the obligation on the Buyer to pay the Football Creditors. Accordingly, he contends, as the Proposal involves certain non-preferential creditors, namely the Football Creditors, being repaid in full, while the preferential creditors, such as the Revenue, are only paid 30p in the pound, it is clear from its terms that s4(4)(a) would be breached if the Proposal were implemented.
43. Before turning to consider this argument, it is, I think, important to look at the commercial realities of this rather unusual case. It seems clear that it will only be possible for any money to be realised for the creditors of the Company if a purchaser for the Club can be found, and liquidation can be avoided in the meantime. The only value in the Company is attributable to: (a) its membership of the League; and (b) the value of the remaining contracts with its footballers. Both would be lost on liquidation. It is equally clear that nobody would be prepared to purchase the business of the Company, ie in effect the Club, without being satisfied that the Club could continue to play in the League, ie that the Notice would be withdrawn and the Share could be transferred to the purchaser. That could only be achieved by satisfying the lawful requirements of the League. Those requirements, both as a matter of fact and in light of the League's entitlement under its Articles, include the paying off of all the Football Creditors.
44. In these circumstances, it is obviously the case that any person contemplating purchasing the business and assets of the Company as a going concern will only do so on the basis that either the Company pays off the Football Creditors in full, or the purchaser does so. In other words, although the payment to the Football Creditors can be said to involve repayment of non-preferential debts of the Company, the reason that the Buyer is making those payments is not to satisfy the creditors so paid as such, but to maintain an asset of the Company without which its business would effectively have no value.
45. In the great majority of cases where the purchaser of a company's business is to pay off some of the creditors of the company, the price the purchaser pays to the company for the acquisition of the business is concomitantly reduced. However, in the present case, counter-intuitively at first sight, the fact that the Buyer is to pay off the Football Creditors of the Company has resulted in no reduction in the consideration to be paid by the Buyer to the Company. (I do not think one can go so far as to say that it has increased the amount payable by the Buyer to the Company, because, even if there was no obligation on the Buyer to pay off the Football Creditors, the Buyer would no doubt do so in order to persuade the League to withdraw the Notice and to agree a transfer of the Share). It is no doubt for this reason that, in paragraph 21 of his judgment, Lightman J said:

"It has not been suggested that the imposition of the obligation on the Buyer to pay the [Football Creditors] reduced the consideration payable by the Buyer and accordingly available for the dividend to the Revenue. There has been no complaint about the terms of the [Sale] Agreement …."

46. Accordingly, when considering the argument which centres around the proper interpretation of s4(4)(a), it is important, I think, to bear in mind that one is here concerned with a case where the administrators have entered into a contract for the sale of the undertaking of a company to a prospective purchaser, who, while he is agreeing to repay certain creditors of the company, is not thereby accorded any reduction in the sum he is to pay for purchasing the undertaking of the company.
47. Section 4(4)(a) can only be relied on in relation to a "proposal … under which" non-preferential creditors are repaid without the preferential creditors being paid in full. On the face of it, these are comparatively narrow words. Section 4(4) does not preclude the approval of a proposal "as a result of which" paragraphs (a) and (b) are infringed, but one "under which" those paragraphs are infringed. Given that its case on this appeal is based solely on s4(4)(a), it is therefore necessary for the Revenue to establish that "the proposal" includes the Sale Agreement, and is not, as is contended by the respondents, limited to the contents of Part 3 of the Proposal.
48. I readily accept the contention that the "proposal" referred to in s4(4)(a) must be a reference to the "proposal" referred to in s1(1), namely "a proposal … for a composition in satisfaction of [the Company's] debts or a scheme of arrangement of its affairs". However, that does not appear to me to lead to the conclusion that the terms of a contract, such as the Sale Agreement, must form part of the proposal.
49. In my judgment, in agreement with Mr Stephen Davies QC, who appears with Miss Raquel Agnello on behalf of the respondents, "the proposal" in the present case is effectively limited to what is in Part 3 of the Proposal, namely how the cash realised by the proposed disposal of the business and assets of the Company under the Sale Agreement is to be disposed of, and it does not extend to the terms of the Sale Agreement itself.
50. What the Proposal actually invited the creditors of the Company to consider, and what those creditors actually voted on at the Meeting, was how the Company's cash - ie the proceeds of the Sale Agreement - were to be distributed. They were not being invited to vote on whether or not to approve the Sale Agreement (although it is true that the implementation of the Sale Agreement, by its terms, depended on the Proposal being approved). That is supported by the fact that the Sale Agreement had been executed only two days after the Proposal had been circulated, and two weeks before the Meeting to approve the Proposal was to take place. There is no suggestion that the administrators had no power to enter into the Sale Agreement without the prior approval of the creditors, whether under the provisions of Part I or Part II of the 1986 Act.
51. "The proposal" in Part 3 of the Proposal, which the creditors of the Company were being asked to approve, provided that, subject to the "further distribution", the non-preferential creditors would receive nothing, and the preferential creditors would receive about 30p in the pound. It was only under the Sale Agreement, executed two weeks earlier, that some of the non-preferential creditors might expect their debts to be repaid. If the non-preferential creditors had sought to enforce the Proposal, once it had been approved, they would have got nothing. Indeed, as Mr Davies points out, they could not even have enforced the Sale Agreement, because, although it imposed an obligation on the Buyer to repay the Football Creditors, that contractual obligation was entered into with parties other than the Football Creditors themselves, and there is nothing in the Sale Agreement to suggest that it should be enforceable by the Football Creditors.
52. Looking at the matter more broadly, it appears to me that this conclusion accords with the general purpose of the statutory CVA regime, without conflicting with the principle that preferential creditors are to be afforded priority. The concept of a corporate or individual voluntary arrangement originated with the Report of the Review Committee into Insolvency Law and Practice ("the Cork Report"), Cmnd 8558, presented to Parliament in 1988. Paragraph 364(2) of the Cork Report said this about the proposed voluntary arrangement system:

"The proposed system has far more flexibility than is available in a creditors' voluntary winding up with regard to the type of proposal capable of being submitted to and accepted by the creditors or some of them …. Unless such flexibility exists, the advantages accruing to the creditors from the provisions of third party monies or from any after-acquired property of the debtor will be lost."

53. Two important points emerge from that brief passage, and, indeed, from the provisions of Part I of the 1986 Act, when read in the context of that Act as a whole. First, the CVA regime is intended to be an additional, and particularly flexible, option in the case of corporate insolvency, in addition to liquidation, administration and administrative receivership. Secondly, a particular feature of a CVA is that any proposal can include, or be based on, monies or other assets belonging to persons other than the company concerned - reflected in Rules 1.3(2)(b) and 1.12(3).
54. In the present case, third party assets, namely the Buyer's monies (or, more likely, monies made available to the Buyer) are to be used to pay the Football Creditors. It would be unfortunate, indeed, surprising, if those monies, which do not, and never will, belong to the Company legally or beneficially, and have in no way been contributed to by the Company, should nonetheless be caught by s4(4)(a). Such a result would seriously hamper a regime which is intended to be flexible, and would render it much less likely that third parties would be prepared to provide assets to assist in the achievement of a voluntary arrangement. It would also be surprising if those monies which do not fall within the direct ambit of the Proposal, and are not reflected in the price paid to the Company, should fall within the ambit of s4(4)(a).
55. Further, there is no logical or commercial reason for preferential creditors seeking priority as against non-preferential creditors in relation to payments made by third parties from their own money. A creditor, whether preferential or otherwise, can justifiably expect to look to the assets of his insolvent debtor (or any guarantor of the debtor) for repayment; indeed, in some circumstances, he may justifiably expect to look to third parties who have received cash or other benefits from the debtor. However, there does not appear to be any good reason why a creditor should be entitled to look to a third party who, from his own free money and (possibly) for good commercial reasons of his own, has chosen to pay one or more other creditors of the debtor.
56. As Lightman J pointed out, the Revenue's argument would result in the CVA regime differing, and indeed being more inflexible from the point of view of the company, and more beneficial from the point of view of preferential creditors, than other statutory corporate insolvency regimes. Thus s175(1), which applies where a company is in liquidation, stipulates that:

"In a winding up the company's preferential debts … shall be paid in priority to all other debts."

It is clear that this section only applies to the payment of debts out of the company's assets. In Buchler -v- Talbot [2004] 2 WLR 582 at 589, Lord Hoffmann said this at paragraph 28:

"The winding up of a company is a form of collective execution by all its creditors against all its available assets. The resolution or order for winding up divests the company of the beneficial interest in its assets. They become a fund which the company thereafter holds in trust to discharge its liabilities …. But the trust only applies to the company's property. It does not affect the proprietary interests of others." (emphasis added)

57. As Mr Davies argues, it would be particularly surprising if preferential creditors were treated more favourably under a CVA than in a liquidation, in light of the fact that a liquidator can propose a voluntary arrangement - see s1(3)(b).
58. The same point may, I think, be made in relation to administrators. Paragraph 73(1) of Schedule B1 to the 1986 Act provides that an administrator's "Statement of Proposals" under paragraph 49 thereof may not include any action which would, in effect, infringe what is prohibited by s4(3) and 4(4). If the Revenue's case is correct here, there is either an undesirable, indeed inexplicable, difference between priorities in administration and voluntary arrangements, or it would not be open to an administrator to put forward a proposal, of a type which is frequently and very beneficially put forward. The type of proposal I have in mind is one which involves the directors, shareholders or persons connected with them, paying off certain debts which would have to be paid off at once if the company is to go on trading. An obvious example would be a supplier whose goods are vital to the company's future trading, who is owed money and is not prepared to go on supplying the goods unless he is paid what he is owed. Mr Newey makes the point that, as with s4(4), paragraph 73(2) of Schedule 1B permits the preferential creditors' priority rights to be over-ridden with their agreement. I do not find that a satisfactory answer. It would give the preferential creditors an unjustifiable ability to delay the actions of the administrator, as indeed it would enable them to delay a voluntary arrangement, and, in extreme circumstances, it would permit them to use their statutory rights as an unreasonable basis for recovery of more than the legislature must have intended.
59. It appears to me that these rather wider considerations support the conclusion that the "proposal" for the purposes of s4 does not extend to an agreement or other understanding, between a third party and some creditors, at least where the money involved is what Lightman J referred to as the third party's "free money", ie money which is not being advanced "at the cost of the company".
60. In my judgment, therefore, s4(4)(a) is not infringed in the present case.

The Revenue's policy argument

61. Having reached this conclusion, I think it is important to deal with the contention advanced on behalf of the Revenue that it would render s4(4)(a) something of a dead letter. The Revenue's argument is that, if, as the judge concluded, s4(4)(a) does not apply to an arrangement such as the Sale Agreement in the present case, because it is not part of the "proposal", then it would follow that s4(4)(a) could easily be avoided by the company concerned entering into an agreement with a third party whereby the third party agreed to pay non-preferential creditors. In my view, that is not a fair criticism. As I have already indicated, the present case is very unusual, because the amount payable to the Company for the sale of its undertaking is in no way reduced by the fact that the Buyer is to pay certain non-preferential creditors, namely the Football Creditors.
62. In the great majority of cases where a company in administration agrees to sell its undertaking to a purchaser, who undertakes to pay off some of the company's creditors, there will be a reduction in the consideration payable by the purchaser to reflect the fact that he has so undertaken. In such a case, unlike the present, it can fairly be said that, at least unless the creditors who are to be paid off are preferential creditors, that contract would potentially be unfair to the preferential creditors, because it would involve the company (albeit indirectly, through the discount in the price payable by the purchaser) funding the payment of non-preferential creditors, with the result that there will be less available to pay all its creditors, including the preferential creditors.
63. However, in such a case, whether or not such an agreement was then followed by a proposal for a CVA, quite apart from other remedies, it would be open to a preferential creditor to apply to the court for appropriate relief under s27. If the court was satisfied that the agreement was a device by which the company was seeking to avoid s4(4)(a), or indeed by which the administrators were seeking to avoid complying with paragraph 73(1) of Schedule 1B to the 1986 Act, then it seems to me that the court would, virtually as a matter of course, grant the preferential creditor appropriate relief. Indeed, even if it was not the intention of the administrators to prejudice the preferential creditors, the court would, I should have thought, require very good reasons before it would contemplate not acceding to the application of the preferential creditor.
64. Of course, a voluntary arrangement can also be proposed by the directors of a company not in administration or liquidation, as s1(1) expressly provides. Accordingly, it could be said that Lightman J's conclusion could enable s4(4)(a) to be avoided by the directors of the company causing it to enter into a contract which prefers non-preferential creditors, which then founds the basis for a proposal for a CVA. In such a case, s27 would not apply. However, that does not cause me to doubt the conclusion I have reached.
65. In the first place, there would be nothing to stop the directors of the company entering into, and indeed completing such a contract, where there is no liquidator, administrator or administrative receiver in place. Secondly, it may well be that s6(1), which is slightly differently worded from s4(4) could be invoked by a preferential creditor in relation to the CVA in such a case. It is unnecessary to express a concluded view on the point, and, indeed, it would be inappropriate to do so, because the issue has not been argued. But it is fair to say that it seems to have been common ground before Lightman J, where the Revenue did rely on s6(1), as an alternative argument, that it would be open, at least in principle for a preferential creditor to rely on that section in such a case. Thirdly, if the court was satisfied that the agreement in such a case was a device to get round, or even had the effect of getting round, s4(4), it may very well be that such a contract could successfully be attacked by an unfairly prejudiced preferential creditor under s239 (concerned with preferences), given the terms of subsection (4)(b) thereof. Fourthly, this court has made it clear in Somji -v- Cadbury-Schweppes plc [2001] 1 BCLC 498 that any voluntary arrangement is subject to a requirement for transparency and good faith. A voluntary arrangement which is said, with apparent arguable justification, to cause unfair prejudice, can expect to receive what Lightman J called "careful scrutiny as to its propriety and conformity with s4(4)(a) (and indeed with fairness)", and if it is improper or unfair, the court will no doubt deal with it accordingly.

If s4(4) does extend to the Sale Agreement

66. Finally, at least in my view, it is by no means clear that, even if the ambit of s4(4)(a) did extend to the terms of the Sale Agreement, it was thereby infringed. If the "proposal" extends to the Sale Agreement, I accept that there is obvious force in the argument that, giving the words of s4(4) their ordinary meaning, s 4(4)(a) is infringed, because some non-preferential creditors are being paid off in full under the "proposal", in circumstances where preferential creditors are only getting around 30p in the pound.
67. However, I consider that there is a powerful argument to support the proposition that, even on this basis, once one reads s4(4)(a) in its overall statutory context, it cannot be said that the preferential creditors are not being paid "in priority to" the non-preferential creditors. First, there is the general point I have already discussed, to the effect that s4(4) should be treated as referring to priorities in relation to claims on the Company's assets, in light of commercial common-sense, the desire for flexibility in voluntary arrangements, and consistency with other insolvency regimes in the 1986 Act.
68. Secondly, while s4(4) must, of course, be construed by reference to the words used, it must also be construed in the context of the 1986 Act as a whole. In that connection, when construing the 1986 Act one should bear in mind the guidance given by Sir Nicolas Browne-Wilkinson, V-C in Bristol Airport plc -v- Powdrill [1990] Ch 744 at 758F-759B, when dealing with Part II of the Act, which relates to administration. Having explained the general purpose of the administration regime, Sir Nicolas went on to say this at 758A-759A:

"In my judgment in construing Part II of the Act it is legitimate and necessary to bear in mind the statutory objective with a view to ensuring, if the words permit, that the administrator has the powers necessary to carry out the statutory objectives, including the power to use the company's property."

However, I should go on to refer to what was said immediately afterwards:

"On the other hand, however desirable it may be to construe the Act in a way calculated to carry out the Parliamentary purpose, it is not legitimate to distort the meaning of the words Parliament has chosen to use in order to achieve that result. Only if the words used by Parliament are fairly capable of bearing more than one meaning is it legitimate to adopt the meaning which gives effect to rather than frustrates, the statutory purpose." (759A-B)

69. Thirdly, it appears to me that the respondents' case receives support from the discussion of the rationale behind the preference provisions in the 1986 Act in Goode on Principles of Corporate Insolvency Law (2^nd Edition) 391:

"Section 239 is aimed at transactions which disturb the statutory order of distribution. It follows that to be a preference within s239 the payment or transfer must be one by which the creditor is put in a better position at the expense of other creditors. Accordingly, it is not a preference for the company to cause a payment or transfer to be made to the creditor by a third party except to the extent to which the ultimate burden falls on the company's assets that would otherwise be available to its creditors …." (emphasis added).

70. Fourthly, the only reason that the Revenue is receiving anything at all is that:

i) under the terms of the Proposal, IMKL is to waive repayment of the loan of £1.5m charged on the assets of the company, and the administrators are to waive part of their fees, both of which would have ranked ahead of the Revenue's debt under s19; and

ii) by repaying the debts owed to the Football Creditors, the Buyer would ensure that the Company remains a member of the League, without which the Buyer would not be prepared to go ahead with the Agreement, and the value of the Company's assets and business would be nugatory.

71. In these circumstances, it is scarcely surprising that, in paragraph 14 of his judgment, Lightman J described the Proposal as "on the face of it highly advantageous to the Revenue".
72. Fifthly, given the requirements of the League, and its rights under its Articles of Association, there could well be an argument to the effect that, on the very unusual facts of this case, the Buyer's obligation to pay the Football Creditors cannot really be treated as a repayment of non-preferential creditors within the meaning of s4(4) at all. It is conceivable that the payment could be treated as one which is simply made to satisfy the lawful requirements of the League, thereby enabling the business of the Company to be sold at a substantially better price than it would otherwise fetch, and the mere fact that the payment happens to have to be made to non-preferential creditors does not bring it within the ambit of s4(4) at all. Such an argument might be reinforced by the fact that, as I understand it, the League held some £1.2m as pool monies for the benefit of the Company, which the League would have been entitled to use, subject to any considerations arising from the judgment in British Eagle International Airlines Ltd v Compagnie National Air France [1975] 1 WLR 758, towards paying off the Football Creditors pursuant to the provisions of its Articles in any event.

Conclusion

73. In these circumstances, I think Lightman J reached the right conclusion, and I would dismiss this appeal.

Lord Justice Mance:

74. I agree.

The Lord Chief Justice:

75. I also agree.