CFL Finance Ltd v Bass & Ors (Good faith to voluntary arrangements : consumer credit law)

A structured settlement of disputed indebtedness does not ordinarily provide “credit” or “financial accommodation” merely because payment is made by instalments. The court must identify the essential character of the agreement objectively. A bona fide compromise, negotiated at arm’s length with legal advice, should generally be enforced and not reopened in the absence of a vitiating factor. A penalty challenge may fail where the agreement reflects legitimate commercial interests, equal bargaining power and skilled legal advice. In deciding whether to adjourn a bankruptcy petition to permit a voluntary arrangement, the court must consider the class nature of insolvency, the likely voting result, the commercial return and all the circumstances. Good faith requires transparency and prevents a creditor receiving undisclosed collateral benefits unavailable to the general creditor body.

CFL Finance Ltd petitioned for the bankruptcy of Moises Gertner in respect of a debt arising from a personal guarantee. The debt had been compromised by a Tomlin Order requiring payment by instalments, with accelerated compound interest following default.

Gertner argued that the compromise was regulated consumer credit, created an unfair relationship, or contained an unenforceable penalty. An opposing creditor, Laser Trust, sought an adjournment so that creditors could consider a second voluntary arrangement after an earlier arrangement had been revoked for breach of good faith and the decision upheld on appeal. The central issues were whether the CFL debt was genuinely disputed, whether a second proposal could be advanced, and how the court should exercise its discretion.

1. CFL debt. The Tomlin Order schedule was a contract. Properly construed in its documentary, factual and commercial context, it required payment of an agreed settlement sum by specified dates. It did not defer an immediately payable debt or extend credit. Its essential character was a compromise of litigation, not an agreement for making loans. The Consumer Credit Act 1974 therefore did not apply to the compromise.
2. The compromise was bona fide, fair and reasonable, and entered into with legal advice. Applying Binder v Alchaouzos [1972] 2 QB 151, the court should not go behind it in the absence of duress, undue influence, mistake, misrepresentation, fraud or another vitiating factor.
3. The accelerated compound-interest provision was a secondary obligation. Applying Cavendish Square Holdings v Makdessi [2016] AC 1172, the penalty argument did not raise a genuine or substantial dispute. The parties dealt at arm’s length, Gertner had skilled legal advice, and the lender had legitimate commercial interests. The compromise and the previous opportunities to raise the issue also prevented its reopening.
4. The earlier breach of good faith remained relevant. A private arrangement giving the largest creditor a collateral advantage unavailable to other creditors created materially different commercial interests and undermined transparency. The Laser Trust evidence was unreliable and did not establish genuine independence or a commercial justification.
5. The court rejected abuse-of-process and collateral-attack arguments as absolute bars to a second voluntary arrangement. However, the similarities between the proposals and the continuing collateral advantage were relevant to discretion.
6. Under section 266(3) of the Insolvency Act 1986, the court should consider the class nature of insolvency, the likely voting result, whether the proposal offers a commercial return, and all the circumstances. The Laser Trust’s vote was discounted. The application to adjourn was refused and an order was made on the bankruptcy petition.
7. The nominees’ investigations were reasonable in the circumstances, but the court was not bound by their opinion.

The judgment records that an earlier IVA had been revoked by HHJ Keyser QC in [2017] EWHC 111 (Ch). The Court of Appeal upheld that decision in [2018] EWCA Civ 1781. Permission to appeal to the Supreme Court was refused. This judgment concerned the subsequent bankruptcy petition and proposed second arrangement.