El Ajou v Stern & Ors

An individual voluntary arrangement may bind creditors as a collective system governing enforcement, even where the creditor was entitled to pursue proceedings to establish liability. Where the arrangement adopts the bankruptcy regime, a creditor’s entitlement to interest is subject to the statutory and procedural limits applicable in bankruptcy. A judgment for discretionary interest under section 35A of the Supreme Court Act 1981 should therefore be qualified or stayed where enforcement would circumvent the arrangement. The existence of the arrangement may constitute a special circumstance under RSC Order 47 rule 1, making enforcement unjust, even after judgment and appellate proceedings have concluded, provided the application does not re-litigate liability.

The claimant obtained judgment against the first defendant under a guarantee for €1,859,201, together with €873,671 interest. The principal was paid by other defendants, but the interest remained unpaid. Before judgment, the first defendant’s creditors had approved an individual voluntary arrangement under the Insolvency Act 1986. The arrangement governed provable debts and adopted the bankruptcy provisions concerning interest.

The first defendant applied under RSC Order 47 rule 1 for a stay of execution and sought declaratory relief, arguing that enforcement of the interest award was inconsistent with the arrangement. The claimant argued that the issue had been determined and could not be reopened. The central questions were whether the interest award was affected by the arrangement and whether enforcement should be stayed.

1. Stay granted. The existence of the IVA constituted a special circumstance making it unjust to enforce the unqualified interest award while the arrangement subsisted. The application did not abuse the process of the court because it challenged enforcement, not the established liability.
2. The claimant was entitled to pursue the original proceedings after the interim stay had ended. An IVA does not ordinarily prevent proceedings to establish a disputed liability unless it contains a term having that effect. The judgment could establish liability for the purposes of the arrangement.
3. The IVA adopted the bankruptcy regime for provable debts. That regime collectively governs interest: interest forming part of a debt is subject to sections 322(2) and 382(1)(d) of the Insolvency Act 1986, while other interest is governed by IR 6.113. Interest cannot be claimed independently where the underlying debt is provable but the applicable regime does not permit that interest to be proved.
4. The discretionary liability for interest arose only when Warren J exercised the power under section 35A of the Supreme Court Act 1981. It was therefore not a bankruptcy debt within section 382 of the Insolvency Act 1986 at the date of the IVA. Nevertheless, that did not entitle the claimant to enforce the interest outside the IVA.
5. The interest order should have reflected the parties’ contractual rights under the IVA. It should either have been omitted or made subject to a stay. If the IVA was completed, the interest award ought not to become payable.
6. The court declined to decide finally whether IR 6.113(2) permits interest where the payment date is ascertainable only by reference to a contingent event. The court considered the narrower interpretation preferable but found it unnecessary to determine the point.

The judgment records that Warren J gave judgment for the claimant on 23 March 2005 and made the interest order on 10 May 2005. The Court of Appeal dismissed the defendants’ appeals on 14 March 2006 and later refused a stay. The House of Lords refused permission to appeal in July 2006. The present court granted a stay of enforcement under RSC Order 47 rule 1.