Gertner v CFL Finance Ltd & Anor [2018] EWCA Civ 1781

“63.6 The resulting position may be summarised as follows. There was an immediate binding agreement between the parties to the KSA. Laser Trust had an unconditional obligation to make payment to Kaupthing. The parties had an unconditional obligation to stay the Kaupthing Proceedings by Tomlin Order. Kaupthing had the right against the defendants in the Kaupthing Proceedings to enforce the KSA as being the terms on which those proceedings were stayed; that enforcement might be by way of specific enforcement or by way of the secondary remedy of damages. However, Kaupthing could not pursue the Kaupthing Debt against the Gertner Parties. Correspondingly, the Gertner Parties were precluded from asserting any right of claim or counterclaim against Kaupthing; their rights, too, lay only in enforcement of the terms of the KSA under the Tomlin Order. The Kaupthing Debt itself, though not capable of being pursued in the Kaupthing Proceedings, purportedly remained in existence until such time if any as it could be assigned to Laser Trust. (In the light of clause 5 of the KSA and the Assignment of Debt and Security to be executed under it, the Kaupthing Debt must for these purposes include Mr Gertner's liability under his personal guarantee.) Clause 2.1, when read in the context of the KSA as a whole, can mean no more than that Kaupthing's rights under the KSA and in respect of ownership of the Kaupthing Debt are not discharged until the Gertner Parties have fully performed their obligations under the KSA. It cannot have the effect that the KSA was anything other than an immediate and binding compromise of the Kaupthing Proceedings.”

“68. As at the date of the creditors' meeting, Kaupthing was not entitled to sue upon or enforce a debt owed by Crosslet Vale under the Facility Agreement or a debt owed by Mr Gertner under his guarantee. Its former entitlement in that regard had been replaced by an entitlement to enforce the terms of the KSA. For reasons already set out, neither clause 2.1 nor clauses 6.2 and 7 of the KSA assist Mr Gertner. Accordingly, even if the KSA can be supposed to have preserved in existence underlying contractual obligations (as to which, see further below), Kaupthing's claims in respect of those obligations had been compromised. To say that the debt continues in existence in those circumstances is indeed a "legal sleight of hand", as CFL submits. 69. Alternatively, even if (contrary to my view) the claims could be said to have some kind of continuing existence, Kaupthing's inability to enforce those claims meant that it could not be considered a creditor in respect of them. The position would be analogous in that regard to the case of a statute-barred debt (as to which, see Ridgeway Motors (Isleworth) Ltd v ALTS Ltd [2005] EWCA Civ 92, [2005] 1 WLR 2871, at [35], and Mittal v RP Capital Explorer Master Fund [2014] BPIR 1537 at [58]). For Mr Gertner, Mr Fraser QC submitted that, if indeed Kaupthing were prevented from enforcing the claims, the case was different from that of a statute-barred debt: a time-barred debt can never be recovered, whether by the creditor or by anyone else, unless the debtor pays voluntarily; in the present case, the covenant not to sue is personal to Kaupthing and does not prevent enforcement of the debt after assignment to Laser Trust; and the result of concluding that the debt was unenforceable and so could not be counted at the creditors' meeting would be that no account could be taken of it when deciding on the Proposal. I do not find that submission persuasive. In the first place, the relevant question is whether Kaupthing was a creditor. If it could not enforce the debt on which it relied, it was not a creditor. Laser Trust did not vote in respect of the debt, and it could not have done so, because it had taken no assignment. I readily accept that the conclusion, namely that no one could vote in respect of the debt at the creditors' meeting, is contrary to what the parties to the KSA sought to achieve; that is not in doubt. But the result arises from an elaborate attempt to eat one's cake and have it. It is, moreover, a result that reflects at least one purpose of the KSA, namely to ensure that Mr Gertner would not be pursued for the debt at all.”

“(3) For the purposes of references in this Group of Parts to a debt or liability, it is immaterial whether the debt or liability is present or future, whether it is certain or contingent or whether the amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion; and references in this Group of Parts to owing a debt are to be read accordingly.”

“The fair construction of the clause seems to me this: 'a contingent debt' refers to a case where there is a doubt if there will be any debt at all; 'a debt, the value of which is not ascertained,' means a debt the amount of which cannot be estimated until the happening of some future event; and 'an unliquidated debt' includes not only all cases of damages to be ascertained by a jury, but beyond that, extends to any debt where the creditor fairly admits that he cannot state the amount. In that case there must be some further enquiry before he can vote.”

“Just how clearly quantified a debt has to be before it is liquidated and ascertained is not a question which it is easy to answer. [And after citing Mellish LJ's definition of an unliquidated debt in the dictum in In re Dummelow, set out above, he continued:] However, there is little subsequent authority which takes matters much further. A claim for damages and a contingent claim have (unsurprisingly) been held to be unliquidated or unascertained claims--see Re Cranley Mansions Ltd; Saigol v Goldstein [1994] 1 WLR 1610; Doorbar v Alltime Securities (Nos 1 and 2) [1996] 1 WLR 456; and Re Newlands (Seaford) Educational Trust; Chittenden v Pepper [2006] EWHC 1511 (Ch).”

“Now I take it to be thoroughly settled, both in Courts of Law and Equity, that where there is a bankruptcy, or an arrangement with creditors by composition or insolvency, when insolvency exists as contradistinguished from bankruptcy, it is the duty of all creditors who have once taken part in the proceedings of bankruptcy or composition to stand to share and share alike. Equality is the only principle that can be applied, and if one creditor, unknown to the other creditors--not unknown to one or two, but to the general body--enters into an arrangement by which he gets for himself from the debtor, or from any one on behalf of the debtor, any collateral advantage whatever, that is a fraud upon the other creditors ...”

“In order that such a deed should be binding on the creditors, it is essential that there should be the most perfect good faith between the debtor and all his creditors. It is very true that it does not appear that the preference is to be obtained from the assets, or that all the creditors will not receive an equal distribution of the assets; but it is a wrong ground to rest the validity of a composition deed upon, to say that the creditor looks only to the equal distribution of assets. There may be cases in which a man might not be capable of deciding for himself whether he would accept the composition, and would rather trust to the judgment of a body of creditors than to his own, whether it was advisable for him to execute the deed; and he is entitled by the agreement into which he enters to insist that the concurrence of the other creditors shall have been obtained by fair means; and if it were obtained by a promise from the debtor to give something more to some creditors than to others, the deed would be fraudulent and void, as between the debtor and the other creditors who were not parties to the arrangement. ”

“24. … Although the English law of bankruptcy now has the appearance of a complete statutory code, it is built on foundations which owe much to past judicial creativity and development of far more meagre statutory material going back to Elizabethan times, the first “modern” statutes being the Bankruptcy Act 1869 (32 & 33 Victc 71) and the Debtors Act 1869 (32 & 33 Victc 62). The deputy judge's impressive survey of the old law shows that in relation to compositions and arrangements with creditors the court did impose a strict requirement of good faith as between competing unsecured creditors, and prohibited any secret inducement to one creditor even if that inducement did not come from the debtor's own estate. There is no strong presumption that a similar principle must be found in the new regime set out in Part VIII of the 1986 Act, but (to put it at its lowest) it would be no great surprise to find it there in one form or another. 25. In applying the terms of section 276(1)(b) to the facts of this case the deputy judge followed the approach of Rimer J in Apton New Homes v Tack (unreported) 19 June 1998. In order to determine whether there had been a material omission he asked himself whether, had the truth been told, it would be likely to have made a material difference to the way in which the creditors would have considered and assessed the terms of the proposed IVA. I consider that that is the correct approach, so long as the question is to be answered objectively, and so long as it is borne in mind that as well as the creditors which were represented at the meeting on 20 December 1999, Mr Cooper held proxies for a number of creditors which were not present by their own representatives. Had Mr Cooper been informed on that day of an important new development which ought to be reported to those for whom he held proxies it would on the face of it have been his duty to adjourn the meeting and report to the other creditors, even if that meant having to obtain an extension of time (under section 376 of the Act). ….. 34. In his conclusion that the IVA was void the deputy judge did in my respectful view err by over-reliance on the old law, to which he devoted a large part of his judgment, and by insufficient regard to the terms and policy of Part VIII of the Act. Legal certainty is important if the debtor, the creditors and the supervisor are to know where they stand. That is no doubt the reason for the short limit for challenge imposed by section 262(3), and the prohibition on other challenges on the ground of irregularity imposed by section 262(8). Mr Mark Phillips, appearing with Dr Fidelis Oditah for Cadbury, submitted that the secret deal found by the deputy judge was more than an “irregularity at or in relation to the meeting”. 35. That submission has some force, but I do not accept it. The approval of an IVA at the creditors' meeting is of central importance to the whole of Part VIII, as appears from section 260. If a proposed IVA has apparently been approved by a creditors' meeting, the only routes to challenge or circumvent it are in my judgment a direct challenge under section 262(1) or an indirect challenge by means of a bankruptcy petition under section 276(1).”

“[64] Those are formidable submissions. I have nevertheless reached the conclusion that the good faith principle applies to the facts of the present case and, by virtue of its application, there was a material irregularity within s 262(1)(b) of the 1986 Act at or in relation to the creditors' meeting which approved Mr Kapoor's IVA. The irregularity was in treating the resolution approving Mr Kapoor's IVA as passed when, for the purposes of r 5.23(4) of the 1986 Rules, more than half in value of Mr Kapoor's creditors voted against it, if Mr Chouhen's vote was excluded as it should have been. [65] The good faith principle articulated in the authorities considered by the deputy judge in Somji's case, and acknowledged by the Court of Appeal in that case, is not restricted to the non-disclosure of secret deals benefiting one or some of the creditors. Although the facts in all those authorities did concern such a situation, the good faith principle, as articulated by the deputy judge and approved by the Court of Appeal, encapsulated 'the fundamental rule that there should be complete good faith between the debtor and his creditors, and between the creditors inter se'. In Dauglish v Tennent (1866) LR 2 QB 49, for example, in which the court declared void a deed by which the defendant assigned all his estate to trustees on trust for distribution equally amongst all his creditors, Cockburn CJ said (at 53–54): 'In order that such a deed should be binding on the creditors, it is essential that there should be the most perfect good faith between the debtor and all his creditors.' [66] In Mare v Sandford (1859) 1 Giff 288 at 294 Stuart V-C said: 'The principles of this Court, which stamp a transaction of this kind with illegality, are not of a very refined kind. They are consistent with the ordinary principles of morality recognised by all mankind. And, moreover, where the Court has interfered to set aside such a transaction, it has done so on the ground of public policy, and of the transaction being such as the law should, in the highest degree, discountenance. The object of the bankrupt[cy] laws is to secure an equal distribution of property among the creditors, so that none shall have any advantage over another… ' [67] That reference to public policy is significant. An IVA is a means by which an insolvent debtor can escape the full and rigorous consequences of a bankruptcy order, including the right of the creditors to select the trustee in bankruptcy, the supervision of the trustee by the creditors and the court, the ascertainment, collection and distribution of bankruptcy estate by the trustee, and the possibility of holding a public or private examination of the bankrupt on oath. In cases, such as the present, where independent creditors have doubts as to whether the debtor has been full and frank in the information he has provided, and, in particular, as to the full extent of his assets, an IVA has potentially severe disadvantages for those creditors. That is no doubt the reason why, when the new statutory scheme for IVAs was introduced by the 1986 Act, it was expressly provided in r 5.23(4) of the 1986 Rules that the resolution approving the IVA would be invalid if more than half in value of the independent creditors, that is non-associates of the debtor, voted against the resolution. [68] The arrangement given effect by the assignment in the present case was patently intended, and intended only, for the purpose of subverting that legislative policy. The contrary is not asserted on behalf of Mr Kapoor. It is at one extreme end of a spectrum of transactions of questionable legitimacy, that is to say consistency with the legislative policy underlying r 5.23(4). The assignment was not a sham, but it does not fall far short of it. Not only was the arrangement wholly uncommercial, from Mr Chouhen's perspective, in that it inevitably involved him paying more for the assignment than he would ever realise and retain in respect of the assigned debt, but, as Mr Smith forcibly submitted, the obligation to return to Crosswood 80% of the distributions received by Mr Chouhen under the IVA meant that in reality Crosswood only ever parted with a small part of its economic interest in the assigned debt. The assignment was designed to confer voting rights on Mr Chouhen with a value of £4m, but to part with only a fraction of the true financial value of the assigned debt. [69] The expression 'material irregularity' is not defined. I agree with Mr Smith that the well established good faith principle applicable to agreements between a debtor and creditors is capable of colouring, and should colour, the meaning of that expression. That reflects the approach of the Court of Appeal in Somji's case. In my judgment, interpreting s 262(1)(b) against the background of the good faith principle and the legislative policy reflected in r 5.23(4), it was a 'material irregularity at or in relation to … [the] meeting' approving Mr Kapoor's IVA to take into account Mr Chouhen's vote for the purposes of r 5.23(4) when to do so would give effect to an arrangement solely, patently and irrefutably designed to subvert the legislative policy underlying that provision and without any commercial benefit intended or claimed for Mr Chouhen. It was an uncommercial arrangement inconsistent with any notion of good faith between Mr Kapoor and his independent creditors, or between Mr Chouhen and Crosswood, on the one hand, and the independent creditors, on the other, and was designed solely to subvert a critical principle of legislative policy as to the conditions for approval of an IVA. That is a perfectly apposite example of 'irregularity', giving the word one of its normal meanings as something which is lacking in conformity to rule, law or principle (see the Shorter Oxford English Dictionary).”

“[54] In the present case, third party assets, namely the Buyer's monies (or, more likely, monies made available to the Buyer) are to be used to pay the Football Creditors. It would be unfortunate, indeed, surprising, if those monies, which do not, and never will, belong to the Company legally or beneficially, and have in no way been contributed to by the Company, should nonetheless be caught by s 4(4)(a). Such a result would seriously hamper a regime which is intended to be flexible, and would render it much less likely that third parties would be prepared to provide assets to assist in the achievement of a voluntary arrangement. It would also be surprising if those monies which do not fall within the direct ambit of the Proposal, and are not reflected in the price paid to the Company, should fall within the ambit of s 4(4)(a). [55] Further, there is no logical or commercial reason for preferential creditors seeking priority as against non-preferential creditors in relation to payments made by third parties from their own money. A creditor, whether preferential or otherwise, can justifiably expect to look to the assets of his insolvent debtor (or any guarantor of the debtor) for repayment; indeed, in some circumstances, he may justifiably expect to look to third parties who have received cash or other benefits from the debtor. However, there does not appear to be any good reason why a creditor should be entitled to look to a third party who, from his own free money and (possibly) for good commercial reasons of his own, has chosen to pay one or more other creditors of the debtor.”

“74. I have found this point a little more troublesome than some of the others, but in the end I find that it suffers the same fate – it does not amount to unfair prejudice. If it were the case that these creditors had no real interest in the CVA at all then there might be something in it. Why should those with no interest in the CVA at all, and who were being paid outside it, be entitled to force unwilling creditors into a CVA which is not approved by a requisite majority of that smaller class? However, as Mr Sheldon pointed out, that is not quite this case. The football creditors do have an interest in the CVA being approved. If it is not approved, and if there is a liquidation, then their contracts of employment come to an end. They may or may not get ones that are as favourable in that event, but if they continue into the new company after the CVA then the balance of their present contracts will be honoured. Mr Sheldon also submitted that they would also have an interest in the event that they were not in fact paid with moneys coming from the Premier League, but that seems to me to be a technical possibility only. Nevertheless, they are creditors, and they do, as creditors, have what can be described as a real interest in the outcome. In the circumstances, troubling though this point is, I do not think it amounts to unfair prejudice. Furthermore, in the end, HMRC have been bound into a CVA which can only leave them financially better off than a liquidation, on the assumptions on which I have to operate for the purposes of this application and appeal. That, too, is not unfair in my view.”

“First, the KSA radically alters the commercial significance of the Proposal for Kaupthing as compared with the other creditors. For CFL and others, the opportunity offered by a bankruptcy was to be replaced by a return that might be regarded as de minimis. Upon the approval of the Proposal, those creditors would, for example, lose any chance to investigate whether potential benefits of the Gertler Arbitration would be the beneficial property of Mr Gertner. Instead they would have a share in what was left of the £487,500 after HMRC had been paid off and the costs of the IVA had been discharged. Kaupthing, by contrast, was to receive a share of whatever proceeds were recovered in the Gertler Arbitration. In his cross-examination (day 2, pp. 89 - 90) Mr Gertner confirmed his expectation as to the scale of the benefit that Kaupthing would receive: "The offers to settle [in the Gertler Arbitration] are into the hundreds of millions that have been made, so therefore what I say to you is that any amount that the bank will receive is a substantial amount. It's not a small amount that the bank is keeping. ... How much will be out of litigation, I have no idea, but I do not think that it will be whole [i.e. full payment of the amount claimed by Kaupthing], but it will be substantially more than other creditors who borrowed at such a time of very high assets would have repaid the bank, so I hope and I pray that it will be a substantial amount." The consequence seems to me inevitably to be that Kaupthing's commercial interests in the outcome of the creditors' meeting were quite different from those of the other creditors. Indeed, the fact that approval of the Proposal would tend to put investigation of the beneficial interest in the Gertler Arbitration out of the reach of the other creditors indicates the clear conflict that arose between Kaupthing's interests and those of the general body of creditors. I regard this as a breach of the principle of good faith.”