Gertner v CFL Finance Ltd

The Court of Appeal considered an appeal against a High Court order challenging the approval of an Individual Voluntary Arrangement (IVA) under section 262 of the Insolvency Act 1986 and the Insolvency Rules (IR 5.21–5.23, IR 5.22). The central issues were (i) the proper construction and legal effect of a settlement agreement (the KSA) between Kaupthing and members of the Gertner group, (ii) whether Kaupthing remained a creditor entitled to vote and if so at what value, and (iii) whether the KSA gave rise to a material irregularity by breaching the principle of good faith between creditors. The court held that, although the KSA did not extinguish or render the debt unliquidated, it provided Kaupthing with a collateral advantage that created a conflict with other creditors and thereby breached the good faith principle; that breach amounted to a material irregularity under s.262(1)(b) and justified setting aside the creditors' approval of the IVA.

The appellant, Mr Moises Gertner, had given a personal guarantee in respect of loans taken by family companies. CFL Finance Limited (CFL) presented a bankruptcy petition after a statutory demand and the debtor proposed an IVA which included a third-party payment of £487,500. Kaupthing Bank hf, the largest creditor, had separately entered into a settlement agreement (the KSA) with Crosslet Vale and related parties shortly before the creditors' meeting; the KSA involved a US$6m payment by a third party and profit-sharing and other arrangements that potentially gave Kaupthing an economic benefit outside the IVA.

(i) Nature of the claim/application: CFL applied under s.262 IA 1986 and IR 5.22 to challenge the approval of the IVA on grounds of unfair prejudice and/or material irregularity, alleging inadequate disclosure, the existence of the KSA and that Kaupthing had been improperly admitted to vote in full.

(ii) Issues framed by the court: (a) construction of the KSA and whether it extinguished or rendered unenforceable Kaupthing's claims so as to disqualify or reduce its voting entitlement (IR 5.21); (b) whether the KSA breached the duty of good faith between creditors such that Kaupthing's vote was a material irregularity (s.262(1)(b)); and (c) whether the IVA unfairly prejudiced CFL under s.262(1)(a).

(iii) Reasoning and conclusion: The court analysed the KSA against its entire terms and the contemporaneous profit-sharing agreements. It concluded that the KSA was an immediate and binding settlement in respect of the dispute, but that, absent express wording to the contrary, contractual forbearance by a creditor to enforce a debt does not necessarily extinguish its status as a creditor for voting purposes. The court held the debt remained liquidated and ascertained, so IR 5.21(3) (valuation of unliquidated claims at £1) did not apply. However, objectively viewed, the KSA gave Kaupthing a collateral advantage (the US$6m and potential share in arbitration recoveries) compared with other creditors and thus created a conflict of interest and breach of the good faith principle applied to creditors' meetings. Relying on established authority about good faith in compositions and the Court of Appeal's decision in Kapoor v National Westminster Bank plc, the court held that the breach constituted a material irregularity under s.262(1)(b) and that Kaupthing's vote should not have been counted in the manner that led to approval. The appeal by Mr Gertner was dismissed and the judge's material irregularity conclusion upheld. The court did not need to decide CFL's cross-appeal on unfair prejudice.

Appeal dismissed. The Court of Appeal held that although the KSA did not extinguish or render the debt unliquidated so as to deprive Kaupthing of creditor status for voting, the KSA conferred a collateral advantage on Kaupthing which breached the good faith principle between creditors. That breach amounted to a material irregularity under s.262(1)(b) Insolvency Act 1986, so the admission and counting of Kaupthing's vote in the way it was exercised at the creditors' meeting was wrongful and justified intervention.

Appeal from the High Court of Justice, Chancery Division (HH Judge Keyser QC) arising from [2017] EWHC 111 (Ch). The matter was decided in the Court of Appeal, Civil Division, [2018] EWCA Civ 1781.