Smith-Evans v Smailes

An individual voluntary arrangement approved and reported to the court is not ordinarily vulnerable to a later collateral attack on the ground that an irregularity meant that approval was never achieved. Insolvency Act 1986, section 262, and Rule 5.22 provide an exhaustive and time-limited route for challenging unfair prejudice or material irregularity. The statutory reference to approval by the creditors’ meeting extends to purported approval as reported to the court. If no timely challenge is made, the arrangement stands. Authority initially lacking to a chairman may also be supplied retrospectively by ratification. The distinction between nullities and irregularities should not be used to undermine the statutory scheme.

The appellant appealed against a bankruptcy order made on 30 November 2012. The bankruptcy petition alleged breaches of an individual voluntary arrangement apparently approved in 2008. The appellant argued that the arrangement was a nullity because the chairman had exceeded the authority given by proxies when reporting modifications to the creditors’ proposals, and because the necessary approval had not been given at the creditors’ meeting.

The district judge rejected the appellant’s factual case and found that she knew of and approved the modifications. The appeal raised whether the proxy irregularities and alleged absence of approval rendered the IVA void, or whether the statutory challenge procedures governed the position.

1. Appeal dismissed. The bankruptcy order was based on breaches of an IVA which remained effective.
2. The chairman initially exceeded the authority conferred by the HSBC and RBS proxies. However, those creditors later voted on the determination of the IVA on the footing that it existed. That conduct amounted to unequivocal ratification. Ratification has retrospective effect and supplied the authority that had initially been lacking.
3. The district judge’s finding that the debtor knew of and approved the modifications was an inference based on evidence and witness assessment. There was no proper basis for interfering with that finding on appeal.
4. The statutory scheme in Part 8 of the Insolvency Act 1986, read with Rules 5.22 and 5.23, provides the relevant mechanism for challenging an IVA approval. Section 262 covers unfair prejudice and material irregularity at or in relation to the creditors’ meeting. Its 28-day time limit, together with the corresponding limit in Rule 5.22, would be undermined if a debtor could later allege that the arrangement had never existed.
5. Section 260 was construed purposively. Approval by the section 257 meeting includes purported approval as reported to the court. An error in the report, including an error occurring after the meeting, is an irregularity in relation to the meeting and must be challenged within the statutory period.
6. There is no automatic invalidity or nullity even where a timely challenge is made. The court’s powers under section 262 are discretionary and depend on unfair prejudice or material irregularity. In the present case there was no unfair prejudice, and the irregularity was not material in light of the creditors’ knowledge and ratification.
7. The reasoning in Re Plummer was doubted and respectfully rejected to the extent that it permitted a later collateral challenge based on alleged non-approval. The court preferred a workable, purposive construction of the statutory code.

• High Court (Chancery Division): Permission to appeal was granted and the substantive appeal against the bankruptcy order was dismissed.
• District judge: The district judge made the bankruptcy order on 30 November 2012 and found that the debtor knew of and approved the IVA modifications.