Peoples Phone Ltd v Nicolaou

An application challenging an insolvency supervisor’s rejection of a proof of debt is not confined to the material available to the supervisor. The court may receive further evidence and should determine whether the proof ought to be admitted or varied.

Where rectification proceedings may establish that a debt was never released, the proper course is generally to adjourn the insolvency application pending their outcome. Procedural defects which are readily curable, and delay incurred while attempting to resolve the mistake without proceedings, do not ordinarily justify striking out the application. Rectification, if granted, relates back to execution of the instrument.

Peoples Phone Ltd appealed against a decision of District Judge Ellington dated 7 December 2010. The judge had dismissed its application to reverse the supervisor’s rejection of a proof for rent arrears in the debtor’s individual voluntary arrangement.

The proof had been rejected because a deed of surrender released liabilities under the lease. Peoples Phone alleged that the release resulted from mistake and had commenced separate rectification proceedings. It sought an adjournment until those proceedings were determined. The central issues were whether the insolvency application was bound to fail, whether Peoples Phone could be a contingent creditor, and whether the application should have been adjourned.

1. Appeal allowed. District Judge Ellington ought not to have dismissed the application at its first hearing. He should have adjourned it pending the outcome of the rectification proceedings.
2. The application was unsigned, undated and unsupported by evidence, contrary to the procedural requirements. Those were relatively trivial and curable defects. The primary facts were substantially undisputed, and the alleged mistake and proposed rectification were clearly identified. The defects did not justify striking out the application.
3. An application under section 37 of the conditions of the IVA is not an appeal confined to the material before the supervisor. It is an application for the court to determine whether the proof should be admitted or varied. The court may receive further evidence and may take account of events occurring after the supervisor’s decision.
4. The balance between the supervisor’s wish to conclude the IVA and the fair determination of a genuine claim favoured awaiting the rectification proceedings. If rectification succeeded, distributing Peoples Phone’s potential share to other creditors would create a windfall. Further interim distributions could be made without prejudicing the other creditors.
5. Rectification, if granted, relates back to the time when the instrument was executed. The deed would then be read as if it had originally been drawn in its rectified form. Peoples Phone would therefore remain an actual creditor within the IVA, rather than acquiring a new debt outside it.
6. The question whether Peoples Phone was a contingent creditor under section 382 of the Insolvency Act 1986 was academic. Nevertheless, the court accepted that it was not a contingent creditor: it was an actual creditor at the date of the IVA, and its continuing status depended on whether rectification succeeded. The application was not bound to fail, because it would fail only if the rectification proceedings failed.

• High Court (Chancery Division): Appeal allowed against District Judge Ellington’s dismissal of the application on 7 December 2010. The application was to be adjourned pending the rectification proceedings.