Kapoor v National Westminster Bank Plc & Anor

An undisputed equitable assignee of part of a debt may vote as the creditor in an individual voluntary arrangement where the debtor has notice of the assignment and the assignor agrees that the assignee should exercise the voting right.

Nevertheless, approval involves a material irregularity where a wholly uncommercial assignment was promoted by the debtor solely to transfer voting rights from an associate to an independent person and thereby subvert the statutory protection for independent creditors. The good faith required between the debtor and creditors, and among creditors, informs the meaning of “material irregularity” in section 262(1)(b) of the Insolvency Act 1986. That requirement extends beyond disclosure and applies even where the arrangement is transparent.

The appellant proposed an individual voluntary arrangement under which his creditors would receive a small dividend. A company associated with him assigned part of its debt to his friend. The assignment was disclosed, but was wholly uncommercial for the friend and left the associate with most of the economic benefit. Its sole purpose was to give the friend an independent vote capable of securing approval.

The High Court revoked the approval for material irregularity and alternatively set aside the chairman’s admission of the friend’s claim. The debtor appealed. The central questions were whether an equitable assignee of part of a debt was the creditor entitled to vote and whether counting that vote constituted a material irregularity under section 262(1)(b) of the Insolvency Act 1986.

1. The appeal was dismissed in substance, but the order was varied. Etherton LJ gave the leading judgment. Sir Mark Potter agreed, and Pill LJ agreed on both issues while adding reasons on material irregularity. The equitable assignee was entitled to vote, so the order setting aside the chairman’s admission of his claim was itself set aside. The revocation of the individual voluntary arrangement and the Bank’s liberty to present a bankruptcy petition remained effective.

2. An equitable assignee has the substantive right to recover the assigned debt in the assignee’s own name. The usual requirement to join the assignor protects the debtor against successive claims and conflicting decisions; it is procedural and may be dispensed with. The assignor cannot sue for its own account and may sue as trustee only with the assignee’s agreement and in a disclosed representative capacity. Accordingly, an IVA chairman should recognise an undisputed assignee of part of a debt as the creditor where the debtor has notice, the assignor agrees, and no risk of challenge or double recovery arises. Parmalat did not establish that only the assignor was the creditor; it concerned standing to present a winding-up petition.

3. The expression “material irregularity” in section 262(1)(b) of the Insolvency Act 1986 is not confined to prescribed documents and meeting procedures. The established requirement of complete good faith between debtor and creditors, and among creditors, informs its meaning. That principle is not limited to secret arrangements or failures of disclosure.

4. Counting the assignee’s vote was a material irregularity. The assignment was promoted by the debtor solely to evade the protection in rule 5.23(4) of the Insolvency Rules 1986. It was wholly uncommercial for the assignee, while the associated assignor retained most of the economic interest. Excluding that vote, more than half in value of the independent creditors opposed the arrangement and the resolution was invalid. The decision was confined to these paradigm facts.

5. This approach creates no undue difficulty for chairmen. A clear vote should be accepted or rejected. If its validity is uncertain, rule 5.22(4) requires the chairman to mark it as objected to, permit it provisionally and leave the dispute for the court.

1. Court of Appeal (Civil Division): By [2011] EWCA Civ 1083, dismissed the appeal against revocation of the IVA and the liberty to present a bankruptcy petition, but set aside the alternative order reversing the chairman’s admission of the equitable assignee’s claim.
2. High Court, Chancery Division: His Honour Judge Hodge QC revoked approval of the IVA under section 262(1)(b) of the Insolvency Act 1986 for material irregularity. Alternatively, he set aside the chairman’s admission of the assignee’s claim under rule 5.22(3) of the Insolvency Rules 1986 and permitted the Bank to present a bankruptcy petition.