Gertner v CFL Finance Ltd & Anor

A creditor may preserve an existing debt while agreeing not to enforce it personally. Such forbearance does not, without a release of the liability, prevent participation in an individual voluntary arrangement or proof for a dividend.

A contingency affecting enforcement does not necessarily make an otherwise liquidated and ascertained debt unliquidated or unascertained for voting purposes. However, the good faith principle disqualifies a creditor whose undisclosed collateral advantage induces support for an arrangement and creates a material conflict with the general body of creditors. Counting that creditor’s decisive vote is a material irregularity under section 262(1)(b) of the Insolvency Act 1986.

The debtor proposed an individual voluntary arrangement funded by a third party. Kaupthing Bank, his largest creditor, voted for the proposal in respect of the full amount of a guarantee debt. Before the creditors’ meeting, Kaupthing had entered into an undisclosed settlement agreement providing it with US$6 million, profit-sharing rights and other prospective benefits.

HH Judge Keyser QC held in [2017] EWHC 111 (Ch) that Kaupthing was no longer a creditor or, alternatively, that its claim should have been valued at £1. He also held that the collateral arrangement breached the good faith principle and caused a material irregularity. The debtor appealed. CFL cross-appealed against the rejection of its unfair-prejudice case.

The principal issues were Kaupthing’s status and voting value, and whether its collateral advantage disqualified it from voting.

1. Appeal dismissed. The judge was wrong to hold that Kaupthing had ceased to be a creditor or that its debt should have been valued at £1. Nevertheless, the approval of the individual voluntary arrangement involved a material irregularity because Kaupthing’s collateral advantage disqualified it from voting. Patten LJ gave the judgment, with which Floyd and Coulson LJJ agreed.

2. The settlement agreement took immediate effect, although ultimate settlement and assignment of the debt depended on performance of specified obligations. Its covenants not to sue restricted Kaupthing’s own enforcement rights but preserved the underlying facility debt and guarantee for later assignment. A creditor may preserve a debt while agreeing not to enforce it personally. That differs from releasing the debt and does not ordinarily remove the right to participate in collective insolvency decisions or prove for a dividend.

3. The debt remained liquidated and ascertained. A contingent debt and an unliquidated or unascertained debt are distinct concepts. Although future enforcement by Kaupthing might depend on non-performance of the settlement obligations, no future event could alter the amount owed under the guarantee. Rule 5.21(3) of the Insolvency Rules 1986 therefore did not apply, and the voting entitlement was ordinarily calculable under rule 5.21(2)(b).

4. The good faith principle forms part of the concept of material irregularity in section 262(1)(b) of the Insolvency Act 1986. The settlement gave Kaupthing a substantial advantage unavailable to other creditors. Objectively, that advantage induced Kaupthing to support the arrangement, avoided bankruptcy and placed Kaupthing’s interests in conflict with those of the general body of creditors. Kaupthing was consequently disqualified from voting. Its vote was decisive, so admitting it caused a material irregularity.

5. Third-party payment of selected creditors is not invariably objectionable. The football-club authorities concerned published, pre-existing rules protecting a defined class. The present agreement was instead an ad hoc private arrangement benefiting the largest and most influential creditor.

6. The appeal was dismissed. It was unnecessary to decide CFL’s cross-appeal alleging unfair prejudice under section 262(1)(a).

1. Court of Appeal (Civil Division): In [2018] EWCA Civ 1781, dismissed the debtor’s appeal because Kaupthing’s collateral advantage disqualified it from voting, although it reversed the judge’s conclusions that Kaupthing was no longer a creditor and that its debt was unliquidated or unascertained. The cross-appeal was not determined.

2. High Court, Chancery Division: HH Judge Keyser QC held in [2017] EWHC 111 (Ch) that admitting Kaupthing’s vote caused a material irregularity because its debt was extinguished, unenforceable or alternatively subject to nominal valuation, and because the collateral agreement breached good faith. He rejected the unfair-prejudice ground.