CFL Finance Ltd v Rubin & Anor (As Joint Supervisors of Moises Gertner's Voluntary Arrangement)

For voting purposes in an individual voluntary arrangement, a creditor must have a subsisting and enforceable debt at the date of the creditors’ meeting. An agreement which compromises a debt, while attempting to preserve it notionally until later performance, cannot enable the creditor to vote for its full amount where the debt is no longer enforceable. If the debt survives only contingently or its value is unascertained, it should be admitted at no more than a nominal value absent evidence supporting a higher valuation.

The statutory requirement of complete good faith between creditors colours the meaning of material irregularity. A secret arrangement which materially changes one creditor’s commercial interests or induces its vote may make that vote inadmissible. Unfair prejudice under section 262(1)(a) concerns prejudice caused by the terms of the IVA itself.

CFL Finance Ltd challenged the approval of an IVA proposed by Moises Gertner. The proposal depended on the vote of Kaupthing, whose admitted debt represented approximately 90 per cent of the voting claims. Shortly before the creditors’ meeting, Kaupthing had entered into a confidential settlement agreement with Mr Gertner, related parties and a trust. The agreement provided for a payment of US$6 million, profit-sharing arrangements and releases, while purporting to preserve the underlying debt until further conditions were performed.

CFL argued that Kaupthing was no longer a creditor, or alternatively that its debt had only nominal value, that its vote involved a material irregularity arising from breach of good faith, and that the IVA unfairly prejudiced CFL. The central issue was the effect of the settlement agreement on Kaupthing’s status and vote.

1. Material irregularity. The application succeeded. Kaupthing’s vote ought not to have been admitted, or alternatively ought to have been admitted only at a nominal value. Without that vote the IVA would not have been approved.
2. Construction of the settlement agreement. The agreement was an immediately binding contract. Although it purported to preserve the rights and obligations under the facility agreement and guarantees, its wider terms created an immediate compromise of the proceedings. Kaupthing’s entitlement was to enforce the settlement agreement, not to pursue the underlying debt. The underlying debt was therefore either compromised or, at best, left in a notional and unenforceable state.
3. A creditor unable to enforce the debt on which it relies is not a creditor for voting purposes. The position was analogous to that of a statute-barred debt. The later assignment contemplated by the agreement did not assist: the assignee would also be bound by the covenants not to sue and releases, and it had not voted at the meeting.
4. Alternatively, if a debt survived, its status was at best contingent on future non-performance of the settlement obligations. Under rule 5.21(3), there was no evidential basis for valuing it above £1. The court distinguished the question of admission from the valuation of an admitted but unliquidated, unascertained or contingent debt.
5. Good faith. Even if Kaupthing remained a creditor for the full amount, its vote should have been excluded. The principle of complete good faith between the debtor and creditors, and between competing unsecured creditors, colours the meaning of material irregularity under section 262(1)(b). The settlement materially altered Kaupthing’s commercial interest by giving it access to a share of potential arbitration proceeds unavailable to the general body of creditors. Its timing, structure and commercial effect also supported the conclusion that it operated as an inducement to vote for the IVA.
6. The language in Kapoor v National Westminster Bank Plc concerning an arrangement designed to subvert legislative policy was not a freestanding legal test. The narrow ratio was that the particular arrangement in that case was an apposite example of material irregularity.
7. Unfair prejudice. The section 262(1)(a) challenge failed. The authorities established that unfairness must ordinarily be caused by the terms of the IVA itself. CFL’s loss of the opportunity to pursue bankruptcy or negotiate a better settlement arose from the approval of the IVA, not from its terms. The same matters instead supported the material-irregularity challenge.
8. The court revoked the approval of the IVA and declined to order a further creditors’ meeting. Consequential matters, including permission to appeal and costs, were adjourned.