McNally, In the matter of the Insolvency Act 1986

On an appeal against the admission of a creditor’s claim for voting purposes in an individual voluntary arrangement, the court must decide whether the challenged indebtedness is, on balance, owed. The legal burden remains on the creditor, but a bona fide assessment of the unsecured element based on a respectable professional valuation shifts the evidential burden to the debtor. In valuing security, costs which must inevitably be incurred before or in realising it must be taken into account, including inevitable receivership costs. The appeal was dismissed because the debtor produced no proper valuation evidence and the creditor’s evidence established the claimed unsecured debt.

The appellant challenged a bankruptcy order made after a proposed individual voluntary arrangement was defeated. He appealed the chairman’s admission of National Westminster Bank plc’s claim for voting purposes, arguing that the value of property securing the debt had been understated and that certain realisation and litigation costs should be excluded. The appeal arose from the District Judge’s refusal to set aside the chairman’s decision and his conclusion that the Bank’s valuation was correct. The central issues were whether the challenge disclosed a real issue requiring a fully contested hearing and whether the Bank’s unsecured claim had been correctly calculated as at the date of the interim order.

The appeal was dismissed.

1. Applicable appeal test. The appeal under rules 5.22(3) and 5.23(7) was not confined to reviewing the chairman’s conduct. As explained in Power v Petrus Estates Ltd [2010] BCC 11, the court may determine the underlying issue even where the chairman acted impeccably. The question was whether, on the balance of probabilities, the challenged indebtedness was owed.
2. Burden of proof. The legal burden remained on the Bank as creditor. Because it had made a bona fide assessment based on a respectable professional valuation, the evidential burden shifted to the debtor. The debtor had to provide respectable evidence capable of disturbing the valuation before a real issue requiring a full hearing could arise.
3. Valuation and costs. The Bank was entitled to rely on its valuation of the security at £350,000. The debtor’s unsupported estimates and an estate-agent marketing letter carried insufficient weight. Historical costs charged against the security had to be included. So too did future costs which were bound to be incurred, including inevitable ongoing receivership costs. Exceptional or unusual costs should not be assumed.
4. Authority on realisation costs. The observations in Owo-Samson v Barclays Bank Plc (No 1) [2003] BPIR 1373 that realisation costs are ignored were confined to disputes at the statutory-demand or bankruptcy-petition stage. The observations concerning inevitable future costs were obiter and did not govern an IVA voting appeal.
5. Correction of judgment. The judge corrected an arithmetical error in the draft judgment and considered consequential issues, relying on the jurisdiction discussed in Re L and B (Children) [2013] UKSC 8 and Space Airconditioning Plc v Guy [2013] 1 WLR 1293.

High Court (Chancery Division): dismissed the appeal from District Judge Musgrave’s decision dated 31 August 2012, which had upheld the chairman’s admission of the Bank’s voting claim and adjudged the appellant bankrupt.