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Challenging an IVA on the grounds of material irregularity

Business meeting Print publication

11/12/2018

In Gertner v CFL Finance Ltd [2018] the Court of Appeal found that there had been a material irregularity at the creditors’ meeting convened to consider the debtor’s IVA proposals. The lender’s breach of the good faith principle between creditors was sufficient to revoke the IVA on grounds of material irregularity.

Background

As discussed in a previous article, a voluntary arrangement, be it an IVA or CVA, can only be challenged on two grounds. First that there is unfair prejudice to a creditor and second that there has been a material irregularity in the decision process.

In each case, material irregularity is a question of fact arising out of the conduct of the decision-making procedure by which the voluntary arrangement is approved. In Gertner v CFL Finance Ltd [2018] EWCA a debtor appealed against an order revoking his individual voluntary arrangement on the grounds that there had been a material irregularity at the creditors’ meeting.

The Court of Appeal upheld the High Court’s decision that there had been a material irregularity at the creditors’ meeting convened to consider Mr Gertner’s IVA proposals. The court examined the terms of the settlement agreement and found that the major creditor (a bank) had received a significant financial advantage from a third party which, when viewed objectively, was drafted to induce the bank’s support for the IVA. This financial advantage had not been disclosed to the other creditors at the meeting, instead they had just been given information relating to the amount of the proposed IVA dividend.

The Court of Appeal decided that the extra payment to the bank created an obvious, material conflict of interest which should have been disclosed to the other creditors. The judgment went on to say that the bank should have been disqualified from voting at the creditors’ meeting because it had breached the duty of good faith between creditors, which is an element of the concept of material irregularity. Without the bank’s vote the IVA would have failed and so the earlier decision to revoke the creditors’ approval stood.

WM comment

Although this decision was in relation to an IVA, the duty of good faith between creditors applies equally to those involved in a company voluntary arrangement. A breach of the duty will lead to a finding of material irregularity and the revocation of the arrangement.

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