National Westminster Bank Plc v Kapoor & Anor

For an individual voluntary arrangement, material irregularity under section 262(1)(b) of the Insolvency Act 1986 extends beyond defects in voting to irregularities in the proposal, supporting documents and meeting process. The requirement of complete good faith and transparency informs that concept.

A partial equitable assignee of a debt is not a creditor of the debtor for voting purposes where the assignor retains the legal title and must enforce the debt. A debtor and an associated creditor cannot use a non-commercial assignment, arranged to circumvent the associated-creditor voting restrictions, to secure approval of an IVA. Counting the assignee’s vote in those circumstances is a material irregularity.

National Westminster Bank Plc applied to revoke approval of an individual voluntary arrangement proposed by Charnesh Kapoor. The bank alleged that the creditors’ meeting had admitted and counted claims arising from a purported assignment by Crosswood Limited of part of its debt to Sanjev Chouhen, and had thereby circumvented the restrictions applicable to associated creditors.

The application also challenged the characterisation and value of the Crosswood claim, the admission of Mr Chouhen’s claim, the treatment of Mr Chouhen as unassociated, and alleged inaccuracies in the IVA documentation. The central issues were whether Mr Chouhen was a creditor, whether he was an associate, and whether counting his vote constituted a material irregularity.

1. Challenge to the IVA. The application under section 262(1)(b) succeeded. The IVA was revoked and the bank was authorised to present a bankruptcy petition, not before 17 February 2011.
2. Material irregularity. Section 262(1)(b) covers irregularities at or in relation to the creditors’ meeting, including voting defects and irregularities in the debtor’s proposal or statement of affairs. Its content is informed by the requirement of complete good faith and transparency between debtor and creditors, as recognised in Somji v Cadbury Schweppes Plc [2001] 1 BCLC 498; [2001] 1 WLR 615.
3. Crosswood liability. The letter of 15 May 2008 created a guarantee liability rather than a direct loan liability. The claim was contingent, unliquidated and unascertained and fell to be valued under Rule 5.21(3). Nevertheless, the available evidence allowed a value substantially above £1 to be attributed to it.
4. Equitable assignment. A partial assignment of a debt operated only in equity. Crosswood retained the legal title and remained the creditor for the purposes of the insolvency legislation. Mr Chouhen, as equitable assignee, was not a person to whom the relevant debt was owed and should not have been admitted as a creditor. This conclusion was consistent with Parmalat Capital Finance Ltd v Food Holdings Ltd [2008] UKPC 23; [2008] BCC 371.
5. Associated-creditor rules. Mr Chouhen was not an associate merely because clause 2.2 required him to pay Crosswood an amount equal to 80% of dividends. The assignment created a debt obligation, not a trust relationship under section 435(5).
6. Circumvention of Rule 5.23(4)(c). The assignment was promoted to evade the associated-creditor restrictions. Mr Chouhen had no legitimate commercial interest and intended to vote for the IVA. Counting his vote as an independent creditor lacked good faith and constituted a material irregularity. The alternative challenge based on inaccuracies in the IVA documentation failed because those inaccuracies had not influenced the voting result.
7. The application to value the Crosswood claim at £1 under Rule 5.21(3), the challenge based on Mr Chouhen being an associate, and the separate documentation challenge were dismissed. The first respondent was ordered to pay the bank’s costs, subject to detailed assessment, with an interim payment on account of £25,000 plus VAT if applicable.

This was a first-instance decision. Permission to appeal was refused because, although the equitable-assignment issue might have had a real prospect of success, the respondent had no real prospect of overturning the independent finding that counting the vote constituted a material irregularity. An application for permission could be made to the Court of Appeal.