National Westminster Bank plc v Kapoor

This appeal decided two related issues arising from the approval of an individual voluntary arrangement (IVA): (i) whether an equitable assignee of part of a debt is the creditor entitled to vote at the creditors' meeting called to approve an IVA, and (ii) whether there was a "material irregularity" under Insolvency Act 1986 s.262(1)(b) where an assignment of part of a debt, effected on uncommercial terms and plainly intended to enable a vote in favour of the IVA that would otherwise be discounted under Insolvency Rules 1986 r.5.23(4), was taken into account.

The court held that an equitable assignee may, in appropriate circumstances, be treated as the person owed the assigned debt and therefore entitled to vote; the equitable assignee has a substantive right in equity to enforce the assigned debt, subject to ordinary procedural rules about joinder. However, on the facts the assignment was a wholly uncommercial transaction, promoted by the debtor and designed solely to subvert the policy underlying IRR r.5.23(4). Taking account of the equitable assignee’s vote in those circumstances was a material irregularity under IA s.262(1)(b) and justified revocation of the IVA.

Background and parties:

• The appellant, Mr Kapoor, faced a bankruptcy petition by National Westminster Bank plc (the Bank) and proposed an IVA under which family funds would provide distributions to creditors.
• Appendix 5 to the proposal listed four creditors, including Crosswood Limited (an associate) and Mr Chouhen (not an associate). Crosswood purported to assign £4m of its claim to Mr Chouhen shortly before the interim order.

Procedural posture: The Bank applied under IA s.262(1)(b) for revocation of the IVA approval on the ground of a material irregularity at the creditors’ meeting; the High Court (HHJ Hodge QC) revoked the IVA and, alternatively, set aside the chairman’s decision to admit Mr Chouhen’s claim. The Bank appealed to the Court of Appeal.

Issues framed:

1. Who was entitled to vote in respect of the assigned part of the Crosswood debt: Crosswood (the legal owner) or Mr Chouhen (the equitable assignee)?
2. Whether the taking into account of Mr Chouhen’s vote constituted a "material irregularity" under IA s.262(1)(b), given the assignment’s uncommercial terms and its purpose of circumventing IRR r.5.23(4).

Court’s reasoning:

• On voting entitlement the court concluded that, as a matter of substantive law and consistent authority, an equitable assignee has a cause of action and is, in equity, the person entitled to the assigned chose in action; subject to procedural rules the assignee may be treated as the creditor owed the assigned debt and therefore entitled to vote, particularly where the assignor and debtor have communicated and accepted that position.
• On material irregularity the court applied the well‑established good faith principle articulated in earlier authorities (and considered in Cadbury Schweppes v Somji). Interpreting IA s.262(1)(b) against that background and against the policy embodied in IRR r.5.23(4), the court held that an assignment effected solely and demonstrably to confer voting rights while leaving the assignor with almost the whole economic benefit was an uncommercial device inconsistent with good faith and designed to subvert the statutory policy. Counting the assignee’s vote in those circumstances was therefore a material irregularity and justified revocation of the IVA.

Disposition: The Court of Appeal set aside the part of the High Court order which declared that the chairman had erred in law in treating the assignee as the creditor entitled to vote; but it otherwise dismissed the appellant’s appeal and upheld the revocation of the IVA and the Bank’s liberty to present a bankruptcy petition.

The appeal was allowed in part and otherwise dismissed. The court held that an equitable assignee can, in equity and subject to procedural joinder rules, be the creditor entitled to vote in respect of the assigned debt; for that reason the judge was wrong to hold that only the assignor could be treated as the creditor. Nevertheless, on the facts the assignment was a wholly uncommercial device, promoted by the debtor to subvert the policy of IRR r.5.23(4); counting the assignee’s vote was therefore a "material irregularity" under IA s.262(1)(b) and justified revocation of the IVA.

Appeal from an order of His Honour Judge Hodge QC dated 20 January 2011 (High Court, Chancery Division) in which the judge revoked the IVA approval under IA s.262(1)(b) and alternatively set aside the chairman's admission of the assignee's claim.