El Ajou v Stern & Ors [2006] EWHC 3067 (Ch)

Case No HC02C00300Case No HC06C03664[2006] EWHC 3067 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 1 December 2006
Before
THE HONOURABLE MR JUSTICE KITCHIN
Between
ABDUL GHANI EL AJOUClaimant(1) WILLIAM GEORGE STERNDefendants(2) DOLLARLAND (MANHATTAN) LIMITEDDefendant(3) REMILE LIMITEDDefendant(4) ILOT 68 DEVELOPMENTS LIMITEDDefendant(5) CHANNEL HOTELS AND PROPERTIES LIMITEDDefendant
Sally Barber (instructed by Zaiwalla & Co) for ClaimantSimon Mortimore QC (instructed by Michael Conn Goldsobel) for First DefendantHearing Hearing dates: 27, 30 October and 1 November 2006
JudgmentMr Justice Kitchin :
[1]This is an application dated 20 June 2006 by the first defendant (“Mr Stern”) for a stay of execution of that part of the order of Warren J made in these proceedings on 10 May 2005 whereby he ordered Mr Stern to pay to the claimant (“Mr El Ajou”) interest in the sum of €873,671 upon the principal sum of €1,859,201, for which judgment was also given. I shall refer to the second, third and fourth defendants as Manhattan, Remile and IDL respectively.[2]Mr Stern applies for a stay of execution under RSC Order 47 Rule 1 on the ground that there are special circumstances which render it inexpedient to enforce the judgment or order, since: i) Mr El Ajou is bound by a voluntary arrangement made on 24 October 2002 (the “IVA”) not to enforce payment of the judgment for interest against Mr Stern (anymore than he could have enforced payment of the principal amount); and/or ii) it is not just and equitable for Mr El Ajou to enforce payment of the judgment for interest against Mr Stern, when the IVA provides for all creditors’ claims, whether for principal or interest, to be dealt with under the IVA and not otherwise.[3]Mr Stern also applies for declaratory relief to the same effect by Part 8 claim form, HC06C03664, issued on 6 October 2006.[4]In essence, the issues between the parties are first, whether the judgment for interest is subject to the IVA and second, whether it is appropriate to allow Mr El Ajou’s entitlement to interest to be re-opened whether directly, by way of a fresh action seeking declaratory relief, or indirectly, by way of an application in the existing proceedings for a stay under RSC Order 47 Rule 1.

Background

[5]Much of the background is not in dispute and the following is largely adopted from the helpful summary provided by Mr Mortimore QC, who appeared on behalf of Mr Stern. On 11 December 1996 Mr El Ajou entered into an assignment (“the Assignment”)with Manhattan, Remile, Dollar Land Holdings plc (“DLH”) and Mr Stern, by which Manhattan and Remile agreed to assign to Mr El Ajou BEF 75 million from the proceeds of sale of certain property in Brussels (“the Brussels Property”) in order to satisfy £1,500,000 of a £5,500,000 judgment debt owed by DLH to Mr El Ajou.[6]By clause 4.1 of the Assignment Mr Stern guaranteed to Mr El Ajou the payment by Manhattan and/or Remile of BEF 75 million, subject, so far as material, to the obligation to pay Mr El Ajou under the guarantee only arising 7 days after completion of the sale of the Brussels Property. It specifically provided:
“The Guarantor hereby guarantees to Mr El Ajou the payment by Manhattan and/or Remile of the sum of 75 million Belgian Francs Provided That:- (a) the obligation of the Guarantor to pay Mr El Ajou pursuant to this guarantee shall arise only 7 days after completion of the sale of the Brussels Property;” (a) the obligation of the Guarantor to pay Mr El Ajou pursuant to this guarantee shall arise only 7 days after completion of the sale of the Brussels Property;”
[7]The Assignment did not include provision for payment of interest.[8]On 24 June 1999 the sale of the Brussels Property to a subsidiary of Atenor Group SA (“Atenor”)was completed on terms that payment of part of the price, known as the “Variable Portion”, was deferred. In breach of the assignment (as the court later found), Manhattan and Remile failed to pay to Mr El Ajou €1,859,201 (equivalent to BEF 75 million) from the proceeds of sale that Atenor did pay at that time. Accordingly, pursuant to clause 4.1 of the Assignment, on 1 July 1999 Mr Stern became liable to pay that sum to Mr El Ajou.[9]No payments were made and on 1 February 2002 Mr El Ajou began these proceedings to establish his entitlement to payment of €1,859,201 from Manhattan, Remile and Mr Stern, who all disputed liability.[10]On 17 September 2002 Mr Stern obtained an interim orderunder s.252 of the Insolvency Act 1986 (“IA 86”) in order that he could propose the IVA to his creditors. The nominee was David Rubin.The interim order had the effect of staying the proceedings.[11]On 24 October 2002 Mr Stern’s creditors duly approved the IVA with certain modifications and the IVAtook effect in accordance with s.260 IA 86. As modified the IVA included provisions for(a) a third party to pay the supervisor £400,000 by instalments, and(b) Mr Stern to make available further sums from realisations from his shares in IDL so as to produce a total dividend of 5p in the £1. Mr Stern’s liability to Mr El Ajou in the principal sum of £1,250,000 (equivalent to €1,859,201), which was then disputed, was included among the claims subject to the IVA. Mr Simms (a legal consultant to Mr El Ajou) voted as proxy for Mr El Ajou in the amount of £1,250,000 to reject the proposal, but other creditors duly approved the IVA by the requisite majority.[12]On 1 November 2002 the interim order was discharged, so ending the stay of the proceedings.[13]The proceedings came on for trial before Nicholas Warren QC, sitting as a deputy judge of the High Court, on 14-17 February 2005 and on 23 March 2005 he gave judgment in favour of Mr El Ajou. On 9 and 10 May there was a further hearing before the judge, now Warren J, to determine the order to be made on the judgment and to deal with the defendants’ applications for permission to appeal. Paragraph 2 of the orderrequired Manhattan and Remile to pay to Mr El Ajou the principal sum of €1,859,201 and interest of €873,671. Paragraphs 3 and 4 provided for payment to be made from an assignment of any further proceeds of sale of the Brussels Property or from an escrow account of Atenor. Paragraphs 5 and 6 of the order dealt with Mr Stern’s position and provided:
“5. It is declared that the First Defendant [Mr Stern] became liable to the Claimant [Mr El Ajou] under the Guarantee contained in Clause 4.1 of the Assignment on 1st July 1999 (being 7 days after completion of the sale of Ilot 68 [the Brussels property]) to pay the said sum of €1,859,201. 6. In pursuance of the aforesaid declaration numbered (5), it is ordered that the First Defendant pay to the Claimant the aforesaid sum of €1,859,201, together with interest thereon at the judgment rate from time to time (being 8% per annum) from 1st July 1999 to 9th May 2005 in the sum of €873,671. The First Defendant is entitled to credit as at the date of payment in respect of any amount previously paid to the Claimant pursuant to other provisions of this order in respect of the sums due under the Assignment.”
[14]€1,859,201 was paid into court pending the defendants’ appeal from funds of Atenor. On 16 March 2006 the Court of Appeal dismissed the appeals. On 14 June 2006 the Court of Appeal refused a stay pending the defendants’ appeal to the House of Lords. The House of Lords refused permission to appeal in July 2006. The €1,859,201 has now been paid out to Mr El Ajou or his solicitors, Zaiwalla & Co. However, the €873,671 interest has not been paid and it is the fear of enforcement proceedings against Mr Stern which has led to this application.

The further hearings before Warren J and the Court of Appeal

[15]After the judgment of 23 March 2005 had been handed down and in advance of the hearing listed before Warren J on 9 and 10 May 2005, Mr El Ajou served upon Mr Stern a draft order indicating that Mr El Ajou was seeking an order for payment by Mr Stern of the principal sum and interest.[16]On the 9 and 10 May there was extensive argument as to the form of order. One of the issues in dispute was whether it was appropriate to order interest. It was submitted on behalf of Mr Stern that no order for interest should be made because there was no provision for interest in the Assignment and because no claim for interest had been pleaded. It was also submitted that it was not appropriate or necessary to make any orders against Mr Stern personally. In response it was submitted on behalf of Mr El Ajou that he was plainly entitled to orders against Mr Stern personally, that he was entitled to interest under s.35A of the Supreme Court Act 1981, that there was nothing in the pleading point and, if necessary, an application would be made to amend. The judge concluded that it was right to make orders against Mr Stern personally and, in the exercise of his discretion, decided to make an order for the payment of interest. He expressed the view that Mr El Ajou could enforce the judgment subject to the stay pending appeal. There was a short discussion of the consequences of the IVA, as I shall explain later in this judgment.[17]Mr Stern, Manhattan and Remile duly did appeal the order. The Notice of Appeal raised three grounds of appeal, the third of which was that the judge had erred in making an award of interest. It read:
“The Learned Trial Judge was wrong and erred in law in awarding interest pursuant to s.35A Supreme Court Act when it had not been claimed specifically nor pleaded by the Claimant (despite the provisions of CPR 16.4(2)) and which relief was dependant upon the Court making Orders for a money judgment which was similarly not specifically claimed or pleaded”
[18]The defendants developed this ground in their skeleton argument. They argued that the claim was largely for declaratory relief, albeit that ancillary relief was also sought. No claim for interest had ever been made in terms. No claim for interest having been made, none should have been awarded. In so far as the judge had a discretion, he was wrong to exercise it as he did. The defendants were unaware they were exposing themselves to the potential of such a sizeable award of interest and their approach to the litigation must necessarily have been influenced and informed by the particular relief sought.[19]On 14 March 2006 the Court of Appeal dismissed the appeal. The court concluded that the appeal on interest was without substance and there were no grounds for interfering with the exercise of Warren J’s discretion. The Court of Appeal having refused permission to appeal, the defendants presented a petition for leave to appeal to the House of Lords.[20]In April 2006 and pending the decision of the House of Lords the defendants applied to the Court of Appeal for a stay of execution. At this point Mr Stern raised the issue of the IVA both by letter and in a witness statement of Mr Rose, his solicitor. Specifically he drew the attention of the court to the fact that he proposed to apply for a stay of execution on the basis that Mr El Ajou was entitled to participate in the IVA for interest at the rate of 8% from 1 July 1999, the date that the principal became payable, to 24 October 2002, the date of the IVA. But he was not entitled to participate in the IVA for interest payable after 24 October 2002 because he was bound by the conditions of the IVA not to claim it. In short, Mr Stern contended that Mr El Ajou was to be treated as having agreed to be bound by the terms of the IVA and was therefore limited to what he could get out of the IVA. Thus the whole of the interest award was irrecoverable and unenforceable against Mr Stern personally.[21]Mr El Ajou took the position that the Court of Appeal did not need to address the merits of the threatened application which would be opposed.[22]As I have mentioned, the Court of Appeal rejected the stay application. Shortly thereafter Mr Stern issued the application before me and the House of Lords has since refused permission to appeal.

The terms of the IVA

[23]The original proposal for the IVA indicated that voluntary contributions of £400,000 from third parties would be made available to the supervisor. It was estimated that unsecured creditors would, as a result, receive about 2.15p in the 1£. However, Mr El Ajou did not believe that the proposal contained a frank assessment by Mr Stern of his asset position. After objections made by Mr El Ajou and other creditors a modification to the IVA proposal was made and accepted by the creditors. The IVA, as modified, provided for funds for distribution to creditors to come from two sources: i) £400,000 provided by third parties, and ii) further amounts to enable a total dividend of 5p in the 1£ to be paid from the amount that Mr Stern might recover from his shareholding in IDL, which would depend on how much of the “Variable Portion” flowed up to that company.[24]I should note that at present the IVA remains in full force and effect. Third parties have paid £400,000. Of that sum, £350,000 is held in a solicitor’s account pending distribution under the IVA. However, it will not be distributed until the outcome of this application is known.[25]The proposal incorporates what are described as “General Conditions” and “Standard Conditions”. The most material of these are as follows.[26]The duration of the IVA was to be 36 months, subject to extension by the supervisor (General Condition 10). But the IVA will terminate earlier if it is deemed to have failed. Failure is deemed to have occurred if, during the currency of the IVA, any creditor obtains a bankruptcy order against Mr Stern (Proposal, clause 8) or in the event of “any bankruptcy petition being filed in respect of any liability arising after the approval of the arrangement”(Standard Condition 21(b)).[27]If the IVA fails then “any creditor bound by the arrangement shall no longer be bound and shall be entitled in respect of his debt to proceed against the debtor as he sees fit” (Standard Condition 21.1(c)).[28]Standard Condition 18 applied the bankruptcy provisions as follows:
“Unless otherwise provided for in the proposal or the context of the proposal otherwise demands, the following provisions of the Act [IA 86] shall apply to the proposal: Sections 322-326 inclusive Sections 328, 329 and 330 with such modifications as shall be appropriate to make and render the same relevant to the proposal, provided that unless the proposal so provides no creditor’s claims shall carry interest for any period commencing with the day on which the proposal is approved by the creditors’ meeting. Creditors’ claims shall be calculated at such date.”

Sections 322-326 inclusive

[29]Standard Condition 24.3 limited the creditors entitled to participate in the IVA:
“Unless otherwise agreed by the creditors in general meeting or otherwise provided for in the proposal, no creditor shall be entitled to participate in the arrangement unless that creditor’s debt is one provable in bankruptcy within the meaning of the Act [IA 86] and Rules [the Insolvency Rules 1986 and the Insolvency (Amendment) Rules 1987]”
[30]Standard Condition 25 (read together with Standard Condition 18) addressed distribution:
“The funds held by the supervisor shall be applied strictly in accordance with the terms of the proposal but, subject thereto, in the order of priority as would apply in bankruptcy.”
[31]Mr Mortimore submitted, and I accept, that the following were implied terms of the IVA, necessary to give it business efficacy: i) that creditors with debts subject to the IVA would take no steps to enforce their debts against Mr Stern so long as the IVA subsisted; ii) that if the IVA was duly completed (and was not deemed to have failed) creditors would accept what, if anything, was distributed to them under the IVA in full and final settlement of their debts.[32]The need for these implied terms was explained by Chadwick LJ in Johnson v Davies [1999] Ch 117 at p. 128 F-G “But, plainly, the arrangement will not work as intended if creditors are under no restriction in relation to the enforcement of their claims. At the least, a term which must be implied in order to give efficacy to the arrangement is that creditors bound by the proposals will take no steps to enforce their debts against the debtor while the debtor is complying, or has complied, with his obligations thereunder.”[33]The same does not, however, apply to the pursuit of a claim to judgment. There is no statutory provision preventing a claimant from pursuing his action once the terms of the IVA have been approved and any interim order for a stay discharged. In Alman v Approach Housing Ltd [2001] 1 BCLC 530 Rimer J was concerned with a CVA. He concluded that a claimant could only be prevented from pursuing his claim by a term of the CVA. On the facts of the case before him, he could see no basis for implying any such term since the arrangement contained no machinery for the determination of disputed claims.[34]In my judgment the same applies to the IVA in issue before me. Mr El Ajou was entitled to pursue his claim following the discharge of the interim order imposing a stay. This had a potential value for Mr El Ajou. It established the liability of Mr Stern in case it should be disputed by the supervisor or in case the IVA should, for some reason, fail.

Relevant provisions of the IA 86 and the Insolvency Rules (“IR”)

[35]Section 260 deals with the effect of approval of a proposal for an IVA:
“(1) This section has effect where the meeting summoned under section 257 approves the proposed voluntary arrangement (with or without modifications). (2) The approved arrangement – (a) takes effect as if made by the debtor at the meeting, and (b) binds every person who in accordance with the rules- (i) was entitled to vote at the meeting (whether or not he was present or represented at it) or, (ii) would have been so entitled if he had had notice of it, as if he were a party to the arrangement.” (a) takes effect as if made by the debtor at the meeting, and (i) was entitled to vote at the meeting (whether or not he was present or represented at it) or, (ii) would have been so entitled if he had had notice of it, as if he were a party to the arrangement.”
[36]This gives rise to what Chadwick LJ described in Johnson v Davies as the “statutory hypothesis” that the person who has notice of and was entitled to vote at the meeting is party to an arrangement to which he has given his consent.[37]Turning to the provisions dealing with bankruptcy, it is convenient to start with s. 322 IA 86 which provides, so far as material:
“(1) Subject to this section and the next, the proof of any bankruptcy debt by a secured or unsecured creditor of the bankrupt and the admission and rejection of any proof shall take place in accordance with the rules (2) Where a bankruptcy debt bears interest, that interest is provable as part of the debt except in so far as it is payable in respect of any period after the commencement of the bankruptcy.”
[38]Section 382(1) IA 86 defines “bankruptcy debt” in relation to a bankrupt as including:
“(a) any debt or liability to which he is subject at the commencement of the bankruptcy, (b) any debt or liability to which he may become subject after the commencement of the bankruptcy (including after his discharge from bankruptcy) by reason of any obligation incurred before the commencement of the bankruptcy, ……. (d) any interest provable as mentioned in section 322(2) in Chapter IV of Part IX.”
[39]Section 382(3) IA 86 explains the meaning of “debt or liability” in relation to the insolvency of individuals and bankruptcy:
“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 its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as matter of opinion; and references in this Group of Parts to owing a debt are to be read accordingly.”
[40]IR 6.113 specifically addresses interest:
“(1) In the following circumstances the creditor’s claim may include interest on the debt for periods before the bankruptcy order; although not previously reserved or agreed. (2) If the debt is due by virtue of a written instrument and payable at a certain time, interest may be claimed for the period from that time to the date of the bankruptcy order. (3) If the debt is due otherwise, interest may only be claimed if, before the presentation of the bankruptcy petition, a demand for payment was made in writing by or on behalf of the creditor, and notice given that interest would be payable from the date of the demand to the date of payment and for all the purposes of the Act and the Rules shall be chargeable at a rate not exceeding that mentioned in paragraph (5). … (5) The rate of interest to be claimed under paragraphs (2) and (3) is the rate specified in section 17 of the Judgments Act 1838 on the date of the bankruptcy order.”

Mr Stern’s case - in outline

[41]Mr Mortimore summarised Mr Stern’s case in the following submissions. It is critical to the preservation of the IVA that Mr El Ajou is not entitled to present a bankruptcy petition against Mr Stern based on non-payment of interest. That will be achieved by a stay of execution under RSC Order 47 Rule 1. (I should note that no point was taken on behalf of Mr El Ajou that a stay would not achieve that result).[42]By operation of s.260(2) IA 86, Mr El Ajou is bound by the terms of the IVA as if he had personally given his consent to it. Therefore Mr El Ajou agreed with Mr Stern and the other creditors that in consideration of the benefits of the IVA he would be entitled to prove for the principal amount of €1,859,201, if he established liability, and interest thereon to the extent that it qualified under rule 6.113, but that he would not be able to recover, or enforce recovery of any other interest.[43]By virtue of the judgment in these proceedings and the order of 10 May 2005, Mr El Ajou established that he was entitled to prove for the principal amount of €1,859,201, but that has been discharged by payment by Manhattan and/or Remile as principal obligors and is no longer provable.[44]The judgment and order also established that the principal amount of €1,859,201, which was due by virtue of a written instrument, had been payable at a certain time for the purposes of rule 6.113(2), namely 1 July 1999.[45]Accordingly Mr El Ajou is entitled to include in his proof (converted to sterling) interest on €1,859,201 from 1 July 1999 to 24 October 2002 at 8% (about €493,477), but no other interest. Also Mr El Ajou is not entitled to enforce payment of any interest outside the IVA.

Mr El Ajou’s case – in outline

[46]Ms Barber, who appeared on behalf of Mr El Ajou, summarised her client’s position in the following submissions. First, Mr El Ajou’s entitlement to interest has now been determined and that is not a matter that this court should reconsider. Moreover, the Court of Appeal has already rejected an application for a stay based on number of grounds, including the existence of the IVA.[47]Second, this is not a suitable case in which to make an order under RSC Order 47 Rule 1. The jurisdiction should only be exercised where special circumstances exist. In a case such as this, where the court has been called upon to exercise a discretion, any special circumstances should be brought to the attention of the court when it comes to consider how to exercise that discretion in the first place, and not at a later date.[48]Third, the order for payment of interest is not caught by the IVA. This argument has a number of limbs. It begins with an over-arching submission that creditors are only entitled to participate in the IVA in respect of debts provable in bankruptcy (Standard Condition 24.3). In this case, so it was submitted, the liability to pay interest depended upon a discretion which was not exercised until after the date of the IVA and hence was not provable. Further, the claim for interest was not provable for a further reason, namely it failed to qualify under s.382 IA 86 or IR 6.113 in any event.

Is the claim for interest affected by the IVA?

[49]I think that it is appropriate to consider this issue first. The starting point is that it is indisputable that the debt under the Assignment which led to the judgment of Warren J is a debt which is provable in the IVA. The question which then arises is how that affects the claim for interest. In order to answer that question I must begin by considering, at least briefly, the scheme provided by the IA 86 for the proving of interest in bankruptcy proceedings.[50]Three classes of case which have a bearing on the issues I have to decide were canvassed before me. The first is the class of case where the debt bears interest in the sense that the creditor has a legally enforceable right to interest at the bankruptcy date. Cases in this category include those where interest is provided for by contract or in a judgment. There is no doubt that such interest is provable in the bankruptcy. It is expressly provided for by s.322(2) and s.382(1)(d) IA 86 and is itself provable as part of the debt. In such a case interest would normally be included in the proof and, when the bankrupt is discharged, he is released from the debt under s.281 IA 86 (unless it falls within one of the exceptions). The court will generally exercise the discretion conferred by s.285 IA 86 to restrain a creditor from continuing or commencing an action on the debt but in an exceptional case may allow an action to proceed. If it does so and the creditor succeeds in the action then the court will not make an unqualified order for the payment of the principal and interest. Rather the creditor, armed with the judgment, can then file proof of the debt in the bankruptcy proceedings. The interest will be provable except in so far as it is payable in respect of any period after the commencement of the bankruptcy (s.322(2)).[51]The second is the class of case where the debt does not bear interest, but interest may be included in the proof under IR 6.113. In such a case it seems to me that the interest is not strictly part of the debt. Nevertheless the same regime applies as in the first case. Thus the court will generally exercise its discretion to restrain a creditor from continuing or commencing an action based upon the debt. However, if the action is allowed to proceed and the creditor is successful then the judgment will establish the right of the creditor in respect of the debt. He can then file proof of the debt and the interest which he claims is recoverable in accordance with the rules. Specifically, he will be entitled to prove for interest from the date specified by IR 6.113 for debts of that particular kind until the date of the bankruptcy order. The rate of interest is that specified under s.17 of the Judgments Act 1838 on the date of the bankruptcy order.[52]The third is the class of case where the debt does not bear interest and interest may not be included in the proof under IR 6.113. The proof can therefore only be for the principal. Subject to this the same regime again applies. Once again the court will generally exercise its discretion to restrain a creditor from continuing or commencing an action based upon the debt. However, if the action is allowed to proceed and the creditor is successful then the judgment will establish the right of the creditor in respect of the debt. He can then file proof of the debt but may not claim in respect of interest.[53]I turn then to consider the terms of the IVA. These incorporate the bankruptcy provisions as regards the admission of creditors to participate and also as regards distribution, save for one modification: Standard Condition 18 expressly provides that no creditors’ claims shall carry interest for any period after the approval of the IVA. Hence the creditors surrendered any claim under the provisions of s.328 IA 86 for post arrangement interest out of surplus.[54]As I have indicated, Ms Barber advanced two principal submissions on behalf of Mr El Ajou as to why the order of Warren J for the payment of interest is not caught by the IVA. The first is that Mr El Ajou did not have a claim for interest that was provable in the bankruptcy and hence, upon the proper interpretation of Standard Condition 24.3, it fell outside the scope of the IVA. As such, it was a claim which Mr El Ajou was entitled to bring and, more importantly, he is now entitled to enforce the judgment and order he has obtained.[55]The submission ran as follows. The debt in issue is clearly not in the first category discussed above, that is to say one which falls within s.322(2) and s.382(1)(d). Moreover, the claim for interest is not one permitted by IR 6.113. In particular it could only qualify under IR 6.113(2) and it fails to do so because the debt was not due by virtue of a written instrument and payable at a certain time. I have recited the material term of the Assignment in paragraph [6] above. The obligation of Mr Stern arose only 7 days after completion of the sale of the Brussels Property. But the Assignment set no date for exchange and no date for completion. Hence the date may have been ascertainablebut it was not certain.[56]In support of this submission Ms Barber took me to the predecessor of IR 6.113, namely paragraph 21 of the Second Schedule to the Bankruptcy Act 1914 (“the 1914 Act”) which reads:
“On any debt or sum certain, payable at a certain time or otherwise, whereon interest is not reserved or agreed for, and which is overdue at the date of the receiving order and provable in bankruptcy, the creditor may prove for interest at a rate not exceeding four per centum per annum to the date of the order from the time when the debt or sum was payable, if the debt or sum is payable by virtue of a written instrument at a certain time, and if payable otherwise, then from the time when a demand in writing has been made giving the debtor notice that interest will be claimed from the date of the demand until the time of payment. ”
[57]The equivalent provision appeared in r.100 of the Companies (Winding Up) Rules, 1949. This was interpreted by Pennycuick J in In re Theo Garvin [1969] 624 at 639-640:
“The Companies (Winding-Up) Rules, 1949, contain the following rule, r. 100: “On any debt or sum certain, payable at a certain time or otherwise, whereon interest is not reserved or agreed for, and which is overdue at the date of the commencement of the winding up, the creditor may prove for interest at a rate not exceeding four per centum per annum to that date from the time when the debt or sum was payable, if the debt or sum is payable by virtue of a written instrument at a certain time, and if payable otherwise, then from the time when a demand in writing has been made, giving notice that interest will be claimed from the date of the demand until the time of payment.”
Now, as I have held, one has here a debt or sum certain on which interest was not reserved or agreed for after the end of the fixed period, and that sum is undoubtedly overdue at the commencement of the winding up. Is the creditor entitled to prove for interest under this rule? He is entitled to do so if, and only if, the debt or sum is payable by virtue of a written instrument at a certain time. There is no question here of a demand claiming interest being made. What is meant by the expression “payable by virtue of a written instrument at a certain time” has been the subject of a number of judicial decisions, and certain of the older decisions based upon the statutory predecessor of the said rule, are in direct conflict with one another. However, the matter was considered by the Privy Council in Maine and New Brunswick Electrical Power Co. Ltd v. Alice M. Hart, where the Privy Council had to consider the effect of a provision comparable to rule 100. Lord Tomlin, giving the decision of the court said this:
“The question of interest next falls for consideration. On this head of the case the Appeal Division of the Supreme Court, differing from the trial judge, have allowed interest against the defendants. There is no agreement to pay interest, either in express terms or implicit, in the language of the covenants.”
He then refers to the relevant section of the New Brunswick Judicature Act and, after setting out that section, he proceeds:
“The language of this section cannot be distinguished from that in section 28 of 3 & 4 Will. 4, c. 42, sometimes called Lord Tenterden’s Act. The English decisions on that section are, therefore, relevant for guidance. In their lordships’ judgment the decision of the Exchequer Chamber in Merchant Shipping Co., v. Armitage is an authority binding the English courts up to and including the Court of Appeal to hold under Lord Tenterden’s Act that if the sum becomes payable at a time fixed by reference to a contingent event which may or may not happen, it is not payable by the written instrument at a time certain.”
It seems to me that I am, plainly, bound to follow what was said by Lord Tomlin in Maine and New Brunswick Electrical Power Co. Ltd. V. Alice M. Hart and it would not be useful to go into the earlier and conflicting authorities. In order then that the depositor can claim interest, it is necessary for him to show that the sum in question is payable by virtue of a written instrument at a time described by the instrument. It is not enough for him to show that the instrument specifies a contingent event by reference to the happening of which the time for repayment can be determined.” “On any debt or sum certain, payable at a certain time or otherwise, whereon interest is not reserved or agreed for, and which is overdue at the date of the commencement of the winding up, the creditor may prove for interest at a rate not exceeding four per centum per annum to that date from the time when the debt or sum was payable, if the debt or sum is payable by virtue of a written instrument at a certain time, and if payable otherwise, then from the time when a demand in writing has been made, giving notice that interest will be claimed from the date of the demand until the time of payment.” “The question of interest next falls for consideration. On this head of the case the Appeal Division of the Supreme Court, differing from the trial judge, have allowed interest against the defendants. There is no agreement to pay interest, either in express terms or implicit, in the language of the covenants.” “The language of this section cannot be distinguished from that in section 28 of 3 & 4 Will. 4, c. 42, sometimes called Lord Tenterden’s Act. The English decisions on that section are, therefore, relevant for guidance. In their lordships’ judgment the decision of the Exchequer Chamber in Merchant Shipping Co., v. Armitage is an authority binding the English courts up to and including the Court of Appeal to hold under Lord Tenterden’s Act that if the sum becomes payable at a time fixed by reference to a contingent event which may or may not happen, it is not payable by the written instrument at a time certain.”[58]Thus, Ms Barber submitted, it is necessary to show that the sum in question is payable by virtue of a written instrument and at a time specified in the instrument. It is not enough to show that the instrument specifies a contingent event by reference to the happening of which the time for payment can be determined.[59]This submission gave rise to a lively dispute, it being contended for Mr El Ajou that the claim for interest was not provable and for Mr Stern that it was.[60]Mr Mortimore submitted that there was a material change in wording between IR 6.113 and paragraph 21 of the Second Schedule of the 1914 Act, the important difference being that paragraph 21 asks only one question:
“Is the debt payable by virtue of a written instrument at a certain time.”
He also submitted that paragraph 21 and r.100 adopted the language of s.28 of the Civil Procedure Act 1833 (Lord Tenterden’s Act) and there was obvious sense in achieving consistency between the two regimes. That benefit went when the 1933 Act was repealed by the Law Reform Miscellaneous Provisions Act 1934. In any event s.28 was controversial and regarded as unsatisfactorily narrow (see, for example, the dissenting judgment of Blackburn J in Duncombe v The Brighton Club and Norfolk Hotel Co (1875) 10 QBD 371 at 374 to 376).[61]It is clear that the words of the new insolvency code have to be construed in their new context. As Hoffmann J explained in In re A Debtor (No 784 of 1991) [1992] 1 WLR 554, in approaching the language of the IA 86 one must pay particular attention to the purposes and policies of its own provisions and be wary of simply carrying over uncritically meanings which have been given to similar words in the earlier Act. Nevertheless it seems to me that there is considerable force in Ms Barber’s submission. The wording of the old and new rules is very similar. Moreover the narrow interpretation IR 6.113(2) is, in my judgment, more consistent with the scheme of the rule as a whole. This interpretation requires the debtor to be able to look at the written instrument and determine what is due and when it is due. If this is not possible then paragraph (3) requires a demand for payment to be made and notice given that interest is payable from the date of the demand. Again the debtor is in no doubt as to his liability. Conversely, the broad interpretation of paragraph (2) would mean that a guarantor may become liable for interest in circumstances where he is unaware that the debt is due. For example, his obligation to pay as a guarantor may be triggered if a primary debtor does not pay a sum within a fixed number of days of a demand, and this may be a matter of which he has no notice. Overall I do not detect a material change in policy in the IA 86 or anything else to indicate that Parliament intended the words of IR 6.113 to bear a different meaning to that of the words of paragraph 21 of the 1914 Act. For all these reasons and were it necessary to do so I would be disposed to accept the interpretation advanced by Ms Barber. However, as I shall now explain, it is not necessary to express a final conclusion on the point and, in the circumstances, I prefer not to do so.[62]I am therefore prepared to assume that interest may not be included in the proof. I must now consider whether this means of itself, and on the proper interpretation of Standard Condition 24.3, that Mr El Ajou was properly entitled to secure and now enforce an unqualified award of interest outside the IVA.[63]In my judgment he was not. I believe that Mr El Ajou must be taken to have agreed to be bound by the bankruptcy regime as a whole in respect of any debt which is provable. The IVA adopted the bankruptcy regime which deals expressly with and determines the right to claim interest. Debts which bear interest are dealt with by s.322(2) and s.382(1)(d) IA 86. Other debts are dealt with by IR 6.113. These provisions collectively confer but at the same time limit the right to claim interest on such debts in the bankruptcy. On discharge the bankrupt will be released from all save excepted debts under s.281 IA 86. That release must carry with it by necessary implication a release from any potential claim for interest on those debts. In short, if the creditor has no claim in respect of a debt then he has no independent and self standing claim to interest on that debt.[64]I believe the same applies to the IVA. If it runs its course and is duly completed then the creditors, including Mr El Ajou, must be taken to have agreed that they will have no further claims against Mr Stern in respect of debts which are provable. The same must apply to interest on those debts. So, in the normal course of events, the creditors will have no further claim for any interest that might be added to or included in their debts for the purposes of participation. Nor will they have any further claim in respect of interest that cannot be included for the purposes of participation, and that is so whether the interest cannot be claimed because the debt does not fall in IR 6.113 or because the interest is in respect of the period after the approval of the IVA.[65]Ms Barber’s second submission was founded on the order made by Warren J on 10 May 2005. This, it was contended, gave rise to a liability which depended upon the exercise by Warren J of a discretion and that discretion was not exercised until after the date of approval of the IVA. Hence the liability was not a debt or liability (contingent or otherwise) to which Mr Stern was subject at the commencement of the IVA and so fell outside the scope of Standard Conditions 24.3 and was not bound by the IVA.[66]In support of this submission I was referred to two cases. In Glenister v Rowe [2000] Ch 76 the Court of Appeal held that an order for costs made against a debtor after his discharge from bankruptcy in proceedings commenced before his bankruptcy was not a contingent liability at the date of his bankruptcy and hence was not a bankruptcy debt within s.281 IA 86 from which his discharge released him. The reasons for this conclusion were, in summary, that the costs of legal proceedings are in the discretion of the court and until an order for costs is made there is no obligation or liability to pay them. The discretionary nature of the court’s power to order costs indicated that there was no liability, contingent or otherwise, in the absence of a court order.[67]In R (Steele) v Birmingham City Council [2006] 1 WLR 2380 the Court of Appeal was concerned with a case where the claimant was awarded jobseeker’s allowance and later, on his own petition, adjudged bankrupt. Thereafter the Secretary of State made a determination under s.71 of the Social Security Administration Act 1992 that the claimant had been overpaid jobseeker’s allowance for a period prior to his bankruptcy. Following his discharge from bankruptcy, the Secretary of State gave notice of his intention to continue to collect the overpayment. The claimant applied for judicial review of this decision, contending that the liability was a contingent liability and therefore a bankruptcy debt from which, following his discharge, he was released. The Court of Appeal held that the potential liability to repay was not a contingent liability in the bankruptcy within s.382 IA 86. Sir Martin Nourse concluded at [14] that since it was necessary, before the determination was made, for the Secretary of State to be satisfied that that there had been a misrepresentation of a material fact it was impossible to treat the determination as being a mere formality. At the date of the bankruptcy there was therefore no present liability to pay, nor, since there was no certainty that the determination would be made, could there be a future liability. Arden LJ and May LJ agreed.[68]In my judgment Ms Barber is right in her submission that the liability to pay interest which arose from Warren J’s order was not a bankruptcy debt within the meaning of s.382 IA 86. The liability arose following the exercise by Warren J of his discretion under s.35A of the Supreme Court Act 1981. That was not a debt or liability to which Mr Stern was subject at the date of the IVA. There had been no prior judgment awarding interest which would qualify as a debt under s.322(2) and s.382(1)(d). Nor was there a contingent liability. As in Glenister the discretionary nature of the power to award interest under s.35A indicates that there is no liability, contingent or otherwise, under s.35A in the absence of a court order. But in any event, the bankruptcy regime expressly addresses the extent to which and the circumstances in which interest may be claimed. Therefore in a bankruptcy Mr El Ajou would not have been entitled to prove for the sum of interest ultimately awarded by Warren J. He would only have been entitled to claim interest in so far as he satisfied the requirements of IR 6.113 and in accordance with the rights and limitations that rule provides.[69]This brings me to what I believe to be the heart of the issue, namely whether or not it was appropriate for Warren J to make the order that he did. That order is unqualified in the sense that it required Mr Stern to make immediate payment of the sum of €873,671 in respect of interest, subject to a stay pending appeal. That appeal has now been disposed of and accordingly Mr Stern must pay it, subject to this application.[70]Once again it is convenient to begin by considering the bankruptcy regime. As I have mentioned, the court will generally exercise the discretion conferred by s.285 IA 86 to restrain a creditor from pursuing an action based upon a potentially provable debt, but may allow it to do so if, for example, it provides the most convenient means of establishing entitlement. Leave would likely be given on terms that there should be no enforcement of any judgment without the leave of the court. In the event that the creditor succeeds I think it unlikely that the court would consider it appropriate to award interest under s.35A of the Supreme Court Act 1981 because the court would be well aware that the bankruptcy regime expressly addresses the circumstances and extent to which claims for interest can be pursued in the bankruptcy in respect of such provable debts. If the court did, however, make an order then it seems to me inevitable that the order would be qualified and subject to a stay. On discharge the bankrupt would be released from the debt but the stay of any order for the payment of interest under s.35A would remain in place.[71]Does the fact that Mr Stern was subject to an IVA make any difference? I do not believe that it does. As I have explained, the IVA adopted the bankruptcy regime and in my judgment the creditors must be taken to have agreed to be bound by that regime in respect of all provable debts. It therefore follows that I do not believe that it was appropriate for Warren J to make the unqualified order that he did. In my judgment the terms of the order should have mirrored the parties’ contractual rights and either not included an order for payment of interest under s.35A at all or, if it did include such an order, it should have been stayed. The award of interest ought never to have been payable if the IVA ran its course.

RSC Order 47 rule 1, Estoppel, Res Judicata, Abuse of Process

[72]As I have indicated, Mr Stern has issued an application under RSC Order 47 rule 1 seeking a stay of execution of the award of interest so long as the IVA is in force and completed in accordance with its terms, and also a Part 8 Claim seeking a declaration that Mr El Ajou is bound by the terms of the IVA. At the hearing before me Mr Mortimore placed particular reliance upon RSC Order 47 rule 1. Paragraph (1) reads: “Where a judgment is given or an order made for the payment by any person of money, and the court is satisfied, on an application made at the time of the judgment or order, or at any time thereafter, by the judgment debtor or other party liable to execution(a) that there are special circumstances which render it inexpedient to enforce the judgment or order, or(b) that the applicant is unable from any cause to pay the money, then, notwithstanding anything in rule 2 or 3, the court may by order stay the execution of the judgment or order by writ of fieri facias either absolutely or for such period and subject to such conditions as the court thinks fit. (a) that there are special circumstances which render it inexpedient to enforce the judgment or order, or (b) that the applicant is unable from any cause to pay the money,[73]It is clear that the application may be made at the time of the judgment or at any time thereafter. One of two preconditions must be satisfied. There must be special circumstances which render it inexpedient to enforce the judgment or order, and in this context “inexpedient” simply means unjust: Canada Enterprises v MacNab [1987] 1 WLR 813 at 818 (CA). Alternatively, the applicant must be unable from any cause to pay the money. Mr Mortimore relied on the former in this application. In the event that one or other precondition is satisfied the court has a wide discretion whether to order a stay of execution either absolutely or for such period and subject to such conditions as it thinks fit.[74]Mr Mortimore submitted that in the present case there are plainly special circumstances, namely the existence of the IVA, and it would be manifestly unjust to allow Mr El Ajou to enforce the judgment and order contrary to the terms of his agreement.[75]Ms Barber, on the other hand, submitted that this application is made too late. Mr El Ajou’s entitlement to interest has now been determined and the issue cannot now be re-opened, whether directly, by way of a fresh action seeking declaratory relief, or indirectly by an application in the existing proceedings for an indefinite stay under RSC Order 47 rule 1. In support of this submission she referred me to Johnson v Gore Wood [2002] 2 AC 1 and, in particular, to the following passage in the opinion of Lord Bingham at p.31:
“But Henderson v Henderson abuse of process, as now understood, although separate and distinct from cause of action estoppel and issue estoppel, has much in common with them. The underlying public interest is the same: that there should be finality in litigation and that a party should not be twice vexed in the same matter. This public interest is reinforced by the current emphasis on efficiency and economy in the conduct of litigation, in the interest of the parties and the public as a whole. The bringing of a claim or the raising of a defence in later proceedings may, without more, amount to abuse if the court is satisfied (the onus being on the party alleging abuse) that the claim or defence should have been raised in the earlier proceedings if it was to be raised at all. I would not accept that it is necessary, before abuse may be found, to identify any additional element such as a collateral attack on a previous decision or some honesty, but where those elements are present the later proceedings will be much more obviously abusive, and there will rarely be a finding of abuse unless the later proceeding involves what the court regards as unjust harassment of a party. It is, however, wrong to hold that because a matter could have been raised in earlier proceedings it should have been, so as to render the raising of it in later proceedings necessarily abusive. That is to adopt too dogmatic an approach to what should in my opinion be a broad, merits-based judgment which takes account of the public and private interests involved and also takes account of all the facts of the case, focusing attention on the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before. As one cannot comprehensively list all possible forms of abuse, so one cannot formulate any hard and fast rule to determine whether, on given facts, abuse is to be found or not. Thus while I would accept that lack of funds would not ordinarily excuse a failure to raise in earlier proceedings an issue which could and should have been raised then, I would not regard it as necessarily irrelevant, particularly if it appears that the lack of funds has been caused by the party against whom it is sought to claim. While the result may often be the same, it is in my view preferable to ask whether in all the circumstances a party’s conduct is an abuse than to ask whether the conduct is an abuse and then, if it is, to ask whether the abuse is excused or justified by special circumstances. Properly applied, and whatever the legitimacy of its descent, the rule has in my view a valuable part to play in protecting the interests of justice.”
[76]Ms Barber contended that any similar attempt to side step the finality of the ruling of the Court of Appeal by way of an indefinite stay should be rejected. She also submitted, and I accept, that in considering the application under RSC Order 47 it should be borne in mind that an application for a stay brought by a defendant for the purpose of re-litigating an issue already decided against him will ordinarily be refused: see eg Canada Enterprises at 817 G-H. Similarly, a stay should not ordinarily be granted on grounds which are really grounds of defence which should have been raised prior to judgment: TC Trustees Limited v JS Darwen (Successors) Limited [1969] 2 QB 295 at 302.[77]I have not found this an easy matter to decide but in the end I have reached the conclusion that I should grant the stay which Mr Stern seeks under RSC Order 47 rule 1. My reasons are as follows.[78]At the outset I recognise that there are powerful reasons for refusing the relief sought. I am conscious that the order made by Warren J required immediate payment (subject to a stay pending appeal). Moreover, the issue of the IVA could have been argued during the hearings before him on 9 and 10 May 2005 or even before the Court of Appeal on the hearing of the appeal on 31 January 2006. If the issue had been argued before Warren J then, on the basis of the conclusions I have reached, the order would not have been made in the form that it was or it would have been stayed. As it was, Mr Stern did not give notice of his intention to make this application until 6 April 2006 and that has necessitated a further hearing.[79]On the other hand, the following matters point in favour of a stay and, in my judgment, do constitute special circumstances which would render it unjust to refuse the relief sought. First, it seems to me that there is an important distinction to be drawn between liability and enforcement. The proceedings before Warren J were essentially concerned with and established the liability of Mr Stern to Mr El Ajou in respect of the principal and interest. Mr El Ajou was entitled to bring and pursue the proceedings to a conclusion to establish that liability. The IVA gave no defence to the claim. It does, however, represent an agreed collective system of enforcement. Armed with his judgment, Mr El Ajou is entitled to participate in the IVA in respect of the principal and, so far as the IVA permits, in respect of interest on that principal.[80]Second, in these circumstances Mr Stern cannot and does not dispute that Warren J was entitled to give judgment for interest. He therefore does not seek to re-open the issues argued before Warren J and on appeal. Rather, he says that the award should not be enforced against him by reason of the IVA. No doubt he would have advanced the same contention in respect of the award of the principal sum had it not been discharged by another party.[81]Third, on the basis of the findings I have reached, Mr El Ajou is bound by the terms of the IVA and consequently it was not appropriate to make an unqualified order in his favour for the payment of interest. However, if I do not grant the stay sought then Mr El Ajou will no doubt seek to enforce the award of interest and, if necessary, present a bankruptcy petition against Mr Stern. In the result the IVA may collapse.[82]Fourth, the IVA was mentioned in the course of the hearing before Warren J but it is apparent that it was not considered in detail. Counsel then appearing for Mr Stern briefly mentioned the IVA in the context of enforcement and there is some indication that Warren J considered it something to be considered further after the hearing. Counsel then appearing for Mr El Ajou submitted that debts incurred after the date of approval were entirely outside the IVA but a little later said that the order should be made and “if there are any ramifications of the IVA they will have to be worked out”. Warren J then made the order sought. The position on the transcript is therefore not entirely clear but it does emerge that no decision was made against Mr Stern on the basis of the IVA. Further, the parties raised the possibility that the IVA might impact on enforcement and, if it did, the ramifications could be addressed later.[83]Fifth, the appeal to the Court of Appeal was on the issues of construction and liability to pay interest. When that failed Mr Stern turned his mind to the possibility of a stay pending an appeal to the House of Lords. It was at this stage that attention was focussed on the impact of the IVA on enforcement. It was specifically raised at the time of the application to the Court of Appeal for a stay pending an appeal to the House of Lords. As I have mentioned, Mr Stern drew the attention of the Court of Appeal and Mr El Ajou to the fact that he proposed to apply for a stay on the basis of the IVA. However, Mr El Ajou took the position that the Court of Appeal did not need to address the merits of the threatened application and so, in dismissing the application for a stay, the court did not do so.[84]Sixth, it is fair to say that if the appeal from the decision of Warren J had succeeded then there would have been no need to consider an application for a stay by reason of the IVA. Once the avenues of appeal had been exhausted this application was launched.[85]Finally, there is no suggestion before me that Mr El Ajou has acted to his detriment in reliance upon any belief that the order for payment of interest would become enforceable in the event the appeal from the judgment and order of Warren J failed. Further, I can address the questions of costs of and occasioned by this hearing in the light of further submissions.

Conclusion

[86]For all these reasons I have come to the conclusion that the existence of the IVA does constitute a special circumstance which would render it unjust to allow the order for interest to be enforced against Mr Stern whilst the IVA subsists. I do not believe that this application is an abuse and, in the exercise of my discretion, I consider it appropriate to grant the stay sought.

Cited in 1 later judgment