Section 262 Insolvency Act 1986 (IA86) enables a creditor to challenge an IVA if there has been a material irregularity at the meeting approving it. The court ruled that there had been a material irregularity at the meeting because the majority creditor representing almost 90% in value failed to disclose to the other creditors that they had entered into a settlement agreement with the debtor which enhanced their position over and above the other creditors.
CFL Finance Limited (CFL) lent £3.5m to a Gibraltar company, Lanza Holdings Limited. Moises Gertner provided a personal guarantee in respect of the debt. Lanza defaulted and CFL sought to enforce its personal guarantee. On 11 September 2015, CFL served a statutory demand against Gertner and then proceeded to present a bankruptcy petition against him which was due to be heard on 23 November 2015.
On 20 November 2015, Gertner served an IVA proposal on CFL. The proposal showed that other unsecured creditors had claims against Gertner which totalled £582m. The largest creditor was the Icelandic bank Kaupthing, which was owed £547m. The IVA proposal indicated that Gertner had no assets and projected a dividend of 0.07p in the £ as a result of a third party making a lump sum payment of £487,500 to enable a distribution to creditors.
CFL had various concerns in relation to the proposed IVA, principally in relation to Gertner's lack of assets and Kaupthing's claim, which was disputed, as well as a payment of £4m which Kaupthing had allegedly received in settlement of its claim. The day before the creditors meeting, CFL tried to obtain more information from the nominee, David Rubin. However, Rubin was unable to provide further details.
The IVA was approved by creditors representing 97.85% in value, including Kaupthing, at a meeting on 17 December 2015, with only CFL and one other creditor voting against it.
In January 2015 CFL issued a court application challenging the IVA under s.262 IA86. Before the hearing, the judge ordered Gertner to disclose a copy of the settlement agreement that he had entered into with Kaupthing. The settlement agreement revealed that a third party had paid Kaupthing US$6 million in full and final settlement of a dispute it had with Crosslet Vale Limited, a company Kaupthing had made loans to and which had been secured by a personal guarantee provided by Gertner. It was a term of the settlement agreement that Kaupthing would not enforce its personal guarantee against Gertner.
At first hearing in the High Court in late 2015, CFL challenged the IVA on the grounds that:
The first judge upheld CFL's challenge to the IVA on the first two grounds. On the first ground, the judge ruled that the terms of the settlement agreement meant that Gertner’s guarantee liability had either been extinguished or was no longer enforceable. It followed that either Kaupthing was no longer a creditor or that Kaupthing's debt was contingent and so Rubin should have rejected Kaupthing's vote or valued its claim at a nominal £1, which would have meant that the IVA would not have been approved.
On the second ground, the judge ruled that the settlement agreement breached the principle of good faith between creditors because it enabled Kaupthing to benefit from the US$6m settlement monies and also from recoveries from an arbitration in Israel to which Gertner was a party, when these remedies were not available to other creditors. The settlement agreement therefore induced Kaupthing to support the IVA proposal which was to the detriment of the other creditors.
On the third ground, the judge ruled that the IVA was not unfairly prejudicial to CFL, because the terms of the IVA meant that all creditors were treated equally.
Gertner appealed to the Court of Appeal on the decision on material irregularity.
Lord Justice Patten, with whom the other judges agreed, ruled that there had not been a material irregularity in relation to Rubin's decision to admit Kaupthing's claim. Under the terms of the settlement agreement, although Kaupthing had agreed not to enforce the guarantee, the debt owed by Gertner to Kaupthing had not fallen away and as such Kaupthing should have been admitted as a creditor for the entire amount of its debt of £547m.
However, the judge upheld the decision of the High Court on the good faith principle, and concluded that there had been a material irregularity at the meeting approving the IVA.The judge accepted that "the mere fact that some (but not all) creditors will receive preferential treatment in the form of payment by a third party does not ipso facto constitute a material irregularity in relation to approval of the IVA", and did not did not directly criticise Gertner for entering into the settlement agreement.
He found that the settlement agreement had been drafted in such a way to enable Kaupthing to remain a creditor at the time of the meeting and, looking at the situation objectively, the additional payment Kaupthing received induced Kaupthing to support the IVA, which in turn avoided Gertner's bankruptcy. In contrast, the other creditors would be limited to the dividend provided under the proposal and any further investigation into Gertner's assets would be stifled. The judge said that "Kaupthing was allowed to vote without disclosing a material and obvious conflict of interest and without its vote the proposal would not have been approved".
Applying the decision of the Court of Appeal in Kapoor v National Westminster Bank plc in 2011, the judge ruled that the good faith principle should be strictly applied, and so Kaupthing's vote should have been excluded because Kaupthing was party to a settlement agreement designed to create an additional financial advantage not available to any other creditor in the IVA.
We have been informed that the case is subject to a pending appeal to the Supreme Court.
Stephen Barclay is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com
Editor's note 10.12.18: some clarifications were made to this story and the news of an appeal added.