England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM High Court of Justice
Chancery Division
Mr Justice David Richards
CH2012/0260 & 0262

		Royal Courts of Justice Strand, London, WC2A 2LL
		21st January 2014

Lady Justice Arden :

1. Part VIII of the Insolvency Act 1986 ("IA86") consists of a detailed statutory code for individual voluntary arrangements ("IVAs"). These provide a means for the court to supervise the making by debtors of arrangements with their creditors for paying debts without becoming bankrupt.
2. The issue for determination on this appeal is whether the appellants, Mr and Mrs Price, who are creditors of the respondents, Mr and Mrs Davis, are bound by the terms of IVAs which their creditors approved at "further meetings", that is, at meetings summoned by the "nominee", at the direction of the court, following a successful challenge to creditors' approval at the original meetings. The "nominee" is the person nominated to supervise the arrangement. He or she must normally be qualified to act as an insolvency practitioner (section 253(2) of the IA86).
3. This case has a number of unusual features:

i) Usually, there is only one meeting of creditors to approve an IVA, namely the original meeting which the court directs the nominee to summon if he files a report containing information required by sections 256 and 256A of the IA86, and the court is satisfied that it is appropriate to convene a meeting of creditors (section 257 of the IA86). As I shall now explain, here the nominee had to summon further meetings of creditors.

ii) The original meetings approved the IVAs. However, after the meetings Mr and Mrs Price brought proceedings in the Brighton County Court under section 262 of the IA86 in which they successfully challenged the chairman's ruling at the meetings that their claims be valued at £1 for voting purposes. DJ Gamba decided that this valuation was wrong. He suspended the approval of the IVAs and exercised the court's power under section 262(4)(b) to direct the nominee to summon further meetings, subject to the debtors' giving notice that they would put forward a revised proposal, which they did.

iii) As a result of that successful challenge, Mr and Mrs Price additionally became creditors of Mr and Mrs Davis between the date of the first meetings and the further meetings in respect of their costs. The Prices had obtained an order that Mr and Mrs Davis pay the costs of that challenge and so they acquired a further claim against Mr and Mrs Davis.

iv) DJ Gamba did not, as empowered to do under section 262(6) of the IA86 renew the "interim orders" previously made to prevent bankruptcy proceedings being taken against Mr and Mrs Davis and execution from being levied on their assets until the meetings were held. The parties and the court seem to have overlooked that power. The court decided instead to suspend the IVAs, no doubt on the basis that the suspension would deter any creditor action. Accordingly, DJ Gamba's order (so far as material) provided that:

a) the creditor approvals of the IVAs at the original meetings should be suspended; and

b) the suspension should end if the further creditors' meetings approved IVAs with variations.

v) There were two potential mismatches in this order:

a) if the suspension was lifted because creditors approved a variation to the IVAs, it was provided that the IVAs as so varied - and not the original IVAs - should come into operation.

b) notice of the further meetings was to be given to "the IVA creditors", defined by the order as creditors under "the IVAs". If the IVAs were approved as varied, those were the creditors to be bound. "The IVAs" were the IVAs approved at the original meetings. This would not include Mr and Mrs Price in respect of their costs. In other words, the order failed to take account of possible changes in the composition of the class of "the IVA creditors".

4. Notice of the further meetings was given to Mr and Mrs Price. It is not suggested that the nominee was aware that there were any other creditors who had claims which arose between the dates of the two meetings and who would not therefore have received notice of the original meetings. The further meetings approved the varied IVAs. Mr and Mrs Price accept that they are bound by the IVAs in respect of their original debt. However, they did not vote at the further meetings in respect of their claim for costs. Had they done so, the resolutions for approving the varied IVAs would have been defeated.
5. Mr and Mrs Price oppose the varied IVAs. So they have served statutory demands on Mr and Mrs Davis for the unpaid costs on the footing that they are not bound by such IVAs in respect of those costs.
6. Mr and Mrs Davis then applied to the court for orders setting aside those demands. DJ Winslett granted those orders. His orders were appealed by Mr and Mrs Price to the High Court where David Richards J, in a careful and closely-reasoned judgment, dismissed the appeals. Mr and Mrs Price now appeal to this court. If the court does not set these statutory demands aside, Mr and Mrs Price will be able to start bankruptcy proceedings against Mr and Mrs Davis and the IVAs may come to an end.

IVAs: further material provisions

7. Section 257 of the IA 86 (as amended) makes it clear which creditors must be summoned to the original meeting. It provides:

"257 (1)     Where it has been reported to the court under section 256 or to the debtor's creditors under section 256A that a meeting of debtor's creditors should be summoned, the nominee (or the nominee's replacement under section 256(3) or 256A(4)) shall summon that meeting for the time, date and place proposed in the nominee's report unless, in the case of a report to which section 256 applies, the court otherwise directs.

(2)     The persons to be summoned to the meeting are every creditor of the debtor of whose claim and address the person summoning the meeting is aware…."

8. The court can make an interim order to prevent creditors from levying execution on the debtors' assets or making them bankrupt (sections 252 to 255 of the IA86). Such orders generally last only 14 days (section 255(6) of the IA 86).
9. Notice of meeting must be given to creditors of whom the nominee is aware (Insolvency Rules ("IR") 17(2)). There is a slight qualification in the case of the original meeting because section 257(2) says that the nominee is only bound to give notice to those creditors of whose claim and address he or she is aware.
10. If the creditors approve the IVA, section 260 (as amended) makes it binding on the creditors who were entitled to vote. I shall call this provision the "statutory binding". Statutory binding is central to arrangements between insolvent persons and their creditors because without it the debtor might not be bound and a creditor who did not receive notice of the meeting would certainly not be bound. Section 260 provides:

"260 (1)     This section has effect where the meeting summoned under section 257 approves the proposed voluntary arrangement (with or without modifications).

(2)     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."

11. The "statutory binding" achieved by section 260 is stated to apply to (among others) those entitled to vote at the meeting. The IR regulate this matter. IR 5.21 provides:

"(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;

(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; and

(c)     where the debtor is an undischarged bankrupt, by reference to the amount of the debt owed to him as at the date of the bankruptcy order."

12. The critical factor in this case is that interim orders had initially been made to protect Mr and Mrs Davis, but they had been discharged immediately after the original meeting and there were no interim orders in force at the date of the further meetings. If DJ Gamba had made interim orders when he directed the nominee to summon the further meeting, the present dispute would not have arisen because the correct date for entitlement to vote would then have been the date of those orders.
13. Once the creditors' meeting is concluded, the chairman must report the result to the court. There is no provision for the original meeting to be reconvened.
14. The court is not concerned to approve any IVA, but it has certain limited powers under section 262 of the IA86 if things go wrong, including power to require further meetings of creditors to be held. If a meeting has, for instance, been improperly conducted, the approval by creditors of an IVA at such a meeting is not invalidated but the court may, if it thinks fit, revoke or suspend that approval.
15. Section 262 provides:

"(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.

(5)     Where at any time after giving a direction under subsection (4)(b) for the summoning of a meeting to consider a revised proposal the court is satisfied that the debtor does not intend to submit such a proposal, the court shall revoke the direction and revoke or suspend any approval given at the previous meeting.

(6)     Where the court gives a direction under subsection (4)(b), it may also give a direction continuing or, as the case may require, renewing, for such period as may be specified in the direction, the effect in relation to the debtor of any interim order.

(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…."

16. Accordingly section 262 provides for further meetings to be summoned to consider IVAs but there is no statutory binding for these meetings unless they are also "meeting[s] under section 257" (see section 260 above).

Reasoning of David Richards J

17. The judge noted that neither the IA86 nor the IR provided that further meetings to consider IVAs should be restricted to the creditors who were entitled to vote at the original meetings.
18. The judge did not accept the relevance of any distinction between suspension and revocation. Mr and Mrs Price had contended that the consequence of the court "suspending" rather than "revoking" the original approval was that only creditors bound by the original IVAs (see section 260(2), paragraph 10 above) were bound by them. The judge held that, if the creditors continued to be bound by the original approval, it would have been unnecessary for the court to make any further interim order as Parliament had provided (section 262(6)).
19. The solution in the judge's view lay in IR 5.21(2). There was no policy reason for restricting the class of creditors for the purposes of the further meetings to creditors at the date of the original meetings. Accordingly IR 5.21(2) should apply. It was not open to DJ Gamba to make an order which varied creditors' entitlement to vote.
20. In conclusion, Mr and Mrs Price were bound by the approvals given at the further meetings.

Case put forward on appeal by Mr and Mrs Price

21. On this appeal, Mr Marc Living, for Mr and Mrs Price, develops the submissions he made to the judge. The thrust of his submissions is that:

a) David Richards J wrongly conflated suspension and revocation. Suspension must be different from revocation. On the lifting of the suspension, the IVAs approved at the original meetings would come into effect.

b) On that basis, only those persons who were creditors when they gave the original approvals which were suspended can be bound by the IVAs approved at the further meetings. Accordingly the IVAs cannot bind Mr and Mrs Price in respect of their costs because they only became entitled to those costs subsequently.

c) In any event, DJ Gamba's order restricted the class of creditors for the purposes of the further meetings to those who were creditors at the date of the original meetings.

22. By contrast, Mr Goldring QC seeks to uphold the reasoning of the judge. His key point is that, once suspended, the approvals had no legal existence whatever and they could not restrict the class of creditors bound by an approval.

My conclusions and my reasons for my conclusions

23. As further explained below, I would reject Mr and Mrs Price's case:

a) The creditors for the purpose of the further meetings are those known to the nominee at the date on which those meetings are summoned.

b) IR 5.21(2)(b) entitles creditors at the date of the summoning of the further meetings to vote at those meetings.

c) The distinction between suspension and revocation is not determinative in this case.

d) The statutory binding in section 260 of the IA86 applies to approvals given at further meetings as much as to approvals given at original meetings.

24. I take these points in turn.

Which creditors were entitled to notice of and to vote at the further meetings?

25. IR 5.21 effectively mandates that the creditors entitled to vote at a meeting are those entitled to notice of it. Under IR 5.17 notice must be given to creditors of whom the nominee is aware. That means that creditors whose claims arise after the date of the original meeting can be creditors entitled to vote at a further meeting summoned under section 262(4)(b).
26. The nominee in fact gave notice of the further meeting to Mr and Mrs Price.
27. The order of DJ Gamba must be read as a whole. It goes on to state that chapters 5 and 6 of the IR apply to the further meetings summoned under section 262(4)(b), and so I do not consider that the order should be read as limiting the creditors entitled to notice of the further meetings to those who were creditors at the date of the original meetings.
28. I would leave open whether DJ Gamba's order could have limited the class of creditors under section 262(7), though provisionally I agree with the judge that this sub-section does not entitle the judge to depart from mandatory provisions of the IR.

Suspending or revoking IVAs under section 262(4)

29. If the court upholds a challenge to an IVA under section 262, it has a limited range of options:

i) It can revoke the creditors' approval and order, or decline to order, a further creditors' meeting;

ii) It can suspend the creditors' approval and order, or decline to order, a further creditors' meeting.

30. There is an obvious difference between the suspension and revocation of creditor approvals: if the court revokes an approval, it is gone for ever, subject to any appeal. Suspension defers the decision, but if it is never effectively lifted it has the same effect as revocation.
31. Mr Living submits that if Parliament uses two different words in a statute they must have separate and distinct meanings. I would accept that as a general proposition. However, one must not attach too much weight to the distinction between suspension and revocation. Something which is suspended is not always different from something that is revoked. That which is suspended can also come to an end and cease to exist. Furthermore, depending on the context, the distinction between revocation and suspension may be immaterial, as it would be for example if the question were: was there an IVA in force immediately before the further meetings? The answer will be in the negative whether the original IVA was revoked or suspended.
32. The court will assess the circumstances of the case before deciding which option in section 262(4) to take. In this case, the desire to protect the assets of Mr and Mrs Davis appears to have been a factor, but whether or not that is so does not matter. Section 262(4) requires the further creditors' meeting to be for the purpose of considering revised proposals by a debtor or, if the reason for the order is that there was a material irregularity in summoning or holding the meeting, the original proposals.
33. Furthermore, the order of DJ Gamba must be interpreted in its context and against the background of what it was intended to achieve. The crucial fact is that, if the IVAs were varied and the creditors approved those varied IVAs, those were the IVAs to come into force, not the original IVAs. In reality what happened in that event is that the varied IVAs replaced the original IVAs. The original IVAs ceased to have any legal existence after that.
34. It follows that the fact that the court suspended the original creditor approvals rather than revoked them does not mean that the creditors bound by the varied IVAs could only be the creditors bound by the original IVAs.

Interpretation of IR 5.21(2)

35. The judge was unquestionably correct to hold that on the plain reading of this rule the creditors who are entitled to vote at the further meetings are those described in IR 5.21(2).
36. Entitlement to vote is relevant for the purpose of the statutory binding in section 260. However, as noted above, the statutory binding is only expressed to apply to meetings under section 257. That leads to the next question.

Does the statutory binding apply to further meetings summoned under section 262 of the IA86?

37. The judge did not deal expressly with this issue.
38. The court must of course give effect to the intention of Parliament. In this case, the literal meaning of section 260 is that it applies only to the original meeting and that a further meeting summoned by a nominee under section 262 has none of the consequences which the IA86 attaches to the original meeting summoned under section 257.
39. However, where the effect of a literal interpretation of a statute is to create significant anomalies which the court is satisfied Parliament could not have intended, the court should seek to find an interpretation which avoids those anomalies.
40. In my judgment, the restriction of section 260 to creditors' meetings summoned by a nominee at the direction of the court under section 257 to consider a debtor's proposal but not the further meeting summoned by the nominee at the direction of the court under section 262 to reconsider the same proposal or a variation of it renders Part VIII of the IA86 incoherent for a number of reasons:

i) If, as here, (1) the original IVA is suspended, and (2) the further meeting approves a varied IVA, section 260 literally construed will have the absurd effect that the IVA becomes binding in its original form.

ii) If the original IVA is revoked and the court directs the nominee to summon a further meeting to consider the same or a varied IVA, another absurd result is reached because neither form of IVA will become binding on creditors. This would be a trap for the unwary.

iii) Further absurdities can be found in other provisions which ensure the integrity of the IVA process. Take the example given by Lord Justice Sullivan in the course of argument. Section 262B of the IA 86 requires the nominee or supervisor who becomes aware that the debtor has committed a criminal offence in connection with an IVA approved at a meeting "summoned under section 257" to report the matter to the Secretary of State. It would be absurd if that provision applied only to the original meeting convened by the nominee and not to any further meeting.

iv) Likewise it would be odd if section 262 did not apply to any IVA approved at any subsequent meeting, on the basis that the conditions for relief require the IVA to be approved at a meeting "summoned under section 257".

41. The provisions of Part VIII can only work in a coherent way if the statutory provisions consequential on the nominee summoning the original meeting under section 257 are "inter-available" when he or she is directed to summon further meetings to consider an IVA.
42. As I see it, the expression "further meeting" in section 262(4)(b) must, in the case of a meeting which the court directs the nominee to summon, mean a further meeting under section 257. Clearly those elements of section 257 which are only capable of applying to the original meeting must be redundant for the purposes of this further meeting.
43. Counsel have not given us any reason why Parliament should restrict section 260 to the original meeting and I have not been able to discern any signal in the statutory language that Parliament intended to achieve what I have called an incoherent or absurd or odd result.
44. Accordingly I would interpret the reference to a "further meeting" in section 262(4)(b) in relation to a nominee to be a reference to a "further meeting under section 257" of the IA86.
45. On that basis, the statutory binding applies in this case. Mr and Mrs Price are bound by the varied IVAs of Mr and Mrs Davis in respect of their costs. The judge was right so to hold, and further to hold that the statutory demands which they had served should be set aside.
46. For these reasons I would dismiss this appeal.

Lord Justice Sullivan

47. I agree.

Lord Justice Davis

48. I also agree.