Scio-Fund Sicav-Fis & Anor v Mohammed Reza Aslam Merchant & Anor

For an individual voluntary arrangement to be approved, the debtor must make full and frank disclosure of relevant matters and creditors must be treated in accordance with the pari passu principle. Undisclosed collateral rights granted to some creditors may constitute both unfair prejudice and a material irregularity under section 262 of the Insolvency Act 1986. The nominee must exercise independent professional judgment and adequately scrutinise the proposal, its assumptions and supporting information. A proposal may remain viable despite a low prospect of achieving its projected return where it offers creditors a realistic alternative to bankruptcy. The court must not substitute its assessment for that of the creditors unless the statutory grounds are established.

The applicants, creditors of the first respondent, challenged the approval of his individual voluntary arrangement under section 262 of the Insolvency Act 1986. They alleged undisclosed standstill agreements with certain creditors, inaccurate disclosure of assets and liabilities, an unrealistic proposal, and failures by the nominee to discharge his duties. They also presented a bankruptcy petition under sections 264(1)(c) and 276(1)(b). The central issues were whether the IVA involved unfair prejudice or material irregularity, whether the proposal had a reasonable prospect of implementation, and whether the statutory conditions for a bankruptcy order were met.

1. The section 262 application succeeded. The standstill agreements gave participating creditors additional rights against FF, including direct payment rights and extended enforcement rights, which were unavailable to other IVA creditors. Their existence, terms and effect were not properly disclosed in the proposal or nominee’s report. The arrangements therefore created differential treatment, breached the pari passu principle and offended the requirement that an IVA be proposed in good faith and with complete transparency. The omission was objectively material because the court could not know how creditors would have voted had they been fully informed.
2. The nominee failed to exercise the required independent professional judgment. He was complicit in concealing the standstill arrangements, did not adequately interrogate the very thin business plan or its assumptions, and initially relied on a non-contractual letter of intent from FF. Those failures amounted to a material irregularity under section 262.
3. The projected return of 100p in the pound was fanciful and the business plan was weak. Nevertheless, the proposal had a reasonable prospect of implementation in the limited sense required by section 256A(3): it offered creditors some possible return where bankruptcy was likely to offer none. The court was not entitled to substitute its own view for that of the creditors on this issue.
4. The applicants failed to establish that the debtor had failed to disclose an interest in the &Soul companies or FF. The evidence did not justify the necessary inference.
5. The court did not determine the bankruptcy petition under section 276, having concluded that the IVA approval challenge succeeded. Relief was to be addressed after circulation of the judgment.