Gertner & Anor v CFL Finance Ltd

This appeal concerned (i) whether the petitioning creditor's asserted debt (derived from a Settlement Agreement appended to a Tomlin order) was disputed on substantial grounds because it was either caught by the Consumer Credit Act 1974 or was void as a penalty, and (ii) whether the judge erred in refusing to stay the bankruptcy petition under section 266(3) Insolvency Act 1986 so that a creditors' meeting could consider a proposed individual voluntary arrangement (the Second Proposal) supported by the largest creditor. The court held that the Settlement Agreement did not amount to the provision of credit within the meaning of the Consumer Credit Act (ss.8–9) and that clause 5 of the Settlement Agreement was not a penalty under the test in Cavendish/Makdessi. The court further held that, in the particular factual matrix, the judge had taken immaterial factors into account when exercising his discretion under section 266(3) and that, absent a realistic risk that the good faith principle (as reflected in IA1986 and the Rules) would vitiate the determinative creditor's vote, the petition should have been stayed so the Second Proposal could be put to creditors. The appeal was allowed and the Briggs order set aside.

This appeal arose from an order of Chief Insolvency and Companies Court Judge Briggs dated 15 July 2019 which refused an application to stay the hearing of a creditor's bankruptcy petition (presented by CFL Finance Limited) so that a creditors' meeting could consider a debtor's proposal for an individual voluntary arrangement (IVA) supported by Laser Trust. The proceedings have a long pedigree: the dispute began with enforcement of a guarantee and was compromised by a Settlement Agreement appended to a Tomlin order; the debtor then sought an IVA (the First Proposal) which was approved by creditors but later set aside following challenge; there was a Court of Appeal decision and subsequent assignment of a major creditor's claims to Laser Trust.

Nature of the application: the debtor and the opposing creditor (Laser Trust) sought a stay of the petition under section 266(3) IA1986 to enable the Second Proposal to be considered by creditors. CFL opposed the stay and contended the petitioning debt was not disputed on substantial grounds.

Issues framed by the court:

• Whether CFL's debt under the Settlement Agreement was disputed on substantial grounds because the Settlement Agreement was a regulated consumer credit agreement (Consumer Credit Act 1974 ss.8–9) or because clause 5 amounted to a penalty (Cavendish/Makdessi test).
• Whether Judge Briggs mis-exercised his discretion under section 266(3) IA1986 in refusing to stay the petition to allow the IVA meeting, in particular whether he wrongly applied or overstated the scope of the good faith principle applicable to IVAs and whether he relied on immaterial factors.

Court's reasoning and outcome:

• On the Consumer Credit Act point the court held the Settlement Agreement was a bona fide compromise replacing earlier claims; it did not provide "credit" or "financial accommodation" within the meaning of the Act and the Tomlin schedule did not change the contractual character of the compromise. The judge's conclusion that the Act did not apply was affirmed.
• On the penalty point the court applied the Cavendish/Makdessi approach: construction is determined at the time the clause was agreed, legitimate commercial interest must be shown and disproportionality assessed. Given legal advice, bargaining parity and the commercial context (short-term, high-rate lending and an acceleration mechanism), clause 5 did not found a substantial penalty defence that would defeat the petition. The judge's conclusion on this point was upheld.
• On the stay discretion the court held that Judge Briggs had taken immaterial factors into account (for example, making value judgments about the size of the dividend and the desirability of further investigation) rather than focusing on whether the good faith principle would realistically vitiate the determinative creditor's vote. Because Laser Trust held over 90% of the debt and would, absent a good-faith taint, determine approval, the court concluded the petition should have been stayed. The judge's view of the good faith rule had also been overstated in parts.

Remedy: the Briggs order was set aside and the proceedings on the petition were stayed in favour of a creditors' meeting to consider the Second Proposal.

The appeal was allowed. The court held that (1) the Settlement Agreement annexed to the Tomlin order did not constitute a regulated consumer credit agreement under the Consumer Credit Act 1974 and the Consumer Credit Act point did not raise a substantial dispute; (2) clause 5 of the Settlement Agreement was not, on its construction and commercial context, a penalty under the Cavendish/Makdessi test; and (3) Judge Briggs mis-exercised his discretion under section 266(3) IA1986 by taking immaterial factors into account and by overstating the scope of the good faith rule, and therefore should have stayed proceedings on the petition so that the Second Proposal could be considered by creditors.

First instance challenge to the IVA before HHJ Keyser, QC ([2017] EWHC 111 (Ch)); appeal to the Court of Appeal ([2018] EWCA Civ 1781) which affirmed material irregularity in the First Proposal; proceedings before Chief Insolvency and Companies Court Judge Briggs (Briggs Decision and order dated 15 July 2019, [2019] EWHC 1839 (Ch)), from which this appeal to the High Court (Marcus Smith J) followed ([2020] EWHC 1241 (Ch)).