Inland Revenue v Wimbledon Football Club Ltd & Ors Rev 2

A company voluntary arrangement must preserve the statutory priority of preferential debts, but section 4(4)(a) of the Insolvency Act 1986 concerns the proposal put to creditors and claims on the company’s assets. It does not generally catch a purchaser’s payment of non-preferential debts from its own money where the payment is not funded by, or reflected in a reduced price payable to, the company. The CVA regime is deliberately flexible and may use third-party assets. A different result may follow where an arrangement indirectly diverts company value or is a device to evade statutory priority. The appeal was dismissed.

The Company, a heavily insolvent professional football club, entered administration. Its administrators agreed to sell its business and assets to a Buyer, which undertook to pay Football Creditors so that the club could retain its Football League membership and valuable assets.

A proposed CVA provided for the sale proceeds to fund a dividend of about 30p in the pound to preferential creditors, including the Revenue, while the Buyer would pay the Football Creditors in full. The creditors approved the arrangement despite the Revenue’s objection. The Revenue applied under section 6 of the Insolvency Act 1986 to revoke or suspend approval. Lightman J rejected the application. The appeal concerned whether the Sale Agreement formed part of the proposal and thereby infringed section 4(4)(a).

Disposition. Neuberger LJ gave the principal judgment. Mance LJ and the Lord Chief Justice agreed. The appeal was dismissed.

1. Effect of infringement. If a CVA proposal conflicts with the clear substantive prohibition in section 4(4)(a), and causes clear prejudice, the court would ordinarily have to prevent implementation or revoke approval under section 6, save possibly in the most exceptional circumstances. The court left open whether that result follows because approval is ineffective or because section 6 requires revocation. This issue was unnecessary to the disposition.
2. Meaning of proposal. The proposal for section 4(4)(a) purposes is the proposal under section 1(1) for a composition or scheme. In this case it was effectively confined to the distribution of the company’s cash, including the proceeds of the Sale Agreement. Creditors voted on that distribution, not on approval of the Sale Agreement itself. The agreement had already been executed and was not automatically incorporated merely because its implementation depended on CVA approval.
3. Third-party payments. Section 4(4)(a) was not infringed by the Buyer’s payment of Football Creditors from its own free money. The payments were not funded by the company, were not reflected in a reduced purchase price, and preserved the League membership and business which gave the company’s assets their value.
4. Statutory context. This construction accorded with the flexibility of the CVA regime and its capacity to use third-party assets under Rules 1.3(2)(b) and 1.12(3) of the Insolvency Rules 1986. It was also consistent with the treatment of company assets under section 175(1) of the Act and with Buchler v Talbot [2004] 2 WLR 582. Preferential priority did not extend to independent third-party funds.
5. Safeguards. If a purchaser’s assumption of creditor liabilities reduced the price payable to the company, the arrangement could indirectly fund non-preferential payments from company assets. A preferential creditor could seek relief under section 27. The court also noted possible challenges under section 6 or section 239, and the requirement of transparency and good faith identified in Somji v Cadbury-Schweppes plc [2001] 1 BCLC 498.
6. Alternative reasoning. Even if the Sale Agreement formed part of the proposal, there was a powerful argument that the payments were made to satisfy League requirements and realise the business, rather than to repay non-preferential debts within section 4(4). The court therefore concluded that the CVA did not infringe section 4(4)(a) and that Lightman J had reached the correct result.

• Court of Appeal (Civil Division): On 28 May 2004, the court dismissed the Revenue’s appeal: [2004] EWCA Civ 655.
• High Court (Chancery Division): Lightman J rejected the Revenue’s application to revoke or suspend approval of the CVA.