England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Rolls Building, 110 Fetter Lane, London EC4 1NL
		29 July 2013

Monday, 29 July 2013

J U D G M E N T

THE JUDGE:

1. This is an application for permission to appeal, in which David Richards J has directed that the appeal shall follow immediately if permission is granted. I have now heard full argument. It is appropriate, in my judgment, to grant permission to appeal, as the points raised by Mr Knox QC for the appellant merited the full argument I have heard. I therefore proceed straightaway to consider the substantive appeal.
2. The appeal is against a bankruptcy order made against Christine Ann Smith-Evans of 30 November 2012. It is said that an individual voluntary arrangement ("IVA") which had, at least ostensibly, been in place since the middle of 2008, down to the events leading to the bankruptcy petition, was a nullity. Therefore, the bankruptcy order should not have been made, as the ground for the bankruptcy order was breach of the provisions of the IVA.
3. The procedure concerning IVAs is set out in Part 8 of the Insolvency Act 1986 ("the 1986 Act"), sections 252 to section 263G, and rules 5.1 to 5.68 of the Insolvency Rules 1986 ("the Rules"). A reference to any section or rule in this judgment is a reference to the section or rule as it stood at the material time, which, in the case of the coming into being of the IVA, was 2008.
4. The critical Rule for the purposes of the present appeal is Rule 5.23, which requires a majority of three quarters or more (in value) of those present and voting in person or by proxy to approve the IVA proposal.
5. Under sections 264(1)(c) and section 276 of the 1986 Act, a supervisor of an IVA can bring a petition to bankrupt the debtor if the debtor breaches the terms of the IVA. The IVA in this case appears, so far as one can tell, to have been initiated under section 256A of the 1986 Act, i.e. without an interim order first being made or applied for.
6. Section 256A(3) provides, so far as material:

"If the nominee is of the opinion that the debtor…is able to petition for his own bankruptcy, the nominee shall, within 14 days…submit a report to the court stating—

(a) whether, in his opinion, the voluntary arrangement which the debtor is proposing has a reasonable prospect of being approved and implemented,

(b) whether, in his opinion, a meeting of the debtor's creditors should be summoned to consider the debtor's proposal, and

(c) if in his opinion such a meeting should be summoned, the date on which, and time and place at which, he proposes the meeting should be held."

7. Section 257 provides that the consequence of a report under, amongst others, section 256A, is that a meeting should be summoned by the nominee for the time, date and place proposed in his report. The persons to be summoned are every creditor of the debtor of whose claim and address the person summoning the meeting is aware.
8. Section 258 provides in subsections (1) and (2):

"(1) A creditors' meeting summoned under section 257 shall decide whether to approve the proposed voluntary arrangement.

(2) The meeting may approve the proposed voluntary arrangement with modifications, but shall not do so unless the debtor consents to each modification."

9. Section 259 requires the chairman of the meeting to report the result of it to the court and to give notice of the result of the meeting to such persons as may be prescribed, i.e. the creditors.
10. Under section 260 it is provided as follows:

"(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. Under section 262 it is provided as follows:

"(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…"

(Then other persons are mentioned.)

"(3) An application under this section shall not be made (a) after the end of the period of 28 days beginning with the day on which the report of the creditors' meeting was made to the court under section 259 or

(b) in the case of a person who was not given notice of the creditors' meeting, after the end of the period of 28 days beginning with the day on which he became aware that the meeting had taken place…

(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) [material irregularity], to reconsider his original proposal…

(8) Except in pursuance of the preceding provisions of this section, an approval given at a creditors' meeting summoned under section 257 is not invalidated by any irregularity at or in relation to the meeting."

12. It is said in this case that the chairman of the meeting exceeded his authority under some of the proxies he held in purporting to report that there had been approval with modifications of the proposals at the creditors' meeting. What happened is that there were a number of creditors who voted for the proposal, with modifications. HMRC were one of them. They had specified that the duration of the arrangement should not exceed 63 months. That seems to have been taken as meaning 3 years, but it seems to me that, whilst that may have been a mistake, 63 months on the face of it means 63 months. However, the proposal, as reported by the chairman, was to the effect that the arrangement was to last 3 years. That was within the HMRC amendment as it did not exceed 63 months.
13. Other bank creditors, HSBC (current account), HSBC (credit card), and RBS also required a modification. Each of their proxies provided that the chairman had no discretion. One such modification was to the effect that the voluntary arrangement would last for a period of 2 years from the date of the creditors' meeting, or until such earlier time as the debts, and the fees and associated costs of the arrangement, had been paid in full, whichever was the sooner.
14. By a letter dated 30 May 2008, but which must have been sent after 3 June, Mr Smailes, who was the nominee and the supervisor, informed the bankruptcy registrar in the Southend County Court that the proposal for the IVA was approved with modifications. All the modifications required by HMRC were recorded as accepted, but only some of those required by HSBC and RBS. Further, it was recorded that the proposed duration was 3 years rather than 2.
15. The HSBC and RBS proxies had been submitted through the Insolvency Exchange ("TIX"). The chairmanship of the meeting was delegated by Mr Smailes to one of his staff, Mr Meadows. Mr Meadows corresponded by email with TIX, pointing out the divergences from the instructions received, and asked in an email of 3 June 2008 as follows:

"I should be grateful if you would please review the above matters, and should you have any problems with the changes…please advise me by 4 p.m today at the latest, as I need to report to the court and all known creditors of the modifications that were made to the debtor's proposal."

There was no reply from TIX to this email, but the proposal was duly reported by the letter of 30 May 2008, which inferentially went after the 3 June email, as I have indicated.

16. Over 2 years later, on 21 July 2010, Mr Smailes served a certificate of breach on Mrs Smith-Evans on the basis that (1) she had not sold or remortgaged her properties, as required by one of HMRC's modifications, nor had she liaised with Mr Smailes on that point, and (2) she had not provided an income and expenditure form for the last annual report, as required by HSBC and RBS's modifications.
17. On 25 March 2011 the creditors voted on which of the following courses of action they wished Mr Smailes to follow, i.e. (a) issuing a certificate of determination; (b) presenting a bankruptcy petition; (c) varying the arrangement; or (d) doing nothing. HSBC and RBS through TIX voted for a certificate of determination, but HMRC voted for presentation of a petition, and their votes were sufficient to carry the day. The significance of this is that, whilst HSBC and RBS knew, through TIX, who had previously been told, that their proxies had been departed from despite their imperative terms, they nonetheless voted on the determination of the IVA upon the footing that an IVA was in place. It is thus abundantly plain, in my judgment, that whilst the chairman of the meeting did not initially, in May 2008, have authority to cast the RBS and HSBC votes in the way subsequently indicated, RBS and HSBC have unequivocally ratified his actions by voting (albeit in the minority) for a determination upon the footing that the IVA was in place.
18. In Smith v Henniker-Major & Company (a firm) [2003] Ch 182 at 202 the following uncontroversial statement of Robert Walker LJ appears:

"Both sides agreed that ratification is an election by a person to adopt a transaction purportedly entered into in his name or on his behalf, but not in fact authorised by him at the time. Effective ratification is 'equivalent to an antecedent authority' (Lord Sterndale MR in Koenigsblatt v Sweet [1923] 2 Ch 314, 325) and so it has retrospective effect."

Subsequently, the following statement of Pennycuick J in Re Mawcon Ltd [1969] 1 WLR 78 at 83 was cited by way of illustration:

"It is well established that a ratification may be implied from conduct. It is further well established that the adoption of part of a transaction operates as a ratification of the whole transaction. A principal cannot pick out of a transaction those acts which are to his advantage. If he ratifies at all he must ratify cum onere."

In my judgment, that applies in this case, so that any authority that the chairman may initially have lacked has been provided retrospectively by a ratification on the particular facts of this case.

19. The issues before the district judge were wide-ranging, and he heard cross-examination over two days. He took a dim view of the credibility of the debtor, and found, contrary to what she claimed, that she knew of the amendments in question, so that she did in fact approve of the modifications at the time. There has been an attempt before me to overturn that finding of fact. It is said that the debtor could not have known of the inconsistencies between the various proxies, because Mr Meadows, the chairman of the meeting de facto, had no actual recollection of what happened, and Mr Smailes did not mention any inconsistency in his report to the court. So neither of them is likely, it is said, to have mentioned it to her. However, the district judge found otherwise, accepting Mr Meadows' explanations of the apparent confusion concerning the state of the proxies, and what he would have done in explaining the matter to the debtor. This is a paradigm example, in my judgment, of a case where the judge's fact-finding function is not to be interfered with on appeal, even though dealing, in part, with inference. The judge heard and saw the witnesses and was able to form a view, not just as to the reliability of the debtor, but as to the extent to which it was appropriate to rely upon what Mr Meadows said would have happened. In my judgment, that was sufficient for the judge to conclude that the debtor in fact approved of the proposals, as modified.
20. I mention that, because I was referred to the decision of Re Plummer [2004] BPIR 767, a decision of Mr Registrar Baister, in which he held that, where the relevant consents of the debtor were not forthcoming, that meant no IVA ever came into being, despite the reporting of its success, and that a petition brought some years later, as in the present case, based upon a breach of that IVA, could not succeed as the IVA was a nullity. Only a valid section 257 meeting could provide the necessary consent.
21. It is said that that reasoning applies here, not just because of the disputed finding of fact, which I have anyway upheld, but because also, on the facts, what Mr Meadows appears to have done was provisionally accept the HMRC proposal, subject to checking first whether the creditors affected, HSBC and RBS, persisted in their amendments to contrary effect. That checking did not take place at the meeting. Indeed, it is unlikely that there was any formal vote at the meeting, as all Mr Meadows had to do was consider the proxies (all given to the Chairman) and count the votes, no creditor actually being present.
22. It follows, on this argument, that any ratification did not relate back to any vote cast at the meeting, none having been cast, but to the decision subsequently to treat HSBC and RBS as having voted in that way, when they did not. The chairman did not, it is said, cast the vote in favour of the HMRC amendments at the meeting (emphasis supplied) but only decided to make a report to that effect subsequently when there was no objection from TIX to his email of 3 June 2008. In other words, the resolution, as passed at the meeting, was not for approval of the IVA, but to check the position further with TIX. Approval may only be given, the argument goes, at "the meeting" itself. Section 258 expressly provides that a creditors' meeting summoned under section 257 (not some other event or meeting) may decide whether to approve the proposals, or any modifications. Further, section 260 (which prescribes the consequences of approval) only applies where that meeting (not something happening after the meeting) approves the IVA. Ratification of something which happened after the meeting is, therefore, on this argument, insufficient to bring those consequences about. Section 262(8) lends further support to this argument, providing than an approval given "at a creditors' meeting" is not invalidated by irregularity except as provided by that section.
23. I have considerable doubts as to the correctness of Re Plummer. It seems to me that the statutory framework with which I am concerned permits a challenge to be made under section 262, within a limited time, and that that procedure is meant to be exhaustive, precluding other forms of challenge, as subsection (8) confirms expressly. Section 262 in terms applies to a case where there has been "some material irregularity at or in relation to" the creditors' meeting. The words could hardly be wider. The time for making a challenge runs from the making of the report to the court or (in the case of a person who was not given notice of the meeting) when he becomes aware that the meeting has taken place. If there is some error or inaccuracy in reporting the outcome of the meeting, that is properly described as an irregularity "in relation to" the meeting, to which section 262 is meant to apply, even if the error or inaccuracy occurs after, and not at, the meeting.
24. The argument against that is that, upon a literal reading of section 260, the approved arrangement only takes effect "where the meeting summoned under section 257 approves the proposed voluntary arrangement (with or without modifications)" and that section 262(8) is similarly limited. It is said that in cases such as Re Plummer and the present case the meeting itself did not approve the IVA, because there was in fact no 75 per cent majority in favour of the proposals as purportedly approved.
25. In my judgment, it is necessary to look at the structure of this part of the 1986 Act as a whole. The critical stage is the report of the decision to the court under section 259. The result of the meeting as stated in that report is obviously meant to be taken at face value and accepted subject to any challenge brought timeously under section 262 or the Rules. That is why section 262 is there and why the Rules make separate provision for the conduct of meetings, with a similar time limit.
26. There is express provision mirroring the section 262 process in Rule 5.22. Under that rule, the chairman is to ascertain the entitlement of persons wishing to vote and to omit or reject their claims accordingly. The chairman, under sub-rule (2), may omit or reject a claim in whole or in part, but under sub-rule (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 or by the debtor."

Under sub-rule (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 give rise to unfair prejudice or material irregularity."

In that respect the criterion for an appeal precisely mirrors section 262.

"(6) An application to the court by way of appeal against the chairman's decision shall not be made after the end of the period of 28 days beginning with the first day on which the report required by section 259 is made to the court."

That also reflects the period specified under section 262.

27. Accordingly, I would construe section 260, where it refers to the section 257 meeting approving the proposed voluntary arrangement as extending to a purported approval as reported to the court. It follows from this that the only route of challenge is under section 262 and/or rule 5.22, both of which are subject to a similar time limit. Otherwise, the statutory scheme is in danger of becoming unworkable.
28. Registrar Baister in Re Plummer said this at paragraph 27:

"In my view, there is a difference between circumstances which give rise to something which may be described as a material irregularity and something which invalidates approval or means that approval was simply never achieved. I put this example to Miss Jordan. Take a case where the chairman wrongly calculated the votes and believes that 78 per cent of creditors have voted to approve an arrangement and reports to the court and the creditors and the debtor to that effect but in fact only 68 per cent of creditors voted to approve. In one sense that is indeed a material irregularity. But it goes further since as a matter of fact and of law the requisite majority was not attained such that in reality there never was approval. It cannot be that in those circumstances section 262(8) could be said to overcome the problem by making real that which simply never was. The reason it cannot is because of its wording, which presupposes approval: it is 'an approval given at a creditors' meeting' which 'is not invalidated'. Non-approval cannot, however, be transformed into approval."

29. I respectfully differ from what Registrar Baister says in that paragraph. The example he gives is a powerful one, but is no different in substance to another common example, where a creditor is allowed to vote at the relevant meeting and his debt is marked as objected to because it is disputed. Let us suppose that that creditor's vote is decisive in defeating the IVA. The debtor can challenge the admission of that debt under section 262 and rule 5.22, and would be expected to do so, if he wished to challenge the outcome of the meeting at all. If it is the other way round and a proposal is carried upon a wrongly admitted vote, any aggrieved creditor can also challenge the decision or appeal under the same statutory provisions. But let us suppose that no creditor in fact challenges the result. We are left with an IVA which has been approved on a disputed debt, which turns out later never to have been owed. Then, just as much in that case as in the example given by Registrar Baister, it can be said that there never was, as a matter of fact and law, the requisite majority. It would follow that the debtor could, when in breach of the IVA, let us say two years later, turn round and say: "There was no IVA and I cannot be made bankrupt for being in breach of its terms", thus making the time-limited right of challenge or appeal redundant. It seems to me that that is such a startling result that it cannot possibly have been intended by Parliament and the draftsman of the Rules. For my part, I would not and do not construe this part of the 1986 Act or the rules as giving rise to those consequences. I would on the contrary construe section 262(8) and rule 5.22(6) as precluding that result.
30. Other examples highlight the startling consequences which would follow if the Appellant's submissions are correct. Thus, under section 258 (4) a secured creditor's rights are not to be affected except with the concurrence of that creditor. Let us suppose that an IVA is passed affecting the rights of a secured creditor who has not consented. The secured creditor could clearly complain. But, if he does not complain, it is, in my judgment, manifestly absurd that the debtor could challenge his own IVA two years or more later on the grounds that the concurrence was not obtained. Likewise, subsection (5) protects preferential creditors: the meeting may only approve proposals affecting them adversely with their concurrence. Again, if one preferential creditor is overlooked, the whole IVA may be automatically invalidated if this reasoning is correct. These are pertinent examples as they come from the same section (258) as was under consideration in Re Plummer, and one would expect the lack of consent from the debtor, the secured creditor and any preferential creditor to carry the same consequences, and be subject to the time limit prescribed for any challenge under section 262(3).
31. In my judgment, although I readily accept that my construction does some violence to the literal language, it seems to me that it is necessary to adopt a more purposive construction in order to avoid potential chaos. Shortly after the Insolvency Act 1986 came into force, the Court of Appeal in a case called Re a Debtor (No 1 of 1987 Lancaster) [1989] 1 WLR 271, approved the statement of Vinelott J in Re a Debotor (190 of 1987) The Times, 21^st May 1988, that "it would be unfortunate if the new provisions were to become enmeshed in the technical objections which disfigured the old law". That concerned a supposedly defective statutory demand. The same must, in my judgment, apply to individual voluntary arrangements.
32. Unfortunately, the distinction between nullities and irregularities seems to have gained credence in the field of out of court appointments of administrators: see the decisions summarised in Re Euromaster Ltd [2013] 1 BCLC 273. There is, however, no need to extend tortuous reasoning of that kind into the area of individual voluntary arrangements, where both the statute and the Rules contain a code for challenging decisions at an early stage. If those decisions are not challenged, in my judgment, they should stand once the relevant report has been made. The time limits, which are tight, set out in both the Act and the Rules, should be applied and not subverted by a collateral attack months or even years down the line.
33. I am fortified in this conclusion by the observations of Carnwath LJ in a different context in the Smith v Henniker-Major decision, to which I have referred. Carnwath LJ, who was in the majority on this point, said this:

"I do not…think that this problem can be solved by the suggested distinction between 'nullity' and 'procedural irregularity'. Such distinctions have not proved workable in administrative law…and I do not think they are workable here."

Though that was in a different context, it seems to me that those observations apply to the present context as well.

34. Accordingly, it does not seem to me to matter if the meeting was erroneously reported in the absence of a timeous challenge. Moreover, there is an additional requirement in both section 262 and rule 5.22, which will be undermined if the "nullity" argument prevails. Under both the section and the rules the court will not act unless there has been unfair prejudice or a material irregularity. If some irregularities, irrespective of prejudice or materiality, result in a nullity, this requirement is bypassed.
35. Applied to the present case, where the chairman's actions, though initially in excess of his authority, have been completely ratified, it seems to me that the scope for the court intervening under section 262 or rule 5.22 is very limited, if there is any such scope at all. The court's powers are discretionary and wide-ranging, expressed by reference to the word "may", and include calling another meeting. There is no automatic invalidity or nullity even in the case of a timeous application. That seems to me to make it all the more likely that Parliament must by section 262(8) have intended the challenge under that section to be exhaustive. As Rule 5.22 goes no further than section 262, dealing with voting issues, that conclusion is reinforced.
36. For the reasons I have given section 262(8) applies here to the approval reported by the chairman of the meeting, and, as there was no challenge under section 262, the matter cannot be taken now by the debtor. Likewise, there was no challenge (assuming there could have been one) under paragraph 5.22, under which the court's power is expressly exercisable only if the circumstances giving rise to the appeal are such as to give rise to unfair prejudice or material irregularity. There is no unfair prejudice in holding the debtor to an IVA which he promoted nor was the irregularity material in light of the affected creditors' knowledge and subsequent ratification.
37. It follows from these observations that the appeal must be dismissed. All further applications, as I understand it, are to be adjourned. I would ask the parties to agree an order giving effect to my judgment and ancillary matters if they can. A telephone hearing can, if necessary, be fixed in Birmingham through the Chancery listing clerk.