Macaria Investments Ltd v Sanders & Anor

For the purposes of a company voluntary arrangement, creditors may vote only in respect of liabilities that genuinely exist. Where votes based on alleged liabilities that do not exist are necessary to secure approval, the resulting decision is a material irregularity under section 6(1)(b) of the Insolvency Act 1986. The court may revoke the approval under section 6(4).

The court may also proceed in a party’s absence where the party has been given adequate notice. An obvious error in stating the hearing date will not amount to misleading conduct where the surrounding correspondence makes the correct date clear and the party could not realistically have attended in any event.

Macaria Investments Ltd applied under section 6 of the Insolvency Act 1986 to revoke approval of a company voluntary arrangement proposed by Gatnom Capital & Finance Ltd. The arrangement had been approved at a creditors’ meeting by votes including substantial alleged liabilities owed under two land contracts.

Gatnom sought to re-open the substantive hearing, claiming that an email from Macaria’s solicitors had misstated the hearing date and caused it not to attend. The court first determined that application, then considered whether the land contracts were genuine and whether the votes cast in respect of them constituted a material irregularity.

1. Application to re-open. Gatnom was not misled by the email stating that the trial would begin on 18 November. The surrounding correspondence showed that the hearing was to take place within the October trial window, that no adjournment had been agreed, and that the email’s date was an obvious mistake because 18 November was a Thursday. In any event, Gatnom’s own case was that its witnesses and expert could not attend because they lacked visas. The application to re-open was dismissed.
2. Genuineness of the land contracts. The alleged contracts involved liabilities exceeding $11 million, yet there was almost no contemporaneous documentation, no adequate documentation of the supposed development services, and no valuation evidence from Gatnom. The prices were many times the likely open-market values, and the contractual structure lacked commercial logic. Taken together, those circumstances established on the balance of probabilities that the contracts were shams.
3. Material irregularity. Since the alleged contracts were shams, the supposed creditors had no genuine liabilities and were not entitled to vote at the creditors’ meeting. A decision approving a CVA which succeeded only because of votes based on alleged liabilities that did not in truth exist was a material irregularity within section 6(1)(b) of the Insolvency Act 1986.
4. Relief. Under section 6(4) of the Insolvency Act 1986, the court had power to revoke the meeting’s decision approving the CVA. That power was exercised and the approval was revoked.