I sincerely apologise for overlooking an alternative – and apparently widely-held – interpretation of the Protocol Standard Terms & Conditions’ (“STCs”) provision for approving variations. In a previous blog post (http://wp.me/p2FU2Z-2a), I had indicated that the Protocol STCs apply a simple majority, whereas many believe that 75% (in value) of voting creditors is required to approve a variation. Whilst personally I still struggle with this, I want to highlight this alternative interpretation to readers and remind you that everything I write on this blog reflects my own understanding and opinion and should not be relied upon; I urge you to make independent checks.
For balance, I will set out what I believe are the arguments for each interpretation:
Clause 19(5) of the Protocol STCs (accessible from: http://www.insolvencydirect.bis.gov.uk/insolvencyprofessionandlegislation/policychange/foum2007/plenarymeeting.htm) states: “Rule 5.23(1) of the Rules will apply to the creditors meeting in deciding whether the necessary majority has been obtained”. R5.23(1) states: “Subject to paragraph (2), at the creditors’ meeting, 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” and paragraph (2) states: “A resolution to approve the proposal or a modification is passed when a majority of three-quarters or more (in value) of those present and voting in person or by proxy have voted in favour of it”. The difficulty I have in looking to apply R5.23(2) to resolutions for variations is that they are not resolutions to approve the proposal or a modification. S436 of the Act states: “‘modifications’ includes additions, alterations and omissions and cognate expressions shall be construed accordingly”, but it is not just the absence of the word “variation” from this definition that gives me pause for thought. References in the Act and Rules to modifications in an IVA context relate to alterations to the terms of the Proposal prior to/at the time of its approval. Of course, any changes to the Proposal after its approval rest with the terms of the Proposal – the Act and Rules do not cover the mechanisms for post-approval changes – and I wonder if the Protocol STCs’ reference solely to paragraph 1 of R5.23 lends weight to the suggestion, I believe, that it is not intended that paragraph 2 be extended to apply to post-approval variations. However, I do accept that it is dangerous to attempt to discern the intentions of the drafters or indeed those of the parties to the IVA Proposal, namely the debtor and creditors.
I guess the strongest argument for a 75% majority is that there is little difference between a “modification” and a “variation”, thus under the Protocol STCs R5.23(2) applies also to post-approval variations. It has also been suggested that there should be no lower threshold to change the terms of an approved Proposal than there is to approve it in the first place and some question the validity of a Proposal term purporting to do just that. On this basis, it has been further suggested that R5.23(4) (re. associated creditors’ votes) might also apply to post-approval variations to Protocol IVAs, or at least that prudence might recommend consideration of this rule.
Whichever way this is cut, there is a risk that someone will be unhappy: for example, if a 75% threshold is used, the debtor and up to 74% creditors voting in favour of a variation will lose to the 25% creditor voting to reject a variation; if a 50% threshold is used, the up to 49% creditor voting alone may feel deprived. Going forward, perhaps it would be safer for IVA STCs simply to describe in full the majorities required for variations, much as R3’s STCs do, and then there could be no argument.