• Davis & Davis v Price & Price – what is the relevant date for IVAs suspended on a S262 challenge?
• Hunt v Hosking & Ors – when is an alleged transaction at an undervalue not a “transaction”?
• Fabb & Ors v Peters & Ors – vesting of causes of action in Trustee foils attempts to pursue misfeasance claim
What exactly is a “suspended” IVA?
Davis & Davis v Price & Price ( EWHC 323 (Ch)) (21 February 2013)
Summary: As a consequence of a successful S262 challenge, two debtors’ IVAs were suspended and further creditors’ meetings were convened to consider their revised Proposals. After these were approved, the S262 challengers issued statutory demands in pursuit of their costs for bringing the challenge. The appeals judge agreed that the statutory demands should be set aside on the basis that the costs were caught in the IVAs, for which the relevant date was the second meetings’ date. Contrary to the wording of the S262 order, the judge felt that the effect of suspending the original IVAs was not to continue to bind the original creditors.
The Detail: The Prices challenged the Davises’ IVAs under S262 in relation to the values of £1 attributed to their claims for the purposes of voting at creditors’ meetings held in June 2010. The challenge was successful and the District Judge ordered the suspension of the Davises’ IVAs – which would not have been approved had the Prices’ claims been admitted for voting in the sum of £35,389, the value placed on the claims for voting purposes by DJ Gamba – and required the Davises to decide whether to re-present the original Proposals or to present varied Proposals for consideration at further creditors’ meetings to be convened by the Nominee. The Davises were also ordered to pay the Prices’ costs of £7,011.
At creditors’ meetings held on 13 January 2011, the Prices again voted to reject the Proposals, which had been revised by the Davises, but the Prices only proved in the sum of £35,389. However, the requisite majorities were achieved and the revised Proposals were approved. The Prices then pursued payment of their costs of £7,011 on the argument that they were not claims in the IVAs, because they did not exist at the time of the original interim orders in April 2010.
The question at the heart of this matter was: what was the effect of the suspension of the Davises’ IVAs? In this appeal, counsel for the Prices sought to distinguish between an order revoking an IVA and one suspending it, both options available to the court under S262(4). Mr Justice David Richards noted that there was only one rule relating to entitlements to vote at a creditors’ meeting convened to consider an IVA Proposal – R5.21; the rules make no distinction as to whether this is the first time such a meeting is convened or whether it is convened on the back of a revoked IVA or a suspended IVA under S262(4). The judge considered that in this circumstance the reference in R5.21(2)(b) to the “amount of the debt owed to him at the date of the meeting” was the amount owed at the date of the January 2011 meeting convened to consider the revised Proposals and therefore the Prices had been entitled to prove also in respect of their costs in bringing the S262 challenge.
So what is the status of a suspended IVA? The wording of DJ Gamba’s order resulting from the S262 challenge had stated that, if the proposed variation was put to the vote and rejected, the approval of the IVAs on 8 June 2010 would be revoked with immediate effect “and the IVA Creditors shall ceased to be bound by the IVAs”; it further provided that, if the IVAs were reconsidered and approved, the suspension of the approval of the IVAs would be lifted with immediate effect and “the IVA Creditors shall continue to be bound by the IVAs in accordance with section 260”. However, David Richards J stated: “I do not think it is right that if the approval of an IVA is suspended, it nonetheless continues to bind creditors. Once approval is suspended, it does not seem to me possible to say that there is an ‘approved arrangement’ within the meaning of section 260(2)” (paragraph 29). He acknowledged that S262(7) grants the court power to give supplemental directions, but he did not believe that this enabled the court to substitute a different rule for R5.21 in relation to creditors’ voting rights.
12/02/2014 UPDATE: Although the appeal heard on 21/01/2014 was dismissed (http://www.bailii.org/ew/cases/EWCA/Civ/2014/26.html), it did highlight a(nother!) problem with the Act: S260, which binds creditors into an approved IVA, expressly has effect “where the meeting summoned under S257 approves the proposed” IVA. However, in this case, the meetings that led to approved IVAs were consequent to a S262 challenge and, as Lady Justice Arden put it, “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” (paragraph 33).
Thus, were the creditors bound by S260? “The court must of course give effect to the intention of Parliament… 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” (paragraphs 38 and 39). In order to achieve this end, Lady Justice Arden interpreted the reference to a “further meeting” in S262(4)(b) to be a reference to a “further meeting under S257” so that S260 has effect.
The Company must be party to the transaction for it to be challenged at an undervalue
Hunt v Hosking & Ors ( EWHC311 (Ch)) (22 February 2013)
Summary: A liquidator sought to challenge as transactions at an undervalue payments made to Mr Hosking from the Company’s client monies held by its accountants – the monies were paid to Mr Hosking in settlement of his private loan to the accountant, who appeared to be entitled to the monies by reason of two fee agreements with the Company. However, the liquidator’s S238 application failed on the basis that the payments to Mr Hosking were not “transactions” to which the Company was party. The judge pointed out that either the accountants were not authorised to pass the monies over, in which case it would be an issue of misappropriation of assets, or the challenge should be levelled at the fee agreements between the accountants and the Company.
The Detail: A firm of accountants, of which Mr Temple was the sole proprietor, held monies on behalf of its client, Ovenden Colbert Printers Limited (“the Company”), from which the accountants appeared to be entitled to draw fees pursuant to two fee agreements. A number of payments were made from the accountants’ client account to Mr Hosking, which he claims related to repayments of his private loan to Mr Temple (who later became bankrupt).
Mr Hunt, the Company’s liquidator, applied under S238 claiming that the payments made from the client account to Mr Hosking were transactions at an undervalue. The liquidator made other allegations regarding the strength of the fee agreements with a suggestion that they may have been induced under misrepresentation. However, the fee agreements were not the subject of the S238 application.
Mr Justice Peter Smith identified a fundamental difficulty with Mr Hunt’s argument that the payments to Mr Hosking were transactions at an undervalue: the Company was not a party to the payments. He illustrated it this way: “If Mr Temple held a bag of sovereigns for the Company and they were held to the Company’s order, and if he gave them away to Mr Hosking, I suggested that that would not be a transaction. It would simply be a case of misappropriation of assets. Of course, the Company through the liquidator would have any number of remedies to recover those sovereigns. Such a claim could be made not only against Mr Temple but also against Mr Hosking if he receives the sovereigns. That is not the present claim… The fundamental difficulty facing Mr Hunt is that however much he investigates; however much mud he wishes to throw at Mr Hosking; none of it is relevant to his application under section 238. This is because on the undisputed facts set out above, the Company has not entered into a transaction which the liquidator can review. The only transactions it entered into in my opinion were the two fee agreements and those are not under challenge and indeed one of them cannot be under challenge due to the passage of time. If the payments were authorised they cannot be challenged unless the two fee agreements are challenged and they are not in these proceedings. If the payments were unauthorised, there is no transaction by the Company” (paragraphs 50 and 55).
[UPDATE 26/11/2013: Hunt’s appeal against the summary judgment/strike out application was dismissed on 15/11/2013 (http://www.bailii.org/ew/cases/EWCA/Civ/2013/1408.html). It seems to me that the fundamental difficulty remained: there was no indication that the Company had been party to any relevant transaction. Thus, the Court of Appeal decided that the judge had been right to strike out the application, as the claims under S238 and S241 had no prospect of success.]
Vesting of causes of action in Trustee foils attempts to pursue misfeasance claim
Fabb & Ors v Peters & Ors ( EWHC 296 (Ch)) (18 January 2013)
Summary: A claim against administrators under Paragraph 75 of Schedule B1 was struck out as an abuse of process on the basis that the claimant knew his causes of action had vested in his Trustee in Bankruptcy at the time. In addition, the fact that 96% of the administrators’ claims against Fabb had been abandoned was not sufficient to support a misfeasance claim, as judgment had been achieved in relation to the remainder.
The Detail: Fabb was made bankrupt after administrators of “Holdings” obtained judgment against him of c.£88,000 in relation to a loan account and on a conversion claim, although over 96% of the administrators’ original claim was, effectively abandoned.
Fabb asserted two causes of action against the administrators: misfeasance and, in effect, malicious prosecution of the earlier proceedings as regards the 96% of the claims that were abandoned. After the proceedings commenced, the court ordered Fabb’s Trustee to assign to Fabb the various claims, conditionally on payment of £10,000; the assignment had not yet been completed.
His Honour Judge Purle QC noted a fundamental objection to the misfeasance proceedings: “Proceedings under paragraph 75 can only (so far as presently relevant) be brought by a shareholder or creditor. Mr Fabb is neither of those things, and nor will he be either of those things even if the assignment takes place. Any interest he may have had in the shares of Holdings is now vested in his trustee. Likewise, any indebtedness formerly due to him is now vested in his trustee… There is a still further objection. These proceedings were brought at a time when Mr Fabb knew that the causes of action he wishes to assert were vested in his trustee in bankruptcy, and that he needed an assignment” (paragraphs 13 and 16). On this basis, the judge felt bound to strike out Fabb’s claim as an abuse of process.
In any event, the judge identified difficulties in relation to the merits of Fabb’s claims that the 96% claim was brought abusively, for an improper motive or an improper purpose: “What to my mind makes the claim impossible is that the proceedings in which the 96 percent claim was included were pursued to judgment. True it is that the 96 percent claim was abandoned, but the rest of the claim was pursued over an eight day hearing, I think it was, and the claim succeeded in substantial amounts, despite a fully argued defence. It is difficult to see in those circumstances how the proceedings can be characterised as malicious or an abuse, as they had to be, and were successfully, pursued to judgment, albeit in a much smaller sum than originally claimed” (paragraph 23).