Gertner & Anor v CFL Finance Ltd [2020] EWHC 1241 (Ch)

“All further proceedings in this action between [CFL] and [Mr Gertner] be stayed upon the terms set out at Schedule 1 to this Order, save for the purposes of carrying the said terms into effect for which [CFL] and [Mr Gertner] are at liberty to apply. [CFL] and [Mr Gertner] shall have permission to apply to the Court to enforce the terms of settlement without the need to bring a new claim.” (3) Schedule 1 to the Tomlin Order contained a settlement agreement (the Settlement Agreement)between CFL and Mr Gertner. So far as material, the Settlement Agreement provided: “RECITALS (1) CFL is the Claimant in proceedings in the High Court of Justice Chancery Division the title and claim number of which is CFL Finance Limited (Claimant) v. Mr Moises Gertner (Defendant) claim number HC10C03795 (“the Proceedings”). (2) CFL claims the following sums from Mr Gertner in the Proceedings: (a) The capital sum of £1,700,000; (b) Simple interest at the rate of 2.25 per cent per month on £1,700,000 from 13 June 2008 to 23 September 2008; (c) Simple interest at the rate of 2.25 per cent per month on £,1700,000 from 24 September 2008 to 13 October 2008; (d) Compound interest on the outstanding balance at 2.5 per cent per month from 14 October 2008 to the date of payment. (3) The Parties wish to settle the Proceedings upon the terms set out in this Agreement. Payments 2. £2,000,000 shall be paid to CFL on the dates and on the terms set out below: (a) £325,000 on or before 26 October 2011; and (b) £1,675,000 by 8 quarterly instalments of £209,375 each and commencing three months after the signing of this Agreement with such payments being made to CFL as follows: (i) £209,375 on or before 26 December 2011 (ii) £209,375 on or before 16 March 2012 (iii) £209,375 on or before 26 June 2012 (iv) £209,375 on or before 26 September 2012 (v) £209,375 on or before 26 December 2012 (vi) £209,375 on or before 26 March 2013 (vii) £209,375 on or before 26 June 2013; and (viii) £209,375 on or before 26 September 2013. 3. £50,000 shall be paid to CFL as a contribution towards its costs on the dates and on the terms set out below: (a) £25,000 shall be credited to the client account of Mishcon de Reya, solicitors for CFL, on the signing of this Agreement; and (b) £25,000 on or before 26 September 2013, such payment therefore being added to the final quarterly instalment due to CFL by Mr Gertner on or before 16 September 2013 as set out in paragraph 2(b)(viii) above. 4. The sums set out in paragraphs 2(a), 2(b) and 3(b) shall be credited to the account in CFL’s name with HSBC, account number 61542354 sort code 40-0118 (“the Account”). Effect of payment defaults 5. If, in breach of paragraphs 2 and 3 above, the sums payable under paragraphs 2(a), 2(b) and 3(b) shall not be paid in cleared funds to the Account by close of business on the dates identified in paragraphs 2(a), 2(b) and 3(b) or within seven days of the dates identified in paragraphs 2(a), 2(b) and 3(b) or if the sums payable under paragraph 3(a) shall not be paid in cleared funds to the client account of Mishcon de Reya on the date identified in paragraph 3(a): 5.1 the following sums claimed by CFL from Mr Gertner in the Proceedings shall become immediately due and owing from Mr Gertner to CFL: (a) The capital sum of £1,700,000; (b) Simple interest at the rate of 2.25 per cent per month on £1,700,000 from 13 June 2008 to 23 September 2008; (c) Simple interest at the rate of 2.25 per cent per month on £,1700,000 from 24 September 2008 to 13 October 2008; (d) Compound interest on the outstanding balance at 2.5 per cent per month from 14 October 2008 to the date of payment. 5.2 Any payments having already been made pursuant to paragraph 2 above prior to any breach shall be credited to the sums which, as a result of any breach, have now become due and owing by Mr Gertner under paragraph 5.1 above. Consent order 6. The Parties agree to sign forthwith or cause their respective solicitors to sign a Tomlin Order…to stay the Proceedings against Mr Gertner and to co-operate in arranging to have the Order filed at the Court and sealed.”

“This agreement shall not be binding on the parties as a settlement of the Dispute and/or the Proceedings until: (A) Kaupthing has received in full without deduction the payment set out in clause 3.1 by the time specified; and (B) the relevant parties have executed each of the agreements or declarations envisaged in clauses 3.1 to 3.8 herein.”

“3.1 Laser Trust shall pay Kaupthing the total sum of US$6 million by close of business on 15 December 2015. The parties agree that it is a fundamental term of this agreement that Kaupthing be in receipt of the payment of US$6 million by close of business on 15 December 2015 and that Kaupthing may in its absolute discretion treat this agreement and any related agreements as having been repudiated in the event that payment is not received by close of business on 15 December 2015. 3.2 Interest shall accrue and be payable on any part of the US$6 million that is not paid in accordance with clause 3.1 at the rate of 6 per cent per annum above the base rate for the time being of the Bank of England from the date on which the relevant sum became due, until, but excluding, the date of actual payment. … 3.4 The obligation on Laser Trust to pay Kaupthing the sums set out in clause 3.1 and the interest in clause 3.2 is absolute. … 3.6 On or before execution of this agreement the parties shall enter into or procure that the relevant parties enter into and adhere to the profit sharing agreements in substantially the form of the draft agreements in Appendices 2, 10 and 11 regarding the future profits of Indus Trading Ltd, Maskelyn Ltd and Redinse Ltd respectively. 3.7 The parties shall use their best endeavours to procure that the relevant parties use their best endeavours to facilitate the enforcement of the security (by way of share transfer) granted over the land in Uherce u Nyran and Nyrany charged to Kaupthing pursuant to the mortgage agreement dated 4 December 2006 between Kaupthing (as security agent) and Mayfield Plzen sro (as security provider) including by entering into, within 7 days of the execution of this agreement in substantially the form of the draft agreement at Appendix 3. 3.8 The parties shall use their best endeavours or procure that the relevant parties use their best endeavours to facilitate (i) the enforcement of the security granted over or (ii) transfer to Kaupthing of the shares in Katanga Mining Limited charged to Kaupthing pursuant to the security agreement dated 11 January 2008 between Pitchley Properties Limited (as charger) and Kaupthing (as security agent).” (as charger) and Kaupthing (as security agent).” (c) The US$6 million referenced in clause 3.1 of the KSA was paid to Kaupthing in accordance with the provisions of the KSA. (d) The profit-sharing agreements referenced in clause 3.6 of the KSA were with three named companies, each of which was (and is) a claimant in an arbitration in Israel, as was (and is) Mr Gertner and his brother Mendi. The arbitration appears to be for high value assets and is brought against a Mr Dan Gertler and various of his family trusts and companies. The arbitration also includes a cross-claim. In the Court of Appeal Decision, Patten LJ recorded: At [21]. “The evidence of Mr Gertner is that the claims have been brought by him and his brother on behalf of the Gertner family trusts but the effect of clause 3.6 of the KSA and the profit sharing agreements was to give Kaupthing an entitlement to share in any recoveries made in the arbitration in return for a release of the named companies from certain liabilities to Crosslet Vale and the Gertner family trusts. The profit-sharing agreements appear to have been executed either on or before 11 December 2015.” (e) By clause 5 of the KSA, the parties agreed that within 90 days of Kaupthing receiving the US$6 million referenced above, and on the satisfaction of certain conditions precedent, there would be an assignment of the benefit of the Kaupthing loan facility agreement and supporting guarantees (referred to in paragraph 7(10) above) to Laser Trust. Although the assignment to Laser Trust did, eventually, take place, it actually only occurred after the Court of Appeal had handed down the Court of Appeal Decision and permission to appeal to the Supreme Court had been refused to Mr Gertner. (14) As I have stated, the creditors’ meeting approved the First Proposal. The approval was overwhelming because Kaupthing voted in favour of the proposal. Although there were questions asked at the creditors’ meeting regarding, e.g. the Israeli arbitration and Mr Gertner’s interest in it, nothing was said about, and there were no questions in regard to, the KSA. (15) On 15 January 2016, CFL issued an application for orders revoking or suspending the approval of the individual voluntary arrangement and/or challenging the decision to admit Kaupthing either to vote at all or to vote as a creditor for more than a nominal amount. In the Court of Appeal Decision, Patten LJ noted (at [30]): At [30]. “These orders were sought on the grounds that the IVA was unfairly prejudicial to the interests of CFL as a creditor or alternatively on the grounds that there had been some material irregularity at or in relation to the creditors’ meeting. The grounds relied upon were that Mr Gertner had failed to give full and frank disclosure of his assets and income and that approval of the IVA was obtained by the vote of Kaupthing whose proceedings against Mr Gertner had not by then been settled or determined and which was party to an undisclosed collateral arrangement outside the IVA with Mr Gertner which would result in Kaupthing receiving payments over and above the dividend in the IVA in settlement of its purported debt.” (16) At the time of this application, the KSA had not been disclosed. It came to be disclosed, as part of disclosure ordered by His Honour Judge Pelling, QC, on 28 October 2016. (17) The application to revoke or suspend the approval of the individual voluntary arrangement came before His Honour Judge Keyser, QC (see the Keyser Decision). The Keyser Decision was appealed to the Court of Appeal (see the Court of Appeal Decision). In very brief summary, as regards the Keyser Decision: (a) Judge Keyser held that on the true construction of the KSA, the debt based on Mr Gertner’s guarantee liability had either been extinguished or was no longer enforceable. Kaupthing was, therefore, no longer a creditor, and so not entitled to vote. Alternatively, Kaupthing’s debt was contingent and therefore unliquidated or unascertained. It therefore should not have been admitted at all or – if admitted – at a nominal value. (b) Judge Keyser also held that the individual voluntary arrangement gave rise to a material irregularity within rule 5.22 of the Insolvency Rules 1986 (the rules then applicable) because the KSA breached the principle of good faith between creditors because it enabled Kaupthing to benefit from the US$6 million and the opportunity to participate in the recoveries in the arbitration (which were not available to other creditors). The KSA thereby acted as an inducement for Kaupthing to support the First Proposal, as a result of which the other creditors would be limited to a dividend based on a share (with Kaupthing) in the £487,500 provided by Laser Trust, whilst Kaupthing would receive not only the dividend, but also the benefits accruing to it under the KSA. (c) Judge Keyser rejected CFL’s argument that the First Proposal was also unfairly prejudicial to its interests as a creditor. He held that the unfair prejudice complained of must derive from the terms of the individual voluntary arrangement itself. In this case, the First Proposal treated all creditors equally: it was the KSA and not the First Proposal that created the difference between Kaupthing and the other creditors of Mr Gertner. (18) On appeal to the Court of Appeal: (a) The Court of Appeal accepted that the failure to assign Kaupthing’s rights to Laser Trust “was not readily explicable given the ability of the parties to make the payment of the US$6 million and to enter into the profit sharing arrangements by the 15 December date”

“74. The good faith principle described by Bingham LJ (as he then was) in Interfoto Picture Library Ltd v. Stiletto Visual Programmes Ltd, [1989] QB 433, 439-445, is consistent with the findings of His Honour Judge Keyser, QC, adopted in the Court of Appeal. He said that the principle “does not simply mean that they should not deceive each other…; its effect is perhaps most aptly conveyed by such metaphorical colloquialisms as “playing fair”, “coming clean” or “putting one’s cards face upwards on the table”

“131. In taking all the circumstances into account, it is relevant to weigh the proposed outcome of the Arrangement, the voting creditors, the evidence and the pertinent observations made by His Honour Judge Keyser, QC in the [Keyser Decision] and Patten LJ in the [Court of Appeal Decision]. 132. The debts of [Mr Gertner] are long in existence. [Mr Gertner] failed to meet his obligations under the personal guarantee provided to CFL and failed to meet his agreed obligations in the [Settlement Agreement]. The presentation of the petition was met with a proposal to creditors for an IVA. The IVA was revoked, an appeal dismissed and soon after the petition was restored a second proposal made on substantially the same basis. 133. It is not unreasonable for the Court to ask, when exercising its discretion, if anything has altered save for the assignment? Has the assignment to a new entity prevented (i) the strict application of the good faith principle and (ii) the major creditor receiving a collateral advantage not available to other creditors? In my judgment, questions (i) and (ii) should be answered negatively. In addition, I infer that the Laser Trust is not wholly independent (or free from the influence) of [Mr Gertner] or a Gertner Family Trust. 134. In these circumstances, I do not undertake a simple accounting exercise and adjourn on the basis that the largest creditor entitled to vote seeks an adjournment. The nature and quality of Laser Trust leads me to discount its influence, and to give greater weight to the wishes of the independent petitioning creditor, CFL. I reach the conclusion, exercising my discretion, after considering the arguments of the creditors in support of and opposing the petition that I should refuse the adjournment application and make an order on the petition.”

“135. In my judgment the CFL debt is not disputed on genuine and substantial grounds. Neither is the debt impugned. The provisions of the [Consumer Credit Act] do not apply to the Contract. On a true interpretation of the [Settlement Agreement] the debt in the [Settlement Agreement] was not deferred, and credit not extended. In my judgment the law does not provide that a structured settlement clause making provision for the payment of a debt over time extends credit or financial accommodation ([27][32]). 136. The “essential character” of the contract cannot be characterised as one “for making loans” ([33]-[35]). In any event the Contract compromised proceedings where [Mr Gertner] defended a claim by CFL for the debt, now under consideration. One of the defences pleaded was that the [Consumer Credit Act] applied. Applying Binder v. Alchaouzos, I find that the terms of the [Settlement Agreement] were fair and reasonable, and I am satisfied that the [Settlement Agreement] constituted a bona fide compromise and the Court should not, in the absence of vitiating factors, go behind it ([40]-[44]). 137. The purpose of most or a good deal of penalty clauses is to compensate the loss resulting from the breach, if the level of damage is exorbitant or disproportionate to a great extent with “the highest level of damages that could possibly arise from the breach” it is likely to be a penalty. There is little guidance on what may constitute a legitimate interest, save that there can be no legitimate interest in punishing the defaulting party. The high interest rates imposed as a condition for lending to Lanza with very high defaulting rates were in keeping with (i) the nature of the lending that was urgent and very short term and (ii) the nature of the lender which was known as a lender of last resort. There is no argument that there was any disproportion between the parties and [Mr Gertner] must accept that he had the benefit of skilled legal advice when entering the Contract. There is no obvious oppression where parties freely enter into a contract at arms-length following litigation and where the challenging party had the benefit of legal advice. The claim that the CFL debt amounts to a penalty does not raise a genuine or substantial dispute: Cavendish Square Holdings v. Makdessi, [2016] AC 1172 ([46]-[49]). 138. The failure to run the penalty claim or not to pursue it by way of a defence when [Mr Gertner] had a chance to do so in the Part 7 proceedings, the compromise the acceptance of the CFL debt in proposals to creditors, and the failure to argue the penalty when an opportunity arose at the statutory demand stage preclude [Mr Gertner] from raising the issue now. The fact that the petition for bankruptcy was stayed is not relevant. The rights and obligations of [Mr Gertner] are governed by the [Settlement Agreement]. One of the rights that he gave up when entering into the [Settlement Agreement] was to forfeit the right to defend the claim to interest on the ground it contravened the common law on penalties. To permit him to re-open that argument at the hearing of a bankruptcy petition in order to argue that the debt contained in the petition is not liquidated is to argue, in substance, that he may contravene the principle Johnson v. Gore Wood & Co (No 1), [2002] 2 AC 1 in respect of the Part 7 proceedings and Turner v. Royal Bank of Scotland, [2000] BPIR 683in relation to the bankruptcy petition. The CFL debt, KSA and the position of Laser Trust need to be looked at as a whole ([51]-[53]). 139. The [Court of Appeal Decision] found that there would be a breach of good faith where one creditor voted in favour of a proposal in which it had quite different commercial interests from those of other creditors. The fact that approval of a proposal would put investigation of a debtor’s interests to an end and out of the reach of other creditors is indicative of a conflict between that party and other creditors entitled to vote. The principle goes hand- in-hand with the need for transparency ([71]-[77]). 140. The evidence provided on behalf of the Laser Trust is not credible and unreliable. The evidence may not be relied upon for: (i) the explanation given in relation to the reasons for purchasing the debt from Kaupthing; (ii) the assertion that Laser Trust has a commercial interest in the proposed Arrangement; or (iii) that Mr Gertner’s [Second Proposal] represents “a better deal for…Mr Gertner’s other unsecured creditors than bankruptcy”

“The court shall not make a bankruptcy order on a creditor’s petition unless it is satisfied that the debt, or one of the debts, in respect of which the petition was presented is either – (a) a debt which, having been payable at the date of the petition or having since become payable, has been neither paid nor secured nor compounded for, or (b) a debt which the debtor has no reasonable prospect of being able to pay when it falls due.”

“Any court in which proceedings are pending against an individual may, on proof that an application under that section has been made in respect of that individual, either stay the proceedings or allow them to continue on such terms as it thinks fit.”

“In a case relating to a proposed IVA – (a) a decision approving a proposal or a modification is made when three-quarters or more (in value) of those responding vote in favour of it; (b) a decision is not made if more than half of the total value of creditors who are not associates of the debtor vote against it.” (a) a decision approving a proposal or a modification is made when three-quarters or more (in value) of those responding vote in favour of it; (b) a decision is not made if more than half of the total value of creditors who are not associates of the debtor vote against it.”

“(1) For the purposes of this Act any question whether a person is an associate of another person is to be determined in accordance with the following provisions of this section (any provision that a person is an associate of another person being taken to mean that they are associates of each other). (2) A person is an associate of an individual if that person is – (a) the individual’s husband or wife or civil partner, (b) a relative of – (i) the individual, or (ii) the individual’s husband or wife or civil partner, or (c) the husband or wife or civil partner of a relative of – (i) the individual, or (ii) the individual’s husband or wife or civil partner. (3) A person is an associate of any person with whom he is in partnership, and of the husband or wife or civil partner or a relative of any individual with whom he is in partnership; and a Scottish firm is an associate of any person who is a member of the firm. (4) A person is an associate of any person whom he employs or by whom he is employed. (5) A person in his capacity as trustee of a trust other than – (b) a trust arising under any of the second Group of Parts or the Bankruptcy (Scotland) Act 2016, or (c) a pension scheme or an employees' share scheme, is an associate of another person if the beneficiaries of the trust include, or the terms of the trust confer a power that may be exercised for the benefit of, that other person or an associate of that other person. (6) A company is an associate of another company – (a) if the same person has control of both, or a person has control of one and persons who are his associates, or he and persons who are his associates, have control of the other, or (b) if a group of two or more persons has control of each company, and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person of whom he is an associate. (7) A company is an associate of another person if that person has control of it or if that person and persons who are his associates together have control of it. (8) For the purposes of this section a person is a relative of an individual if he is that individual's brother, sister, uncle, aunt, nephew, niece, lineal ancestor or lineal descendant, treating – (a) any relationship of the half blood as a relationship of the whole blood and the stepchild or adopted child of any person as his child, and (b) an illegitimate child as the legitimate child of his mother and reputed father; and references in this section to a husband or wife include a former husband or wife and a reputed husband or wife and references to a civil partner include a former civil partner and a reputed civil partner. (9) For the purposes of this section any director or other officer of a company is to be treated as employed by that company. (10) For the purposes of this section a person is to be taken as having control of a company if – (a) the directors of the company or of another company which has control of it (or any of them) are accustomed to act in accordance with his directions or instructions, or (b) he is entitled to exercise, or control the exercise of, one third or more of the voting power at any general meeting of the company or of another company which has control of it; and where two or more persons together satisfy either of the above conditions, they are to be taken as having control of the company. (11) In this section “company” includes any body corporate (whether incorporated in Great Britain or elsewhere); and references to directors and other officers of a company and to voting power at any general meeting of a company have effect with any necessary modifications.” (2) A person is an associate of an individual if that person is – (a) the individual’s husband or wife or civil partner, (b) a relative of – (i) the individual, or (ii) the individual’s husband or wife or civil partner, or (c) the husband or wife or civil partner of a relative of – (i) the individual, or (ii) the individual’s husband or wife or civil partner. (b) a trust arising under any of the second Group of Parts or the Bankruptcy (Scotland) Act 2016, or (c) a pension scheme or an employees' share scheme, is an associate of another person if the beneficiaries of the trust include, or the terms of the trust confer a power that may be exercised for the benefit of, that other person or an associate of that other person. (a) if the same person has control of both, or a person has control of one and persons who are his associates, or he and persons who are his associates, have control of the other, or (b) if a group of two or more persons has control of each company, and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person of whom he is an associate. (a) any relationship of the half blood as a relationship of the whole blood and the stepchild or adopted child of any person as his child, and (b) an illegitimate child as the legitimate child of his mother and reputed father; and references in this section to a husband or wife include a former husband or wife and a reputed husband or wife and references to a civil partner include a former civil partner and a reputed civil partner. (a) the directors of the company or of another company which has control of it (or any of them) are accustomed to act in accordance with his directions or instructions, or (b) he is entitled to exercise, or control the exercise of, one third or more of the voting power at any general meeting of the company or of another company which has control of it; and where two or more persons together satisfy either of the above conditions, they are to be taken as having control of the company. Britain or elsewhere); and references to directors and other officers of a company and to voting power at any general meeting of a company have effect with any necessary modifications.”

“I agree with Robert Walker LJ, and only add some words of my own by way of emphasis. In my judgment, the effect of section 276 of the Insolvency Act 1986 and the Insolvency Rules 1986 made under it, is to ensure that every proposal for an individual voluntary arrangement should be characterised by complete transparency and good faith by the debtor.”

“43 This statutory language plainly provides that a debtor may be in default, and liable to a bankruptcy order, even when he has apparently complied with the rules which govern the contents of the proposal. An accurate proposal dealing with but limited to the matters prescribed by the rules is not sufficient of itself to establish compliance with the requirements of section 276. “Information” must not be provided by the debtor which is false or misleading in any material particular, and the “information” that is provided by him must be complete. This obligation continues up to the date of and during the meeting of creditors itself. Properly fulfilled this obligation enables the creditors to make an informed decision about the proposal for a voluntary arrangement. 44 The principles laid down in the cases decided in the 18th and 19th centuries, accurately summarised by the judge below, have not, as he rightly put it, “become outmoded or unnecessary in modern times”

“…where a given matter becomes the subject of litigation in, and of adjudication by, a court of competent jurisdiction, the Court requires the parties to that litigation to bring forward their whole case, and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of matter which might have been brought forward as part of the subject in contest, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case. The plea of res judicata applies, except in special cases, not only to points upon which the Court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time.”

“A consumer credit agreement is an agreement between an individual (“the debtor”) and any other person (“the creditor”) by which the creditor provides the debtor with credit of any amount.”

“33 The penalty rule is an interference with freedom of contract. It undermines the certainty which parties are entitled to expect of the law. Diplock LJ was neither the first nor the last to observe that “The court should not be astute to descry a “penalty clause”: the Robophone case, [1966] 1 WLR 1428, 1447. As Lord Woolf said, speaking for the Privy Council in Philips Hong Kong Ltd v. Attorney General of Hong Kong, (1993) 61 BLR 41, 59, “the court has to be careful not to set too stringent a standard and bear in mind that what the parties have agreed should normally be upheld”, not least because “any other approach will lead to undesirable uncertainty especially in commercial contracts”. 34 Although the penalty rule originates in the concern of the courts to prevent exploitation in an age when credit was scarce and borrowers were particularly vulnerable, the modern rule is substantive, not procedural. It does not normally depend for its operation on a finding that advantage was taken of one party. As Lord Wright MR observed in Imperial Tobacco Co (of Great Britain and Ireland) Ltd v. Parslay, [1936] 2 All ER 515, 523: “A millionaire may enter into a contract in which he is to payliquidated damages, or a poor man may enter into a similar contract witha millionaire, but in each case the question is exactly the same, namely,whether the sum stipulated as damages for the breach was exorbitant orextravagant…” 35 But for all that, the circumstances in which the contract was madeare not entirely irrelevant. In a negotiated contract between properlyadvised parties of comparable bargaining power, the strong initialpresumption must be that the parties themselves are the best judges of whatis legitimate in a provision dealing with the consequences of breach. In thatconnection, it is worth noting that in the Philips Hong Kong case, 61 BLR 41,57-59, Lord Woolf specifically referred to the possibility of taking intoaccount the fact that “one of the parties to the contract is able to dominatethe other as to the choice of the terms of a contract” when deciding whethera damages clause was a penalty. In doing so, he reflected the view expressedby Mason and Wilson JJ in the AMEV-UDC case, 162 CLR 170, 194 that thecourts were thereby able to “strike a balance between the competinginterests of freedom of contract and protection of weak contracting parties”(citing Atiyah, The Rise and Fall of Freedom of Contract (1979), chapter22). However, Lord Woolf was rightly at pains to point out that this did notmean that the courts could thereby adopt “some broader discretionaryapproach”

“It is not in dispute that clause 5 of the [Settlement Agreement] is a secondary obligation. It is said that the [Settlement Agreement] was drafted so that any default, however minor, would result in the debt immediately multiplying into millions. An example of this is that Mr Gertner was 8 days late in making the first instalment payment and this placed him in default such that paragraph 5 [of the Settlement Agreement] required him immediately to pay approximately £5 million. The monthly compounding provision in paragraph 5 has caused the debt to reach £33 million. Mr Kirk argues that this is “out of all proportion” to the legitimate interest of CFL, which has already recovered £3.34 million from the original commercial loan of £3.5 million.”

“48. There is little guidance on what may constitute a legitimate interest, save that there can be no legitimate interest in punishing the defaulting party. The high interest rates that were imposed as a condition for lending to Lanza with very high defaulting rates were in keeping with (i) the nature of the lending that was urgent and very short term and (ii) the nature of the lender which was known as a lender of last resort. Such a lender is only approached in circumstances where the lending is for short term and a borrower is unable to obtain finance elsewhere. I infer that [Mr Gertner] was unable to obtain finance for Lanza from other sources. The failure of [Mr Gertner] to respond positively in repaying the debt due under his guarantee and submitting to the Tomlin Order as a result of a threat to issue an application for summary judgment many years later may go some way to legitimizing CFL’s particular concern or interest in [Mr Gertner’s] performance. Although not expressly stated by [Mr Gertner], the argument must be that CFL had no such legitimate interest and therefore the high interest rates found in the secondary obligation contained in clause 5 of the [Settlement Agreement] were intended to punish [Mr Gertner]. By accelerating payment and requiring compound interest, clause 5 went beyond mere compensation for breach of operative clause 2 of the contract. The full background and legitimacy issue has not been covered by the evidence, but in my judgment I find that the observation made by Lord Hodge JSC in Makdessi at [266] pushes the penalty argument below the threshold test of a serious and genuine dispute. This is because “the extent of the disproportion is likely to depend on the bargaining power of the parties and their access to legal advice…..the greater the equality of bargaining power, the greater the access to legal advice, the less likely it is that the clause will be held to be a penalty”: Goode on Commercial Law 3.136. As I have mentioned, Mr Kirk did not advance the penalty argument in oral submissions, but has cited Makdessi to advance his case. There has been no submission that there was inequality of bargaining power. [Mr Gertner] must accept that he had access to legal advice and was advised by skilled lawyers. In my judgment these factors lead me to conclude that it is not genuinely arguable that there is any disproportion between the parties, or that the [Settlement Agreement] was not entered into with eyes wide open and on careful legal advice. 49. In reaching my conclusion I have in mind that “the power to strike down a penalty clause is a blatant interference with freedom of contract and is designed for the sole purpose of providing relief against oppression for the party having to pay the stipulated sum. It has no place where there is no oppression”: Elsey v. J.G. Collins Insurance Agencies Ltd,(1978) 83 DLR (3rd) 1, 15. There is no obvious oppression where parties freely enter into a contract at arms-length following litigation and where the challenging party had the benefit of legal advice. This is sufficient to put paid to the argument insofar as it was advanced…”

“Taking account of public policy considerations referred to in Binder that (i) there should be finality, (ii) the same party should not be subject to the same claims by the same person more than once, and (iii) encouraging, and when appropriate enforcing any bona fide compromise, especially one arrived at under legal advice, I find that the terms of the [Settlement Agreement] were fair and reasonable and I am satisfied that the [Settlement Agreement] a bona fide compromise and the Court should not, in the absence of vitiating factors, go behind the agreement.”

“Any payments having already been made pursuant to paragraph 2 above prior to any breach shall be credited to the sums which, as a result of any breach, have now become due and owing by Mr Gertner under paragraph 5.1 above.”

“111. The Court has a discretion as to whether to make a bankruptcy order on a petition: sections 264(2) and 266(3) IA1986. This much, at least, is common ground. 112. The Appellants say that it is not an appropriate exercise of discretion for the Judge to make a bankruptcy order in the present case. They say that the Judge ought to have adjourned the Petition to await the outcome of the IVA Meeting. 113. An appellate Court should only interfere with a judge’s exercise of discretion if he “has exceeded the generous ambit within which a reasonable disagreement is possible”: see G v. G (Minors: Custody Appeal), [1985] 1 WLR 647 at 651-652. 114. This is therefore a case in which this court should refrain from interfering, unless satisfied that the Judge has made a significant error of principle, or a significant error in the considerations taken or not taken into account.” satisfied that the Judge has made a significant error of principle, or a significant error in the considerations taken or not taken into account.”

“The sums to be paid to the creditors through the proposal had been described as de minimis. CFL forcefully argue that the acceptance of the proposals by the passing of a resolution voted on by Laser Trust will force it to accept a de minimis payment when it has been out of its money for 8 years. It contends that it is unreasonable, having in mind, first there has been no objective investigation into the affairs of [Mr Gertner], and, secondly, the unexplained inability of [Mr Gertner] to settle with some creditors by directing that the proceeds of the arbitration be shared among a few. Ms Blom-Cooper [CFL’s solicitor] explains in her second witness statement that in addition to the KSA there has been:86 “…a settlement agreement entered into with Bank Leumi whereby the bank was to receive the upside from the Arbitration if it agreed to withdraw its bankruptcy petition against Mr Gertner…Following the Bank Leumi settlement, so far as I am aware, CFL was the only creditor pressing for payment. When CFL refused to accept Mr Gertner’s offer of settlement, Mr Gertner did a deal with Kaupthing (in the form of the KSA) and put forward the First Proposal which, in my view, was for the sole purpose of cramming down CFL’s debt.” “…a settlement agreement entered into with Bank Leumi whereby the bank was to receive the upside from the Arbitration if it agreed to withdraw its bankruptcy petition against Mr Gertner…Following the Bank Leumi settlement, so far as I am aware, CFL was the only creditor pressing for payment. When CFL refused to accept Mr Gertner’s offer of settlement, Mr Gertner did a deal with Kaupthing (in the form of the KSA) and put forward the First Proposal which, in my view, was for the sole purpose of cramming down CFL’s debt.” (3) The fact that the First Proposal – which had been approved by Mr Gertner’s creditors – had been upset because of the KSA, which – as the Court of Appeal found – caused Kaupthing’s approval of the First Proposal to infringe the good faith rule. Laser Trust only became Mr Gertner’s creditor through the operation of the KSA. It might very well be said that if Kaupthing’s approval was tainted, then so should the approval of its assignee, Laser Trust: Briggs Decision at [128]. See also [133]: “It is not unreasonable for the Court to ask, when exercising its discretion, if anything has altered save for the assignment?” “The Laser Trust is in the same or nearly the same position as Kaupthing. It seeks to benefit from an ad hoc private arrangement as described by Patten LJ. That benefit will mean that it, as the largest and most influential unsecured creditor, will vote for an outcome for which it had little or no interest…” (4) Laser Trust, itself, provided an unsatisfactory account of its involvement in Mr Gertner’s affairs. In a passage that was criticised by Mr Gertner and Laser Trust, the Judge said this: At [130]. “The evidence of Mr Steinberg and Mr Hassan is not reliable, and I have said is of little or no substance. The evidence cannot be relied upon to give a true account of the reasons for paying US$6 million for the Kaupthing debt, the reason given for the desire to vote in favour of the Arrangement or that the Laser Trust is free from the influence of a Gertner Family Trust or of [Mr Gertner]. In these matters there has been a failure to provide a “complete picture”, a good faith requirement. There has been a failure to provide any records, any account as to the source of the US$6 million or an analysis of the Trust’s accounting position that, on its own evidence, leads it to conclude that its deferred return from the proposed Arrangement is a good return. The reason for this absence of evidence is that the Laser Trust has no accounts for financial statements…”

“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 rule 5.23(4) [of the 1986 Rules]. 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 £4 million 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 section 262(1)(b) against the background of the good faith principle and the legislative policy reflected in rule 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 rule 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 of 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…”

“…Mann J heard a section 6 application by HMRC in which the Premier League rules requiring the payment of football creditors in full were challenged as unlawful and contrary to public policy because they contravened the principles of pari passu distribution and the antideprivation principle. The football creditors had already been paid in part by the Premier League out of monies from television rights and the balance was due to be paid sometime after the approval of the CVA. Under the Premier League rules which apply during the administration or insolvency of a club, the right to receive monies from television rights is suspended and the League is entitled at its discretion to use the monies to pay the football creditors. The monies therefore cease to be payable to the club or to its administrators. Notwithstanding this, the football creditors were allowed to vote in respect of their claims at the meeting even though the CVA assumed that they would be paid in full in due course by the Premier League. As part of a wide challenge to the proposal, HMRC contended that the proposal was unfairly prejudicial to its interests as a creditor because it approved past and future payments in full to the football creditors and also involved a material irregularity insofar as football creditors were permitted to vote notwithstanding that they had or would receive payment of their debts in full.”