As you will no doubt be aware, the increase in the bankruptcy threshold to £5,000 has seen an increase in the proportion of debtors seeking to avoid bankruptcy through an IVA. This is something driven by potential supervisors and debt management companies, as larger debts are more lucrative for those arranging and supervising the IVAs.

What has not changed is the requirement of a 75% majority by value of creditors voting or represented at the creditors’ meeting to approve the IVA proposal. This enables creditors with a significant portion of the total debt, or a group of creditors, who for whatever reason are not satisfied with the proposal to vote it down provided they command more than 25% of the vote.

The question addressed in this article is, what happens when you have a sufficient portion of the vote to reject the proposal and correctly cast that vote, only for it to be overlooked or ignored? This is particularly problematic where a supervisor is reluctant to assist, as it would in effect remove the supervisor from appointment.

The statutory provision: section 262 of the Insolvency Act 1986

The principal mode of challenging a decision to approve an IVA is that provided for in s.262, which can be brought by either a creditor or the nominee (as well as a debtor, the official receiver or a trustee in bankruptcy). Given that the nominee can apply, the first port of call should always be corresponding with the nominee to alert them of the irregularity and invite them to apply. This saves the creditor incurring the cost of an application and avoids resistance from the nominee. Where the nominee refuses, this also leaves open the option of seeking costs from the nominee where that refusal was unreasonable.

The two part test to be taken from s.262 is that there must be-

a) either, an unfair prejudice to a creditor or the debtor, or a material irregularity at or in relation to the meeting; and,

b) an application made within 28 days of the decision where a creditor had notice of the meeting, 28 days of a report to the Court under s.259(1)(b) or 28 days from awareness of the meeting where no notice was given.

Limb a) is easily satisfied by a creditor’s vote having been ignored where that vote would have changed the decision at the meeting, as this plainly constitutes a material irregularity for the purpose of s.262(1)(b). The more pressing matter is promptness, as 28 days from a decision where a creditor does not attend is not that long at all particularly when allowing for time to receive that report and then the report reaching the right person within an organisation. It may only be at that stage a creditor would become aware of their vote having been ignored. The 28 days is however a hard deadline, save where an extension is granted or the application falls to be made outside the ambit of s.262.

Extension: section 376 of the Insolvency Act 1986

The provisions of s.376 are fairly wide ranging;

376. Time-limits.

Where by any provision in this Group of Parts or by the rules the time for doing anything (including anything in relation to a bankruptcy application) is limited, the court may extend the time, either before or after it has expired, on such terms, if any, as it thinks fit.

There have however been cases giving guidance on the relevant factors to be applied, such as in Tanner v Everitt [2004] EWHC 1130 (Ch) where Mann J (considering an extension under s.262(3) ) stated;

“46. … I have borne in mind all the relevant factors — the length of the delay, the reasons for the delay, the apparent merits of the underlying application and the prejudice to all relevant parties.”

It is therefore clear that, akin to most applications for an extension of time, the length of and reason for the delay are central. Mere ignorance is unlikely to be enough. What is unusual is that the merits of the substantive application weigh on the decision of whether to grant the extension. In this respect, a total failure to consider votes which would have changed the outcome provide an underlying application with a strong prospect of success.

To rely on s.376, creditors must therefore act quickly to maximise their chances and ought to arm themselves with details of steps taken following approval of the IVA. If nothing has been done by the debtor, supervisor or other creditors, it is difficult to envisage what prejudice could be caused by the delay.

Outside the scope of section 262: Re Plummer [2004] BPIR 767

The most fruitful avenue for creditors applying out of time had, until recently, been the decision of Registrar Baister in Re Plummer [2004] BPIR 767;

“[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 Ms Jordan. Take a case where the chairman wrongly calculates the votes and believes that 78% of creditors voted to approve an arrangement and reports to the court and the creditors and the debtor to that effect but in fact only 68% 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 s.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.

[28] For the reasons I have given I conclude that Ms Plummer’s proposal for an individual voluntary arrangement was not approved and that it is … a nullity and void. It follows that Mr Penn had no locus to present the petition that is before me and that it must be dismissed.”

This provided an argument that where irregularity was so serious that the IVA was a nullity and never truly existed, s.262(8) could not apply so as to make it valid, s.262 was not the basis for the application to the Court and therefore the 28 day limit did not apply.

The decision of Briggs LJ in Narandas-Girdhar and Anr v Bradstock [2016] EWCA Civ 88 has however cast considerable doubt over the correctness of Registrar Baister’s decision in Re Plummer. Briggs LJ did not accept a narrow construction of material irregularity, preferring what he terms the “broader view” that even where the irregularity was sufficient to render the IVA void, it was still within s.262 and therefore subject to the time limits;

[49] It will by now be apparent from the foregoing that, in the present case, the judge preferred the more purposive approach in the Smailes case to the more limited view of the ambit of s.262 in Re Plummer. In my view he was right to do so, but I would prefer to explain why in my own words than to review at length his careful reasoning. The starting point is to recognise that both the narrow and the broad view of the ambit of s.262 have much to commend them, viewed in the abstract. The notion that s. 262 is necessary to enable someone to challenge an IVA on the ground of material irregularity at or in connection with a creditors’ meeting because the mere irregularity would not render it void is a perfectly reasonable one, and lies comfortably side by side with the undoubted need for a statutory jurisdiction to relieve for unfair prejudice in the same section. So is the contrasting notion that, to maximise certainty as to the validity of an IVA, s.262 sensibly imposes a strict statutory regime designed to ensure that all challenges to validity of the approval at the meeting are raised and resolved as soon as possible.

[50] To my mind the factors which point convincingly to the broader view as to the ambit of s.262 are two in number. The first is the steer to be derived from the clear language of s.262(8) which (as Lloyd J said in Fletcher v Vooght ) clearly assumes that a material irregularity might be serious enough to invalidate the IVA otherwise than in pursuance to an application under the section, but for the statutory ban which sub-section (8) imposes, coupled with the time limit in subsection (3) . This is in my view completely inconsistent with the notion that material irregularity means only some mere irregularity which does not have an invalidating effect.

[51] The second factor is that the narrower view would deprive the court of the flexible jurisdiction under subsection (4) to make sensible provision in an appropriate case for suspending approval, or summoning a further meeting to consider a revised proposal. It would also remove the discretion given to the court as to how if at all to respond to the challenge, in every case where the irregularity was of the invalidating kind. All that the court could do would be to strike down the IVA as void, leaving the debtor and creditor to start all over again. This would be so even if (as here) the invalidity was raised by someone who had supported the approval of the IVA from start to finish, and adhered to it for many years, where the invalidating event has caused him no prejudice at all. This seems to me so greatly to emasculate the obvious purpose of s.262 in its context as to conflict with Parliament’s intention, purposively viewed.

[52] A third but less persuasive reason for preferring the broader view coincides with Judge Purle’s analysis, namely that the narrower view would in every case require it to be determined whether the irregularity was or was not of the invalidating kind, an exercise likely to be fraught with arcane and old fashioned distinctions derived from the common law about meetings.

The decision in Bradstock is all but fatal to the avenue opened to creditors in re Plummer. The only conceivable argument which remains, as it was not directly rebuked in Bradstock, is that whilst s.262(8) precludes invalidity without order of the Court it does not grant validity to a decision which was never valid in the first place. The argument is however somewhat tenuous.

Conclusion

The starting point is that where a creditor’s correctly submitted vote is ignored, there is provision within the Insolvency Act 1986 for that to be challenged and the ignorance of a vote which would have changed the decision of a creditor’s meeting would ordinarily constitute a material irregularity. An application made within 28 days on that basis should therefore succeed in having the decision to approve the IVA revoked or direction given for a further meeting.

There is however much less certainty when applying outside the 28 day limit, but the 28 day limit is certainly not an absolute bar. The first avenue on realisation that the vote has been ignored but you are out of time to apply, is to make the application under s.262 with a further application for extension under s.376. It will be important to explain the reason for the delay and act promptly so as to minimise the delay. Efforts should also be made to illustrate minimal prejudice would be caused by the delay. The alternative, which could be run as an alternative ground within a single application, is to contend that re Plummer remains good law in cases where the IVA was never valid and so there is no time limit as the application falls outside s.262. This line of argument is, as stated above, a tenuous one which could be met by some resistance and subject of an appeal if successful.

Alex Worthington