England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
ON APPEAL FROM THE NEWPORT (ISLE OF WIGHT) COUNTY COURT
IN BANKRUPTCY

		Royal Courts of Justice Strand, London, WC2A 2LL
		21st October 2003

Mr Justice Evans-Lombe:

 

1. This is an appeal from the order of Deputy District Judge Taylor sitting in the Newport (Isle of Wight) County Court on the 7^th July 2003 whereby, pursuant to section 262 of the Insolvency Act 1986 he revoked the approval given at a meeting of creditors of Mark Robert Little, a bankrupt, which approved an Individual Voluntary Arrangement ("IVA") under part (viii) of that act in respect of the bankrupts affairs. He further ordered that there should be a fresh meeting of creditors to consider whether it would approve that IVA.
2. The material events in this case are as follows: on 26^th March 2003 a bankruptcy order was made against Mr Little (the Bankrupt") in the Newport County Court. On the following day a stay of advertisement of the bankruptcy was granted so that the bankrupt could explore the possibilities for an IVA. Mr P. A. Roberts, an insolvency practitioner, the appellant, was approached and accepted appointment as Nominee. On 10^th April an interim order was made until the 29^th May. On the 14^th April Mr Roberts wrote to the Bankrupt's creditors convening a meeting on the 2^nd May to consider the Bankrupt's proposals for the settlement of his debts by means of an IVA. The letter was accompanied by a copy of the Bankrupt's proposals, a copy of his estimated statement of affairs, Mr Roberts comments on those proposals, a copy of rule 5.18 of the Insolvency Rules 1986 and a form of proxy. At its penultimate paragraph Mr Robert's letter stated:-

"If you wish to attend please return the form of proxy together with your statement of claim…."

3. It is to be noted that this letter overlooked the amendments to the Insolvency Rules consequent on the Insolvency Amendment (No. 2) Rules 2002 which came into force on the 1^st January 2003. Thus while Mr Roberts wished to draw attention to the provisions of Insolvency Rule 5.18 as it had previously been, those provisions were, by the time of the letter, appearing in the rules currently in force at rule 5.23 subject to minor amendments to sub rules (6) and (7). More importantly, the new rules had introduced other provisions elsewhere in Part (5) of the Rules, in particular, the introduction of a new rule 5.22 dealing with the procedure for admission of creditors claims for voting purposes to which I will return.
4. On the 17^th April the Official Receiver, who, in the absence of appointment of a trustee in bankruptcy, remained trustee of the bankrupts estate, wrote to all creditors asking for them to return proofs of debt. This letter contained a summary of the bankrupts assets and liabilities showing debts of £314,663. That figure coincides with the sum of the "estimated unsecured liabilities" shown at appendix 1 of the bankrupts IVA proposals circulated by Mr Roberts to creditors. Included in that figure is the indebtedness of Pinnacle Entertainment Ltd "Pinnacle", the respondent to the appeal, in the sum of £135,290. Rule 5.23(1) provides that in order for a voluntary arrangement to become effective it must receive a favourable vote of creditors representing at least three quarters in value of the debtors total indebtedness. It follows that in this case Pinnacle controlled any meeting of the bankrupts creditors for the purposes of an IVA because their debt, apparently admitted, was more than 25% of his total indebtedness.
5. The meeting of creditors on the 2^nd May was adjourned to the 7^th May and again adjourned to the 8^th May. On the 7^th May Pinnacle submitted a completed proxy form in respect of their indebtedness, by fax, to Mr Roberts. This proxy which was in the form sent to Pinnacle by the letter of the 14^th April, was dated the 7^th May and signed by Pinnacle's finance controller. It instructs the chairman of the meeting to vote for rejection of the proposed voluntary arrangement but contains no indication of the size of the bankrupts indebtedness to Pinnacle or any other particulars of how the claim is made up.
6. Rule 5.23 of the Insolvency Rules 1986 as amended provide so far as relevant:-

"5.23(1) Subject as follows, at the creditors meeting for any resolution to pass approving any proposal or modification there must be a majority in excess of three quarters in value of creditors present in person or by proxy and voting on the resolution.

(2) …

(3) In the following cases there is to be left out of account a creditors vote in respect of any claim or part of a claim-

(a) Where written notice of the claim was not given, either at the meeting or before it, to the chairman or the nominee;…

(5) It is for the chairman of the meeting to decide whether under this rule –

(a) A vote is to be left out of account in accordance with paragraph (3)…

(7) The chairman's decision on any matter under this rule is subject to appeal to the court by any creditor or by the debtor… ."

7. In the result the meeting of creditors was concluded on the 8^th May. No creditor attended in person. All the creditors, save one, who attempted to play a part in the meeting did so by the submission of proxies to the chairman. Of those creditors three submitted proxies but no separate document purporting to give particulars of their claim, of whom one submitted a proxy to accept the arrangement and two, including Pinnacle submitted proxies to vote against it. The chairman rejected those proxies for voting purposes by reason of a failure to comply with sub rule (3) of rule 5.23. The votes of the remaining creditor's proxies were sufficient to achieve the necessary majority in number and value to approve the bankrupt's proposed arrangement.
8. Pinnacle then applied to revoke that approval under section 262 and at the hearing of that application on 7^th July 2003 the Deputy District Judge made the order which I have outlined. The hearing seems to have proceeded in ignorance that the relevant Insolvency Rules governing individual arrangements had been amended with effect from 1^st January 2003.
9. The Deputy District Judge took the view that the requirement to serve a "statement of claim" in addition to a proxy in order to entitle a creditor to vote was "a matter of conjecture". He appears to have arrived at this conclusion relying on two passages from Muir Hunter on Personal Insolvency and Stephen Lawson on Individual Arrangements. I have not been shown the latter. The relevant passage in Muir Hunter seems to be a note to sub-rule (3) of the former rule 5.18(3) which reads, under the heading "admissibility of claims":-

"The creditor must in order to be entitled to vote have given notice of his claims to the chairman or the nominee (if different); but since there is no reference here to Case 1or Case 2 it is not clear whether (since by rule 5.17(2) the Case 1 creditor's claim is based on his debt at the date of the bankruptcy order), the Case 1 creditor needs to give a further written notice of his claim."

10. Since Mr Little, at all material times, was an undischarged bankrupt his creditors, including Pinnacle, would have been "Case 1" creditors had the un-amended rules still been in force (see Insolvency Rule 5.1of those rules). The new rules abolish the concept of Case 1 and Case 2 creditors.
11. It is the appellant's submission that the words of sub-rule (3)(a) of Insolvency Rule 5.23, on their plain meaning, require a separate notice of a creditors claim, giving particulars of it, to be given by the creditor to the Nominee, or the chairman of the meeting if different, in order for that creditor's vote to be admitted to approve or reject an IVA at the creditor's meeting required by the rules for that purpose. Pinnacle did not do that and accordingly Mr Roberts' rejection of their proxy for voting purposes was justified and the Deputy District Judge was therefore not entitled to come to the view that the conduct of the meeting had been irregular for the purpose of section 262.
12. It was submitted for the respondents that the form of proxy submitted by Pinnacle, when read with the bankrupt's proposal, of which Mr Roberts was at all times aware, was a sufficient written notice of Pinnacle's claim to comply with sub-rule (3)(a). The debtor's proposal, itself, constituted written notice of Pinnacle's claim to the Chairman. If the sub-rule must be read as requiring the written notice to be given by Pinnacle itself then the proxy was clear written notice that Pinnacle regarded itself as a creditor of the bankrupt and thus had a claim the amount of which Mr Roberts was already fully aware. The appellant's submissions required sub-rule (3)(a) to be understood as if it read – "where written notice of the claim specifying its amount was not given by the creditor seeking to vote on the resolution either at the meeting or before it, to the chairman or nominee;" Such an interpretation of the sub-rule was not required to give it effect and was unjustified.
13. Insolvency Rule 5.22, which was introduced as a result of the Amendment Rules 2002 and was in force at all material times provides under the heading "procedure for admission of creditors claims for voting purposes":-

"5.22(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…."

14. There then follow detailed provisions as to the chairman's powers to decide and as to the availability of an appeal from his decision which are not material to this judgment.
15. Sub-rule (1) of rule 5.22 places upon the chairman of the meeting (the Nominee unless he is not available see rule 5.19) a duty to investigate the claim of a creditor to vote on the resolution to approve. In the present case by reason of the proxy Mr Roberts had notice in writing that Pinnacle regarded itself as a creditor able to vote at the meeting. He also knew that the bankrupt accepted that Pinnacle's claim was some £135,290. Without more there was no reason on the evidence available to him for the chairman (Mr Roberts) to conclude that Pinnacle was not a creditor entitled to vote at the meeting for £135,290. The only question is whether sub-rule (3)(a) required on its proper construction, Mr Roberts nonetheless to reject Pinnacle's claim for voting purposes.
16. There is no authority on the proper construction of sub-rule (3)(a) or, so far I am aware, on any provision in similar terms, which would give guidance as to how this sub-rule is to be construed. On a literal interpretation of the sub-rule's words any notice in writing to the chairman, by whomsoever, of the existence of a creditor's claim on the debtor or bankrupt would be sufficient for the purposes of the sub-rule. It seems to me, however, that the rule must be read as requiring the written notice to be given by the creditor seeking to vote. Any ordinary person reading this sub-rule would, it seems to me, assume that that was the case.
17. By the same token any ordinary person would regard the sending of a written proxy by a creditor to the chairman, to be written notice by that creditor to the chairman that he had a claim on the estate of the debtor or bankrupt in respect of which he wished to vote. In my judgment that is enough to satisfy the requirements of sub-rule (3)(a). However the chairman, in discharge of his duty under Insolvency Rule 5.22(1) must be satisfied as to the amount in respect of which that creditor's vote is permitted to be cast. "It is incumbent on a creditor who wishes to vote in respect of his debt to state to the best of his ability the total amount that is owing to him by the debtor…." See re K.G. Hoare 1997 BBIR page 683 at page 695 per E.G.Nugee QC sitting as a Deputy Judge of the Chancery Division. A proxy in the form used in this case without more would not be sufficient to justify a creditor being admitted to vote. It would be necessary for him to satisfy the chairman, either before the meeting or at it, as to the amount of the debt in respect of which he sought to vote. In the present case that was not necessary because the chairman was in possession of evidence which demonstrated that the debtor admitted his indebtedness to Pinnacle in the sum of £135,290.
18. For these reasons, even if different from those given by the Deputy District Judge, it seems to me that he was entitled to come to the view that Mr Roberts had received sufficient evidence for the purpose of Rule 5.22 so as to require him to admit Pinnacle to vote at the meeting of creditors to approve the bankrupt's IVA in respect of a claim totalling £135,290 and sub-rule (3)(a) did not require him to leave it out of account. He was therefore justified in coming to the conclusion that the disallowance of Pinnacle's vote constituted, in the circumstances, a material irregularity in the holding of the creditor's meeting and justified his revoking the approval which that meeting purported to give. It follows that this appeal must be dismissed and the order of the Deputy District Judge should stand.
19. It would obviously have been better had Pinnacle, either by addition to the form of proxy or by a separate document, indicated the amount of their claim and how it was made up. This problem is unlikely to arise in future because a yet further amendment of the Insolvency Rules has altered the form of proxy to include particulars of the debt in respect of which the proxy is being provided.