England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		26 June 2006

The Chancellor :

Introduction
1. The third respondent, Newlands (Seaford) Educational Trust ("the Company"), is company limited guarantee without a share capital. Since its incorporation in 1987 it has provided education for children between the ages of 3 and 18 in premises in Seaford, Sussex. For the most part such premises are held by the Company under two leases from the late George Chittenden. The first is a lease dated 1st January 1988 whereby Mr Chittenden demised the main school premises to the Company for a term of 75 years at an initial rent of £53,750 but subject to a quinquennial upward only rent review. It contains covenants on the part of the Company to keep the premises in good and tenantable repair and condition for school use (clause 2(3)) and to permit the landlord to enter on the demised premises to carry out the repairs of which it had given notice to the tenant the cost whereof "shall be a debt due to the Landlord from the Tenant and be recoverable by action" (clause 2(7)). Clause 4(1) contains a proviso for re-entry for unpaid rent. The second lease is dated 1st January 1998. By that lease Mr Chittenden demised Stable Cottage to the Company for a term of 10 years at an initial rent for £5,750 but subject to a quinquennial upward only rent review. This lease also contains a tenant's covenant to repair but without the limitation for school use (clause 2(3)). It contains a covenant and right of re-entry in substantially the same terms as those contained in clauses 2(7) and 4(1) of the first lease.
2. Mr Chittenden died in April 2001 and the Applicants ("the Landlords") are his personal representatives. By 2004 the Landlords had become concerned that the Company was not properly repairing the properties in accordance with its covenants contained in the two leases. On 26th April 2004 it received a schedule of dilapidations from the chartered surveyors instructed by them, F.R.Gainsbury. The schedule is over 200 pages long. It contains a detailed list of all the items the surveyors considered to constitute breaches of the repairing covenants. The items were not separately priced but the total cost is estimated at £875,000 subject to increase on closer inspection after opening up the buildings. Solicitors for the Landlords sent the schedule to the Chairman of the Governors of the Company on 24th May 2004. The solicitors for the Company responded on 9th July 2004 denying liability for the reasons set out in their counter-schedule. The surveyors, having examined the counter-schedule, wrote to the solicitors for the Landlords disagreeing with the Company's contentions.
3. Such correspondence continued sporadically until April 2005. On 13th April 2005 the solicitors for the Company wrote to those for the Landlords enclosing a marked up schedule indicating, as they claimed, that the vast majority of the items on the original schedule had been dealt with, or were currently being undertaken or were scheduled to be carried out before September 2005. They added:

"We fail to see how your client could take any action for purported breaches of covenants when that action would be based on a schedule of dilapidations which is now in excess of a year old. Furthermore you have not served the s.146 notice required by the Leasehold Property (Repairs) Act 1938 and you would also need the leave of the court to bring forfeiture proceedings against our client."

On 21st July 2005 the Landlords' surveyors, having reinspected the demised premises, advised them that the vast majority of the items on the original schedule had not been attended to.

4. Following a further inspection on 17th August 2005 the solicitors for the Landlords wrote to those for the Company on 24th August 2005 complaining that the Company had not complied with the repairing covenants "to a very substantial extent". This was refuted by the solicitors for the Company in letters dated 8th September, 21st October and 7th November 2005. On 9th and 10th May 2006 the demised premises were inspected by both the original surveyors and a firm of design and architectural consultants instructed by the Landlords. They both confirmed that the items referred to on the original schedule of dilapidations had not been attended to at all or the repair work had not been effectively or correctly carried out.
5. In the meantime the school was closed and the Company went into administration under Schedule B1 to the Insolvency Act 1986 on 5th April 2006. The first two respondents were appointed the joint administrators ("the Administrators"). The statement of affairs provided to the Administrators by the directors of the Company on 20th April 2006 showed a deficiency with regard to creditors of £559,342. The statement of affairs did not include anything in respect of the alleged liability to the Landlords for failure to repair the demised premises.
6. The Administrators' proposals for achieving the purposes of the administration, as required by paragraph 49 Schedule B1 Insolvency Act 1986, were sent out to all known creditors of the Company on 27th April 2006 together with a number of supporting documents. They included (a) the Administrators' proposals for the School, (b) a Company Voluntary Arrangement proposal and (c) a letter dated 25th April 2006 from a parent of one of the pupils at the School, Mr Michael Holland, seeking the support of other parents to his efforts to save the School, (d) a notice convening the initial meeting of creditors required by paragraph 51(3) Schedule B1 Insolvency Act 1986 for 10.30 am on Friday 12th May 2006 and (e) a notice convening a meeting of creditors as required by s.3(2) Insolvency Act 1986 in accordance with Insolvency Rule 1.13 et seq. for the purpose of considering and approving the CVA for 11.30am on Friday 12th May 2006.
7. The Administrators proposals for the Company/School set out the background to the administration and the last minute attempts to save the Company. They record that on 21st April 2006 Adelphi Midland Estates Ltd, a company controlled by Mr Holland, had bought the Company's freehold properties for £2.5m and that on 24th April 2006 a new school had been opened in one of them under licence granted by the Administrators. They indicate that Mr Holland had funded the Administrators to the extent necessary to formulate a CVA under which he would, if the CVA were approved, pay a further £500,000 in the purchase of further assets of the Company. They stated that in their view the most appropriate exit from administration was approval of the CVA.
8. The proposed CVA envisages that another company controlled by Mr Holland will pay £500,000 in the purchase of assets of the Company and that sum and any balance of the £2.5m paid by Adelphi for the freehold properties would be applied in paying a dividend to the Company's creditors other than the Landlords. In this respect paragraph 7.2 states:

"The Company will remain responsible and will continue to pay all rent and other liabilities falling due to the Landlord in respect of the Leasehold Property in the ordinary course of business. The Landlord will not therefore be a creditor compromised under the terms of this proposal and any claim which the Landlord may have against the Company in respect of the Leasehold Property will fall outside the terms of this Proposal."

The consequence of excluding the Landlords was explained in paragraph 6.1.4 in these terms:

"...in the event that the Company is placed into liquidation, and the Dilapidations claim is proved to be valid, the level of dividend available to creditors will be significantly reduced as a result of this additional creditor."

9. On 10th May 2006 the Landlords sent to the Administrators proxy forms in favour of their solicitor and counsel to vote against both the approval of the administrators' proposals and against the proposed CVA in the sum of £1,175,000. That sum was made up as to £300,000, being two years aggregate rent due in the future under the two leases and £875,000 being the amount set out in the schedule of dilapidations dated 26th April 2004.
10. The two meetings were held on 12th May 2006. At the first the chairman, the second respondent, operated Insolvency Rule 2.38(5) to value the Landlords' claim at £1. The proposals were approved by creditors whose debts totalled £1,199,478.30 with creditors whose debts aggregated £9,853.92 voting against, a majority in favour of £1,189,624.40. At the second meeting the Landlords' debts had been valued at £1 in accordance with the provisions of Insolvency Rule 1.17(3). As the chairman subsequently reported to the Court, the CVA was approved by the requisite majority in excess of 75% consisting of creditors with debts valued at £1,348,187.43 voting in favour and creditors with debts valued at £6,456.87 voting against. The Landlords now challenge the valuations of their debts at £1 under, respectively, Insolvency Rule 2.39(4) and s.6(1)(b) Insolvency Act 1986 in conjunction with Insolvency Rule 1.17A(3).
11. Accordingly the issues for my determination are:

(1) whether, for the purposes of voting at the initial proposals meeting, the chairman's decision under IR 2.38(5) to value the Landlord's claims at £1 was open to him and if not what, if any, order to make under IR 2.39(4);

(2) whether, for the purposes of voting at the creditors' meeting to consider the CVA, the failure of the chairman to value the Landlords' claims under IR 1.17(3) at any sum greater than £1 was open to him and if not;

(3) whether such failure constituted a material irregularity, and if so;

(4) what, if any, order to make under IR 1.17A.

I will deal with those issues in that order.

Insolvency Rule 2.38(5)
12. The material parts of IR 2.38 and 2.39 are in the following terms:

"2.38

[(1)-(2)]

(3) The Chairman of the meeting may call for any document or other evidence to be produced to him, where he thinks it necessary for the purpose of substantiating the whole or any part of the claim.

(4) Votes are calculated according to the amount of a creditor's claim as at the date on which the company entered administration, less any payments that have been made to him after that date in respect of his claim and any adjustment by way of set-off in accordance with rule 2.85 as if that Rule were applied on the date on which the votes are counted.

(5) A creditor shall not vote in respect of a debt for an unliquidated amount, or any debt whose value is not ascertained, except where the chairman agrees to put upon the debt an estimated minimum value for the purpose of entitlement to vote and admits the claim for that purpose.

[(6)-(10)]

2.39

(1) At any creditors' meeting the chairman has power to admit or reject a creditor's claim for the purpose of his entitlement to vote; and the power is exercisable with respect to the whole or any part of the claim.

(2) The chairman's decision under this Rule, or in respect of any matter arising under Rule 2.38, is subject to appeal to the court by any creditor.

(3) If the chairman is in any doubt whether a claim should be admitted or rejected, he shall mark it as objected to and allow the creditor to vote, subject to his vote being subsequently declared invalid if the objection to the claim is sustained.

(4) If on an appeal the chairman's decision is reversed or varied, or a creditor's vote is declared invalid, the court may order that another meeting be summoned or make such other order as it thinks fit."

IR rule 2.43 prescribes that at a creditors' meeting in administration proceedings 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.

13. In a letter dated 9th May 2005 to the solicitor for the Landlords the Administrators explained that, as the value of the Landlords' vote for the purposes of the second, CVA, meeting would be £1, at the first meeting "we are prepared to allow your client to vote and that its debt will be valued at £1. In each case this was on the basis that the Landlords' claim was in an amount which was not ascertained.
14. In respect of the first meeting and the application of Rule 2.38(5) counsel for the Landlords submitted that it was the duty of the chairman to try to estimate a minimum value, otherwise the creditor was disenfranchised in respect of a claim which might, in the event, turn out to be very large. This is consistent with the judgment of Knox J in Doorbar v Alltime Securities Ltd (No 2) [1995] BCC 728, 738 from which, on appeal, Peter Gibson LJ did not disagree [1995] BCC 1149, 1157. In the alternative he suggested that the Landlords' debt was disputed so that the chairman should have applied IR 2.39(3) so as to allow the Landlords to vote in accordance with the full value, as claimed, of their debt.
15. I do not find it necessary to reach any conclusion on either of these submissions. I have set out in paragraph 10 above the figures for those voting on the resolution to approve the Administrators' proposals. The aggregate value of the debts of those voting at the first meeting against the resolution (£9,853.92) and the value of the Landlords' debt as claimed by them (£1,175,000) is (£1,184,853.90) less that the value of the debts of the creditors voting in favour of the resolution (£1,199,478.30). Thus the resolution would have been defeated even if the Landlords had been permitted to vote to the full value, as claimed by them, of their debt.
Insolvency Rule 1.17(3)
16. Insolvency Rule 1.17 provides as follows:

"(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) Votes are calculated according to the amount of the creditor's debt as at the date of the meeting or, where the company is being wound up or is in administration, the date of its going into liquidation or (as the case may be) when the company entered administration.

(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."

17. Insolvency Rule 1.17A, so far as material, provides as follows:

"(1) Subject as follows, at any 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 1.17 is subject to appeal to the court by any creditor or member of the company.

(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 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 give rise to unfair prejudice or material irregularity."

18. By Insolvency Rule 1.19(1) a resolution approving a proposal for a CVA requires a majority in excess of three-quarters in value of the creditors present in person or by proxy and voting on the resolution. As I have recorded in paragraph 10 above in the case of the resolution to approve the CVA creditors with debts valued at £1,348,187.43 voted in favour and creditors with debts valued at £6,456.87 voted against. Thus had the chairman allowed the Landlords to vote for any sum in excess of £443,000 the CVA would not have been approved.
19. Counsel for the Landlords contends that the Chairman was obliged to consider the material adduced by the Landlords and had he done so he would have fixed a value higher than £1 and should have fixed a value well in excess of £443,000. He points out that the Landlords' claim contains two elements, namely £300,000 being two years future rent and £875,000 for dilapidations. With regard to the rent he relies on a letter dated 10th May 2006 from Knight Frank to the Landlords' solicitor indicating their opinion that it would be likely that it would take two years or potentially longer to identify a private independent school as a tenant. He submits that the claim in respect of the rent is not unliquidated or unascertained but disputed with the consequence, so he submits that IR 1.17A(4), not IR 1.17(3), applies. In the case of the dilapidations he contends that the Landlords' surveyors have inspected the demised premises on three occasions, the most recent being 10th May 2006, and they stand by their original schedule of dilapidations. He points out that the Company made no attempt to provide any professional evidence to back up its denial of liability. He relies on the Landlords' right under clause 2(7) of the leases to enter the demised premises, do the repairs and recover the costs as a debt due by the Company.
20. These submissions are disputed by counsel for the Administrators. She points out that a CVA does not have to treat all creditors of the same class on the same basis so that the omission of the Landlords from this CVA is permissible. In that respect she relies on Re Cancol [1995] BCC 1133 and IRC v Wimbledon FC [2005] 1 BCLC 66, 74 paragraph 18. In addition she points out that the Landlords had a remedy under s.6(1)(a) Insolvency Act 1986 had they considered that they are unfairly prejudiced by the CVA but have not pursued it. She relies on the facts that Mr Michael Holland is now on the board of the Company and that the intention to continue the school on the demised premises can only be accomplished if the Landlords claims for future rent and for dilapidations are met. She relies on the facts that the Landlords have not sought to exercise their rights under clause 2(7) of the Leases, and there is no reason to think that they can or will in the future, nor have they served any s.146 notice. If such a notice is served then the Company will claim the benefit of the Leasehold Property (Repairs) Act 1938 and s.18 Landlord and Tenant Act 1927.
21. In these circumstances counsel for the Administrators contends that the whole of the Landlords' claim is unliquidated and unascertained so that IR 1.17(3) applies to the exclusion of IR 1.17A(4). She accepts that the chairman of the meeting must take account of the material put before him relating to the Landlords' claim but in the absence of any clear evidence of value is not obliged to put any value higher than £1 on the unliquidated or unascertained claim. She submits that there was no such evidence in this case and the chairman, in effect, had no alternative to doing what he did.
22. The first question is which rule, 1.17(3) or 1.17A(4), is to be applied. In Re A Debtor (No 222 of 1990), ex parte the Bank of Ireland [1992] BCLC 137 Harman J was concerned with the earlier version of the relevant rules contained in Insolvency Rule 5.17 in the context of debts which had arisen under guarantees which were disputed by the bankrupt principal debtor on the ground that the guarantees had been procured by misrepresentation. Their votes were rejected by the chairman of a meeting held to consider a proposed IVA on the grounds that they were unliquidated or of unascertained amounts. The creditors appealed. Harman J concluded (p.144d) that their claims were not unliquidated or for unascertained amounts but were disputed so that what is now IR 1.17A(4) applied. The test to be applied by the Chairman in such a case was described by Harman J (p.144f) as follows:

"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."

23. In Re Cranley Mansions Ltd [1994] 1 WLR 1610 a meeting of creditors convened to consider a proposed CVA was attended by a creditor claiming a contingent debt for unliquidated or unascertained damages which she asserted was worth £900,000. Under the old Insolvency Rule 1.17(3) there was no provision for a default value of £1. The chairman assessed the value of the claim at £1. The creditor appealed on the ground that the debt was disputed so that the equivalent of IR 1.17A(4) applied and he should have been allowed to vote to the full value of £900,000. This argument was rejected by Ferris J. He concluded that the debts were unliquidated and unascertained and that a debt could not, for the purposes of the relevant rules, be both unliquidated/unascertained and disputed. Accordingly the forerunner of IR 1.17(3) applied to the exclusion of the forerunner of IR 1.17A(4). Although the current rules are not in the same terms it is not suggested that on this point the differences should lead to any different conclusion.
24. I have no doubt that both elements of the Landlords' claim in this case are unliquidated and unascertained. The claim for future rent in the amount of £300,000 is by definition both unliquidated and unascertained, see Doorbar v Alltime Securities Ltd (No 2) [1995] BCC 728, 738 and Re Sweatfield [1997] BCC 744, 749. The claim for the dilapidations is also both unliquidated and unascertained on either of the two bases on which it might be claimed. If the claim were in debt arising under clause 2(7) of the Lease it will depend on the cost to the Landlords of carrying out the repairs required by the Leases. If the claim is for damages for breach of covenant such a claim is necessarily unliquidated and unascertained until quantified by judgment. It follows in my judgment that the claim of the Landlords comes within IR 1.17(3) and not IR 1.17A(4).
25. The predecessor of IR 1.17(3), provided that the creditor should not vote "except where the chairman agrees to put upon the debt an estimated minimum value for the purpose of entitlement to vote". The test to be applied in such a case was described by Knox J in Doorbar v Alltime Securities Ltd (No 2) [1995] BCC 728, 738F-H in these terms:

"...it is inescapable that some sort of assessment of minimum value should be made. Reference to minimum value contains a recognition that there will in many cases be a bracket of values covering various shades of opinion and somewhere within which no doubt will lie the best estimate of open market value and perhaps other values on different bases. There is no guidance whatever in the rules how the process is to be done, but I do not accept that it necessarily has to be done on a basis which is mathematically simple if that basis does not reflect the value which the relevant creditor has at stake. What is clear is that the rules do not contemplate perfection in the valuation process, partly because it is only agreement to put a minimum value and not the correct value, and partly because an appeal can only succeed if there is unfair prejudice or material irregularity."

26. In the Court of Appeal ([1995] BCC 1149, 1157) Peter Gibson LJ, with whom Hirst LJ and Forbes J agreed, put it somewhat differently. He said:

"The context of the crucial words in r.5.17(3) is that there is a general prohibition on voting by the creditor with an unliquidated or unascertained claim, to which prohibition there is an exception if the chairman agrees. That agreement significantly is not expressed to be with the creditor or anyone else. It is not an agreement on the value...; the chairman only agrees to put on the debt an estimated minimum value. That is an unlikely subject of a bilateral agreement and to my mind it suggests that it is left to the chairman alone to decide 'at the very least the claim is worth £x', rather than to arrive at an agreement with the creditor on that minimum value. Given that the chairman is not a lawyer but an insolvency practitioner at a meeting of creditors, it seems to me to be unlikely that the draftsman contemplated the necessity of agreement with the creditor on each debt of this character. It is sufficient if the chairman expresses his willingness to put, and puts, an estimated minimum value on the debt."

27. Given the different wording of IR 1.17(3) it would be unsafe merely to apply the reasoning of the Court of Appeal; there are both similarities and differences. The similarity lies in the context. In each case the claim is for an amount which is unliquidated and/or unascertained. In each case the chairman is an insolvency practitioner whose function is to decide the value of the debt for voting purposes at a meeting of creditors. Accordingly, it appears to me that the phrase "unless the chairman agrees" should be interpreted in a similar manner. Thus the initial question for the chairman is whether he is prepared to put a value on the claim higher than £1.
28. The issue of "higher value" is literally different to the issue of "an estimated minimum value" but the context remains one of an unliquidated or unascertained claim for which a minimum value is now prescribed by the rule. Thus the comparator implicit in the word "higher" is the minimum value of £1. The chairman should not speculate. Nor is he obliged to investigate the creditor's claim. But he must examine such evidence, and I do not use that word in any technical sense, as the creditor puts forward and any relevant evidence provided by any other creditor or the debtor. If the totality of that evidence leads him to the conclusion that he can safely attribute to the claim a minimum value higher than £1 then he should do so.
29. The evidence before me and before the chairman is essentially the same. The future rent element of the claim depends on whether the lease is forfeit in the future and remains unlet for a period of 2 years. I do not see any basis on which either contingency can be given any value. One can only say that they may or may not happen. Likewise in the case of the dilapidations the schedule prepared in April 2004 does not quantify individual items. Accordingly it is not possible to point to items which do not appear to be in dispute and conclude that at least £x should be treated as admitted. But even if it were it would not be relevant to either of the bases on which the Landlords' claim can be put; it would be neither a measure of the cost of repairs actually incurred by the Landlords for a claim under clause 2(7) of the Leases nor would it indicate the amount if any by which the value of the Landlords' reversion was diminished by the want of repair for the purposes of s.18 Landlord and Tenant Act 1927.
30. It may well be that the minimum value of the Landlords' claim is greater than the sum of £1 attributed to it by IR 1.17(3) but I do not see any basis on which the chairman could have put any higher value on it. There is simply no evidence on which he could conclude with any degree of confidence that the value of the claim is at least £x, let alone the sum of £443,000 which is the minimum required to give rise to any material irregularity.
31. For these reasons I conclude that the chairman had no option but refuse to put any higher value on the Landlords' claim. In this event the issues described in paragraph 11(3) and (4) above do not arise.
Conclusion
32. For all these reasons I dismiss:

(a) the appeal of the Landlords under IR 2.39(4) in respect of the amount for which they were permitted to vote at the initial meeting to consider the Administrators proposals held on Friday 12th May 2006; and

(b) the appeal of the Landlords under s.6(1)(b) Insolvency Act 1986 and IR 1.17A(3) in respect of the amount for which they were permitted to vote at the meeting held later on Friday 12th May 2006 to consider the CVA to which the Administrators proposals had referred.