Cadbury Schweppes plc v Somji

An approved individual voluntary arrangement may be challenged only under the statutory routes provided by Insolvency Act 1986: directly under section 262 or indirectly through a bankruptcy petition under section 276(1).

For section 276(1)(b), an omission is material if, viewed objectively, disclosure would probably have made a material difference to creditors’ consideration and assessment of the proposed arrangement. The debtor’s duty to provide complete and accurate information continues until and during the creditors’ meeting. It extends to advanced negotiations for secret collateral payments intended to secure supporting votes, even where the money comes from an independent third party and falls outside the arrangement.

A debtor proposed an individual voluntary arrangement offering creditors approximately five cents in the dollar. Two previously dissenting banks changed their votes after entering a confidential agreement with an independent company. The agreement required them to support the arrangement and promised substantially larger payments if it was approved and survived the statutory challenge period.

Cadbury Schweppes plc, another dissenting creditor, challenged the arrangement and petitioned for the debtor’s bankruptcy. The deputy judge rejected unfair prejudice under section 262(1)(a) of the Insolvency Act 1986, but declared the approval void under the old law governing secret inducements and made a bankruptcy order under section 276(1)(b).

The debtor appealed. The central issues were whether the undisclosed negotiations constituted a material omission and whether an approved arrangement could be declared void outside the statutory challenge mechanisms.

1. Disposition. The Court of Appeal unanimously dismissed the debtor’s appeal against the bankruptcy order. It nevertheless omitted the provisions of the deputy judge’s order declaring the approval of the individual voluntary arrangement void. Robert Walker LJ gave the leading judgment; Sir Christopher Staughton and Judge LJ agreed.
2. Material omission. Per Robert Walker LJ, the proper question under section 276(1)(b) of the Insolvency Act 1986 was whether disclosure would probably have made a material difference to the way creditors considered and assessed the proposed arrangement. That question was objective. It included the interests of absent creditors whose proxies were held by the proposed supervisor.
3. The negotiations with the two banks were not an ordinary purchase of distressed debt. The agreement’s only unconditional obligations required the banks to vote for the arrangement and to preserve secrecy. The proposed assignments were conditional upon approval of the arrangement and the expiry of the section 262 challenge period.
4. The debtor knew that negotiations for a better collateral deal had reached an advanced stage. That was highly material. Disclosure would have alerted other creditors to the possibility of negotiating for more than the dividend offered under the arrangement. The statement that the debtor had no further offer to make conveyed a misleading, take-it-or-leave-it message. Its failure to mention the negotiations was therefore a material omission, although the third-party money was outside the debtor’s estate and outside the arrangement.
5. Continuing duty of disclosure. Judge LJ emphasised that section 276 and the Insolvency Rules 1986 require complete transparency and good faith from the debtor. Compliance with the information expressly prescribed by the Rules is insufficient if the information actually supplied is materially false, misleading or incomplete. The obligation continues until and during the creditors’ meeting so that creditors can make an informed decision.
6. Exclusive statutory routes. Per Robert Walker LJ, once a proposed arrangement has apparently been approved, the only routes for challenging or circumventing it are a direct application under section 262(1) or a bankruptcy petition under section 276(1). The deputy judge therefore erred in declaring the arrangement void under the old law after rejecting the section 262 challenge. The bankruptcy order remained justified under section 276(1)(b).
7. The court did not determine the scope of unfair prejudice under section 262(1)(a). Robert Walker LJ noted, without deciding the point, the substantial first-instance authority limiting that provision to unfairness caused by the terms of the arrangement itself.

1. Court of Appeal: The debtor’s appeal against the bankruptcy order was dismissed unanimously. Paragraphs 4 and 5 of the deputy judge’s order, which treated the approval of the individual voluntary arrangement as void, were omitted.
2. High Court, Chancery Division: Mr Anthony Boswood QC, sitting as a deputy judge, rejected the creditor’s challenge under section 262(1)(a) of the Insolvency Act 1986, declared the approval of the arrangement void under the old law governing secret inducements, and made a bankruptcy order under section 276(1)(b).