In the recent judgment in Elser v Sands and Others, Chief ICC Judge Briggs refused to allow the Chairman of a meeting of creditors, convened for the purpose of approving an IVA (“the Meeting”), his costs on an appeal made pursuant to Rule 15.35 of the Insolvency (England & Wales) Rules 2016, against certain of his decisions at the Meeting.


Rule 15.35 allows the Court, where it considers there has been "unfair prejudice" or "material irregularity" in respect of a decision of a convener or Chair of a relevant decision procedure, to reverse or vary the decision, or declare votes invalid and order another decision procedure to be initiated, or make such Order as it thinks fit. 

 

The Facts


Mr McCarthy (“the Debtor”), an undischarged bankrupt, proposed an IVA which was approved at the Meeting. The Applicant, Mr Elser, was a dissenting creditor represented by Kevin Mitchell in Isadore Goldman's London team.


Mr Elser alleged a material irregularity had occurred at the Meeting, the factual basis of which was the Chairman’s decision to admit the claims of three disputed creditors (the Fourth, Fifth and Sixth Respondents to the application).


The Chairman was the First Respondent to the application but took a neutral stance other than in respect of allegations made against him on behalf of Mr Elser in his evidence. 


The application was settled with one of the disputed creditors, the Sixth Respondent, in advance of the trial.

 

Decision on the main application 


Chief ICC Judge Briggs found that: 

  1. One of the disputed creditors, the Fifth Respondent, had not established his claim on the evidential standard of proof. The acceptance of his vote by the Chairman of the Meeting was a material irregularity. His vote was therefore declared invalid. 
  2. There should be a very substantial reduction in the claims advanced by the other remaining disputed creditor, the Fourth Respondent, however the reduction did not amount to a material irregularity.
  3. The time and cost of convening a new meeting of creditors would be pointless as the Debtor had failed to make any payments into the IVA, the Fifth Respondent had failed to establish he was a creditor and the Sixth Respondent had, as part of the terms it had settled upon with Mr Elser, agreed not to vote in favour of an IVA at any future meeting. The decision made at the Meeting would therefore be reversed and the approval of the IVA revoked.


Decision as to costs

 

Chief ICC Judge Briggs found that the Debtor and the Fifth Respondent were the unsuccessful parties for the purpose of Mr Elser's costs application. After substantial consideration, Chief ICC Judge Briggs declined an application for costs by the Chairman, reasoning that:

  1. He had no discretion to make such an Order, as the CPR did not contemplate costs Orders intra parties.
  2. Even if he was wrong on that and did have discretion, he would not exercise any discretion in favour of the Chairman, as this would go against the principle that costs Orders should reflect the overall justice of the case. There was no dispute between the Chairman and the Debtor and Fifth Respondent and it would not be right to visit his costs on them.
  3. A Chairman has a role to assist the Court in an appeal from their decision on entitlement to vote under rule 15.35, but need not to be represented for this purpose. The rules did not mandate attendance at Court and the Chairman could decide whether to attend for the purpose of being neutral.
  4. Nominees were likely to take account of the possibility of potential challenges and the possible need to provide assistance to the Court and comply with any legal obligations, when negotiating a fee for the IVA with the debtor. 
  5. The position would be different where allegations had been made against a Chair by any party which he was required to defend and where he could establish himself as being the successful party. 


What can be taken from the decision?

 

In making this decision, the Chief ICC Judge has set down a very clear path which should be followed by a Chair on any appeal against their decision at a meeting of creditors, and by any creditors seeking to challenge the decision. That path is, however, somewhat at odds with the approach frequently adopted in such applications to date. In summary:

  1. Providing a Chair conducts themselves properly and fairly, then the test is not whether they were right or wrong in allowing a creditor to vote, but whether the Judge on an appeal and hearing all of the evidence, including that adduced subsequent to the meeting of creditors, determines that the creditor was entitled to vote and if so, for what sum.
  2. The Chair is required to assist the Court, but is not envisaged as becoming substantially involved in the proceedings which follow the making of the challenge.  
  3. In agreeing to accept an appointment as Nominee in relation to an Individual Voluntary Arrangement, the Insolvency Practitioner should factor into the fee he agrees with the Debtor, any additional time costs that might be incurred in the event of a challenge. 
  4. The position will be different if the applicant, or any other party to the application, makes claims against the Chair which he is required to defend, but even in those circumstances, the legal costs which he may be able to recover, may be limited to those incurred in defending such allegations.   


Summary

 

This decision may well provide very substantial assistance to a Chair where a dissenting creditor or aggrieved debtor challenges the outcome of a meeting of creditors. Providing he/she acts in good faith and is able to clearly set out that he/she has acted reasonably and fairly in the way he/she has conducted themselves as Nominee and at the meeting, then he/she is relatively well protected on the position of costs and fairly well insulated from the proceedings that follow.

 

Whether it is practical to factor in the costs of assisting the Court within an enhanced Nominees fee remains to be seen, however, given that these fees are already the subject of fierce competition across the profession.

 

If the application which is brought makes claims against a Chair or makes criticisms of him/her that require defence or rebuttal, it is important to isolate those issues and to deal with them in isolation, giving notice of adverse costs being claimed against the party making the claims or criticism, such that he/she can identify himself/herself to the Court as the successful party on that issue.

 

From experience, most insolvency practitioners can readily identify cases where a challenge is likely to be made some way before a meeting of creditors takes place. Prudently, a number take the precaution of seeking legal advice on whether claims should be admitted and if so, for what sum. However, where advice might now be more readily and perhaps additionally sought is on the process which the Nominee/Chair adopts both in advance of the meeting and at the meeting itself. Communication and transparency with all may be a key step.

 

From the perspective of creditors, it is a case of knowing your battleground. It can be frustrating when a creditor client feels they have been unfairly treated by a Chair. All too often this encourages reckless allegations and ill thought-out challenges. You have now been warned. Again, and we say this so often, the earlier a client makes contact with their solicitor or advisor the better. If you take advice before a creditors’ meeting, you have a much better chance of resolving matters without the need for a challenge, with its cost implications. Further, if you do question the integrity of the Chair, then you have the opportunity of testing that position before the meeting is concluded. If you do decide to bring a challenge, make sure you have identified the correct tests and targets.

 

This is not a “get out of jail free card” for the Chair of every meeting. It does not protect Nominees or Chairs who do not follow a proper and fair process, both in determining whether a meeting should be convened, or in the way they conduct themselves at or in preparation for a creditors’ meeting.