ON APPEAL FROM THE HIGH COURT OF JUSTICE
His Honour Judge Hodge QC
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE ETHERTON
SIR MARK POTTER
| CHARNESH KAPOOR
|- and -
|(1) NATIONAL WESTMINSTER BANK PLC
(2) KIAN SENG TAN
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A Merrill Communications Company
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Tom Smith (instructed by DLA Piper UK LLP) for the First Respondent
Hearing dates : Friday 29th July 2011
Crown Copyright ©
LORD JUSTICE ETHERTON
The legal framework
"5.21 Entitlement to vote
(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-
(a) where the debtor is not an undischarged bankrupt and an interim order is in force, by reference to the amount of the debt owed to him as at the date of the interim order;
(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."
"5.22 Procedure for admission of creditors' claims for voting purposes
(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 of 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 to give rise to unfair prejudice or material irregularity. "
"5.23 Requisite majorities
(1) Subject to paragraph (2), at the creditors' meeting, a resolution is passed when a majority (in value) of those present and voting in person or by proxy have voted in favour of it.
(2) A resolution to approve the proposal or a modification is passed when a majority of three-quarters or more (in value) of those present and voting in person or by proxy have voted in favour of it.
(4) Any resolution is invalid if those voting against it include more than half in value of the creditors, counting in these latter only those
(a) who have notice of the meeting;
(b) ; and
(c) who are not, to the best of the chairman's belief, associates of the debtor.
(7) The chairman's decision on any matter under this Rule is subject to appeal to the court by any creditor "
262 Challenge of meeting's decision
(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
(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 at the meeting; "
The factual background
"In consideration of the agreement of the Assignee [Mr Chouhen] to pay to the Assignor [Crosswood] the sum of £50,000 on the dates and in the tranches mentioned in Clause 2, the Assignor HEREBY ASSIGNS to the Assignee with full title guarantee absolutely the Assigned Debt (together with all amounts in respect of such amount thereof) to the intent that on completion of this Assignment the Crosswood Debt shall be reduced to £4,500,000."
"In consideration of the assignment of the Assigned Debt to the Assignee the Assignee hereby undertakes to pay to the Assignor the following amounts:
2.1 the sum of £100,000, £50,000 of which shall be paid on the signature of this agreement and £50,000 of which shall be paid within six months of the date hereof; and,
2.2 an amount equal to 80% of all sums which may be received or recovered by the Assignee in respect of the Assigned Debt whether in any IVA of the Debtor; in his bankruptcy; or otherwise ("dividends"), which shall be paid to the Assignor by the Assignee within 28 days of each receipt of a dividend."
The Bank's application and the Judge's judgment
" Mr Harbottle [counsel for Mr Kapoor] submits that it follows from all of that that where notice of the equitable assignment has been given, the assignee, and not the assignor, is the correct party to prove in the IVA. It seems to me that that cannot be reconciled with the decision of the Privy Council in the Parmalat case. That decision seems to me clearly to recognise that the assignor of an equitable assignment is a 'creditor' for the purposes of the insolvency legislation. It seems to me that one has to go back and consider what is meant by a 'creditor'. There is guidance as to that contained in the Insolvency Act itself. The concept of a 'bankruptcy debt' is addressed in Section 382, which provides (by sub-section (1)), that 'bankruptcy debt', in relation to a bankrupt, means (subject to the next sub-section) any of the following, including, relevantly, 'any debt or liability to which he is subject at the commencement of the bankruptcy'. The definition of 'creditor' is addressed in Section 383(1) and it means, in relation to a bankrupt, 'a person to whom any of the bankruptcy debts is owed'. In other words, the relevant question is whether an equitable assignee of part of a debt is a person to whom the relevant part of the debt is owed.
 In my opinion, he [viz. Mr Chouhen] is not. As the passage from Halsbury makes clear at paragraph 71, the assignee cannot give a good discharge for the debt. It seems to me that Mr Marcus Smith's [the author of a work on the law of assignment] analysis is correct, and that an equitable assignee of part of a debt is entitled in equity, but not at law; and that it is the assignor who must enforce his claim against the debtor, albeit for the benefit of the assignee. The normal principle, although it admits of exceptions, in the law of trusts is that the beneficiary under a trust cannot sue in relation to the trust property. It is the trustee who must sue, and he can recover more than merely nominal damages. It therefore seems to me that it was wrong for the chairman to have treated Mr Chouhen as a creditor. It seems to me that the creditor was Crosswood Limited, which of course was an associate of the debtor. "
" It seems to me that the irregularity consisted in the counting of Mr Chouhen's vote, when he was an equitable assignee of part of a liability to which the debtor was subject, in favour of an associate, in circumstances where Mr Chouhen had taken an assignment on terms which, from his perspective, were wholly non-commercial, and in circumstances where he did so with the express intention, and objective, of voting for the IVA proposal in circumstances where the equitable assignor's vote would fall to be discounted as that of an associate. It seems to me, in such circumstances, that there is a lack of good faith on the part of Mr Kapoor, as the debtor, in promoting such an arrangement; and a lack of good faith on the part of Mr Chouhen, as an alleged creditor, in participating in the arrangement. On the evidence, it is quite clear that Mr Kapoor, the debtor, was intimately involved in the making of these arrangements. Indeed, it was he who promoted the assignment with the express object of seeking to get around the restrictions imposed by Rule 5.23(4)(c).
 If endorsed by the court, the somewhat unusual facts of the present case might become a commonplace in circumstances where a debtor seeking to promote an IVA is faced with an obstacle, in the form of the discounting of the votes of an associated creditor. That, it seems to me, would clearly undermine the policy objective which underlies Insolvency Rule 5.23(4)(c). In the particular circumstances of this case, where the whole arrangement was promoted by the debtor with a compliant friend, and with the express objective of enabling a debt to be counted which should not strictly be counted, it seems to me that that demonstrates a lack of good faith, contrary to the principles applicable to the promotion of an individual voluntary arrangement. I am therefore satisfied that, in that sense, there was a 'material irregularity'; and that the resulting vote at the meeting in favour of the IVA proposal should be set aside."
Mr Chouhen's creditor status as a result of the Assignment
"That there is a long-standing practice that, before giving judgment in an action at the suit of an equitable assignee, the Court will normally require him to bring his assignor before the Court is beyond doubt. But it does not follow from that that there is no cause of action vested in the assignee and capable of being asserted by him alone or, indeed, that the assignor has in all cases, and necessarily to be a party. The reason for the requirement is not that the assignee has no right which he can assert independently, but that the debtor ought to be protected from the possibility of any further claim by the assignor who should therefore be bound by the judgment. A further reason given by Lord Justice Chitty in Durham Brothers v Robertson,  1 QB 765 is that the assignor ought to be given the opportunity to challenge the assignment if he wishes, though this probably comes to the same thing. The concept behind the rule is that the debtor should not be put in double jeopardy.
These cases by themselves demonstrate the subsistence of a cause of action in the assignee, but in fact the authorities go further. In William Brandt's Son & Co Ltd v Dunlop Rubber Co Ltd  AC 454, judgment was given for the assignee although the assignor was not made party to the action. The case was, it is true, an exceptional one, for the debtor had in fact settled with the assignor and disclaimed any desire to have him there. Nevertheless, it demonstrates that the requirement is a procedural and not a substantive one upon which the assignee's cause of action depends."
"It is now more that 120 years since the confluence of the separate streams of common law and equity through the Judicature Act 1873. As its modern version (section 49 of the Supreme Court Act 1981) makes clear, every civil court has to administer law and equity on the basis that whenever there is any conflict between common law and equity, the rules of equity shall prevail, every court is to continue to give effect to equitable rights and subject thereto to common law rights and the court's jurisdiction is to be exercised so as to secure that as far as possible all matters in dispute are completely and finally determined and multiplicity of proceedings is avoided."
"For my part, I regard it as sufficient to look at the position as established by the authorities since 1873. In doing so, it is important to distinguish between what is a requirement of substantive law and what is merely a procedural requirement. It is, in my judgment, elementary that where, as here, there is an agreement to assign a legal chose, in equity the assignee becomes the owner and controller of the legal chose. He is entitled to sue for the recovery of the chose, but as a matter of practice he will normally be required by the court to join the assignor either as plaintiff or, if he refuses to give his consent to this, as defendant. All this seems to me to be in conformity with section 49 of the Act of 1981. An assignor, if the assignment is known, will not be allowed to sue in his own name for himself. He may sue as trustee for the assignee if the assignee so wishes, but in that event he should reveal his representative capacity and if he attempts to recover for himself, even if, for example, only part of the debt has been assigned, he will be required to join the assignee."
"These authorities, in my judgment, clearly establish that the equitable assignee can be regarded realistically as the person entitled to the assigned chose and is able to sue the debtor on that chose, but that save in special circumstances the court will require him to join the assignor as a procedural requirement so that the assignor might be bound and the debtor protected. If, unusually, the assignor sues, he will not be allowed to maintain the action in the absence of the assignee."
"as in my judgment it is clear from the line of authorities to which I have referred that an equitable assignment creates in the equitable assignee the right to sue the debtor, subject to the procedural rule requiring the joinder of the assignor."
"There is a rule of practice that the assignor should be joined, but that rule will not be insisted upon where there is no need, in particular if there is no risk of a separate claim by the assignor."
"The main reason why an assignee of a part of a debt is required to join all parties interested in the debt in an action to recover the part assigned to him is in my opinion because the Court cannot adjudicate completely and finally without having such parties before it. The absence of such parties might result in the debtor being subjected to future actions in respect of the same debt, and moreover might result in conflicting decisions being arrived at concerning such debt. In my opinion, however, this reasoning does not apply to a winding up petition. After a winding up order has been made the Court in all cases when it is necessary will investigate, adjudicate upon, and settle the petitioner's debt as well as the debts of the other creditors. In the case of an assignee of part of a debt the Court in adjudicating upon his claim can and will do so in the presence of the persons entitled to the remainder of the debt, and the rights of all parties interested in the debt will be completely and finally settled once and for all."
" In other words, a winding-up order does not affect the legal rights of the creditors or the company. It only puts into effect a process of collective execution against the assets of the company, for the benefit of all creditors. In the course of that process, the rights of creditors may have to be determined. But such a determination is not necessary at the stage when the order is made. An equitable assignor therefore has a sufficient interest without joining the assignee."
"The scheme is quite clear. The chairman has power to admit or reject; his decision is subject to appeal; and if in doubt he shall mark the vote as objected to and allow the creditor to vote. That is easily carried out upon the basis advanced by Mr Moss QC, Mr Mann and Mr Trace. It provides a simple clear rule for the chairman, not a lawyer, faced at a large meeting with speedy decisions necessary to be made to enable the meeting to reach a decision. On that basis the chairman must look at the claim; if it is plain or obvious that it is good he admits it, if it is plain or obvious that it is bad he rejects it, if there is a question, a doubt, he shall admit it but mark it as objected."
"It was my first thought that it must be a matter giving rise plainly to prejudice if a creditor who is prima facie entitled to have his vote admitted, even if marked 'objected', was refused any right to vote in that his interest would be severely prejudiced. It further seemed to me prima facie that the exercise of a decision making power vested in the chairman was not prima facie naturally described as 'an irregularity'. I was however, greatly impressed by the argument of Mr Trace for Victoria Deep Water Terminal Ltd and Scruttons plc. He advanced the proposition that linguistically 'irregular' relates to 'rule' and that the provisions elsewhere show that voting at the meeting is a matter of the rules a departure from which is truly an 'irregularity'."
" this interpretation of s 262(1)(b) results in my view in s 262 forming a coherent and comprehensive code of remedies. Section 262(1)(a) permits a challenge based on the substantive terms of the arrangement; and s 262(1)(b) permits a challenge based on the existence of irregular shortcomings in the documentation provided to creditors for the purpose of making their decision at the s 257 meeting as well in the convening and conducting of such meeting."
"Those authorities show that, in approaching the language of the 1986 Act, one must pay particular attention to the purposes and policies of its own provisions and be wary of simply carrying over uncritically meanings which had been given to similar words in the earlier Act. It does not, however, mean that the language of the new Act comes to one entirely free of any of the intellectual freight which was carried by words and phrases in earlier bankruptcy or other legislation."
" The intellectual freight least likely to be jettisoned includes the basic doctrines (such as proportionate treatment of unsecured creditors, and the principle of set-off) which have been features of English bankruptcy law since its earliest days. Although the English law of bankruptcy now has the appearance of a complete statutory code, it is built on foundations which owe much to past judicial creativity and development of far more meagre statutory material going back to Elizabethan times, the first "modern" statutes being the Bankruptcy Act 1869 (32 & 33 Vict c 71) and the Debtors Act 1869 (32 & 33 Vict c 62). 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 1986 Act, but (to put it at its lowest) it would be no great surprise to find it there in one form or another."
" That statement must have been made on behalf of Mr Somji. "Take it or leave it" was the message which it gave, and it was a material omission not to state that two of the previously dissentient creditors were at an advanced stage in negotiations for a better deal outside the IVA."
"the effect of section 276 of the Insolvency Act 1986, and the Insolvency Rules 1986 made under it, is to ensure that every proposal for an individual voluntary arrangement should be characterised by complete transparency and good faith by the debtor."
"Information" must not be provided by the debtor which is false or misleading in any material particular, and the "information" that is provided by him must be complete. This obligation continues up to the date of and during the meeting of creditors itself. Properly fulfilled this obligation enables the creditors to make an informed decision about the proposal for a voluntary arrangement.
" The principles laid down in the cases decided in the 18th and 19th centuries, accurately summarised by the judge below, have not, as he rightly put it, "become outmoded or unnecessary in modern times". By contrast with the simple language of the section perhaps some of the eloquent flourish in these judgments may appear a little extravagant to us. Nevertheless section 276 and the Rules encapsulate the principles of transparency and good faith and make proposed secret deals or confidential arrangements of the kind referred to by Robert Walker LJ as unacceptable today as they were in Victorian England."
"For example, suppose that A and B (not being associates) have contracted jointly with C on terms that the contract terminates automatically on either A or B becoming bankrupt. A owes £250,000 to X, which has issued a statutory demand. A proposes an IVA. There are other creditors, including Y who is owed £150,000 and is hostile. There are other friendly creditors such that if B pays off Y, the IVA will go through. If B paid Y would that be an irregularity? It is submitted that that would be a surprising result to most people. Yet how does that differ from Mr Kapoor's case?
Second, it is not clear what degree of intention would be required. Consider the case of an agreement the main aim of which is a particular object which has nothing to do with the IVA but which the parties know is bound to affect the voting: is this an irregularity?"
"Third, what transactions are included and what excluded? Can there be an irregularity even before the date of the proposal? Does a transaction many months before the proposal which is entered into in the knowledge that there may be a proposal count for these purposes?"
"If the question is whether a given transaction is such as to attract a statutory benefit, such as a grant or assistance like legal aid, or a statutory burden, such as income tax, I do not think that it promotes clarity of thought to use terms like stratagem or device. The question is simply whether upon its true construction, the statute applies to the transaction. Tax avoidance schemes are perhaps the best example. They either work ... or they do not ... If they do not work, the reason ... is simply that upon the true construction of the statute, the transaction which was designed to avoid the charge to tax actually comes within it. It is not that the statute has a penumbral spirit which strikes down devices or stratagems designed to avoid its terms or exploit its loopholes. There is no need for such spooky jurisprudence. "
"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. "
"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."
SIR MARK POTTER
LORD JUSTICE PILL