Material Irregularity from Own Interests

Material Irregularity from Own Interests

Material Irregularity from Own Interests

Material Irregularity from Own Interests is a post following on from a case concerning an application by Royal Bank of Scotland plc (“RBS”) against an Individual Voluntary Arrangement (“IVA”) provider Creditfix Limited and some other parties including an Insolvency Practitioner employed by Creditfix Limited. The case is Royal Bank of Scotland plc v Munikwa [2020] EWHC 786 (Ch).

The case was about an Insolvency Practitioner’s fees and how a creditor could exercise rights over the same in the context of an IVA proposal and consequential modifications.

There is another post on a topic about fees called Challenging a Trustee in Bankruptcy’s Fees. That post was couched in general terms. Whilst it concerns fee challenges, it does not concern a material irregularity from own interests on such matters.

At the heart of the case was RBS’s apparent dissatisfaction with the approach adopted by the Insolvency Practitioner and approval of certain IVA proposals and the fee structure contained therein.

Although an IVA proposal is the debtor’s – the person who is insolvent owing money to creditors – proposal, this document will usually consist of a bundle of clauses formulating the terms and conditions applicable to the proposal drafted by the Insolvency Practitioner’s firm. Such IVA proposals will often have a considerable number of standard clauses. These will often address a series of statutory and regulatory matters.

It is common in IVAs for major creditors who routinely feature, to submit modifications to the IVA proposal. RBS in its application, sought a declaration that Creditfix’s standard IVA proposal clause paragraph 10.17 (“Paragraph 10.17”):

…confers no authority upon the nominee in relation to any individual voluntary arrangement to disregard modifications proposed by creditor“.

The facts of the case do not appear all that complicated but some of the remarks of the judge appear of concern, hence the reference to material irregularity from own interests.

There were a number of IVAs considered as a consequence of the application by RBS. The judge picked out one as an example.

RBS voted on it in such terms that acceptance of the Debtor’s IVA proposal was conditional upon acceptance by the debtor of its proposed modifications.

At the adjourned meeting which determined the outcome of the IVA the judge highlighted that the report from the Chair was:

“… quite startling.”

The issue was that the debtor had not agreed RBS’s modifications but nevertheless the Chair:

“… used RBS’s proxy to vote in favour of his proposal.”

A letter was issued to creditors which stated that fee modifications:

“…conflicted and which were incompatible with the terms set out in the Proposal… this has meant that some of those proposed fee modifications have been disregarded by the Chair…”

The judge suggested that there was an appearance of:

“…an overwhelming case of material irregularity…”

The judge went on to be somewhat unimpressed by the arguments that the Paragraph 10.17 at the heart of this case set out no enforceable rights but:

“… both the chair and the supervisor have relied upon it as doing exactly that, so enabling the former to reject RBS’s modifications and treat its proxy as a vote in favour of the proposals…”

After further review of the documentation the judge then made the following reasonably strident observation:

“The chair’s report and Mr Sloper’s 9 August 2019 letter are, though, indefensible in their terms.”

Although RBS’s modifications were disregarded and suggested as being incompatible with the IVA proposal the judge said that it was:

…no bar to the statutory scheme that a proposed modification conflicts with the proposal; in most instances that will be so…“.

The judge said with conviction that there was no power for an Insolvency Practitioner in looking at a modification incompatible with an IVA Proposal, to exercise discretion and professional judgment over it but only to consider it with the Debtor and creditors.

The notable issue, in this case, was the matter of fees for the Insolvency Practitioner (“IP”) and the judge pointed out the cardinal principle about voting on an IP’s remuneration under Rule 16.7 of the Insolvency (England and Wales) Rules 2016. An IP is not permitted to vote for his or her own remuneration save at the specific direction by the proxy-holder.

Conclusions

The judge then appears to have articulated certain further pointed assertions as follows:

“… Creditfix has, as in the chair’s report and its accompanying letter, been fixated on fighting its own battle on the debtor’s field.”

“Plainly there has been a material irregularity; and that has been brought about by Creditfix’s promotion of its own interests.”

“I also intend to direct that a copy of this judgment be provided to Mr Sloper’s regulatory body. The evidence is that he has caused or permitted these cases, and many others, to be conducted otherwise than in accordance with the Act and Rules; and has done so to promote his own interests and/ or the interests of his employer, Creditfix. These are significant and multiple failings which ought to be the subject of further detailed consideration.”

RBS succeeded in obtaining a declaration that Paragraph 10.17 did not afford the nominee or chair the right to disregard the modifications.

Disclaimer: This post “Material Irregularity from Own Interests” is not legal advice and not to be relied upon as such. No liability is accepted by the author or the author’s firm, Oliver Elliot Chartered Accountants, for any reliance placed upon any aspect of this post. You should seek independent professional advice on the facts of your case.

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