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Overview Of Material Irregularity At Creditors Meeting

Material Irregularity At Creditors Meeting is a case about:

  • A creditors meeting in December 2018
  • Chief Insolvency and Companies Court Judge Briggs said there was a material irregularity

The case was about an investment banker, Rory McCarthy, who was made the subject of a Bankruptcy Order in March 2018. He attempted in December 2018 an Individual Voluntary Arrangement (“IVA”) to annul his bankruptcy.

Material Irregularity Appeal Of The Creditors Meeting

The creditors’ meeting in December 2018 was chaired by an Insolvency Practitioner, Mr Sands, whose decision was challenged in the matter of Elser v Sands & Ors [2022] EWHC 32 (Ch).

This case involved the challenge in respect of three creditors:

The factual basis for the material irregularity is described as: “the Chairman’s decision to admit the following claims for voting purposes: Mr Jamie Bond (£4,152,569) and Mr Chris Jonns (£2,343,750) and OBN Investments Ltd (£3,000,000).

These three creditors were the key disputed creditors and had anyone of these three claims been rejected the IVA would not have passed because there would not have been the required 75% creditor support for the IVA.

A notable feature of this case was an absence of records and inconsistencies in the position of the disputed three creditors and the information supplied by Mr McCarthy at various times in respect of the same.

The Basis For The Appeal

Rule 15.35 of the Insolvency (England And Wales) Rules 2016 permits a creditors meeting result to be challenged. Such an appeal must be brought within 21 days of the decision of such a meeting.

The Smell Test

A creditor, Mr Elser, issued the application to appeal the creditors meeting decision. His solicitor, Mr Head said:

smell test

He criticises Mr Sands on the basis that he acted as a “rubber stamp” in respect of the Disputed Debts that “do not pass a basic smell test”; failed to provide Mr Head with a “proper explanation, let alone evidence in support, as to what steps [he] took to verify these debts or what documents [he] examined…on the face of it [he] appears to have exercised no judgment at all, independent from what [he was] told by Mr McCarthy”; that the court should have an opportunity to see “to what extent Mr McCarthy, Mr Bond, Mr Jonns, Mr Sands or Mr Bucknall were or were not parties to misleading and or prejudicing the interests of other creditors”; and Mr Sands failed to heed warnings as to the unreliability of Mr McCarthy;

The Court did not find these criticisms to be justified. However, whilst Mr Sands said that normally a Nominee ought to be able to rely upon the information provided by the individual proposing an Individual Voluntary Arrangement, the Court did say that the duties of a Nominee in a Voluntary Arrangement should not be undertaken in an unquestioning manner.

How A Creditor Appeal On A Proof Of Debt Works

When a creditor appeals to the Court about a decision at such a creditors’ meeting it is not a review of the Chair’s decision; the Court looks at the matter afresh:

It is wrong to view the Application made by Mr Elser as an application to appeal the decision of Mr Sands. The Application asks the court to find a material irregularity and then decide, in its discretion, what directions to give having decided the issues in respect of the impugned claims.

What Happened At The Appeal?

The Judge considered the three disputed creditors in some detail and the evidence of various parties such as Mr McCarthy and Mr Sands.

In relation to Mr McCarthy the Judge said:

Overall, I assess Mr McCarthy’s evidence as honestly given but sufficiently vague to lead me to conclude that I should treat some of his evidence with great caution. This is because he cannot be trusted to provide accurate details of his financial position unless supported by documentary evidence. One example of his failure concerns the purported debt owed to Mr Jonns. On his own evidence he chose not to disclose this debt in the Paylor proposal or to the TIB. He did not want Mr Jonns to know of his insolvency or antagonise him. The explanation discloses a willingness to deceive in respect of his financial dealings. Mr Robinson provides a long list of other failures. I select three examples:

92.1. His statements to the court in 2016 listing his liabilities at £0.8m, omitting reference to a £1.602m debt to OBN and the debt claimed by Mr Bond.

92.2. Advancing a case of ability to pay debts as they fall due in a 20 November 2017 statement to the court notwithstanding enforcement of security for a debt over his property. It is not clear when Mr McCarthy knew and his present case is that he owed millions of pounds to Mr Bond and Mr Jonns at that time and was being pressed by Mr Jonns for payment; and

92.3. Disclosing alleged debts for the first time in the March IVA proposal while omitting other presently alleged debts, purportedly on the basis that he “can decide who do I put into my IVA”.

It seems that of the three disputed debts, one seems to have been considered unsupported, one was reducted by very roughly 25% of its value and the other was withdrawn by the disputed creditor:

In my judgment there was a material irregularity at the December 18 Meeting.

Mr Jonns has not produced a witness statement of fact or attended court to permit scrutiny of the proof of debt he submitted at the December 18 Meeting. The claim he has submitted has not been established on the evidential standard of proof. The acceptance of his vote for the proposal at the December 18 Meeting was a material irregularity. I shall declare his vote invalid.

Mr Bond has established that monies were lent to Mr McCarthy and the balance due to him is £2,800,966.

The OBN debt was accepted at the December 18 Meeting. OBN has played no part in these proceedings since September 2019; it has withdrawn its proof and the Applicant does not appeal the decision to admit.

Mr McCarthy has failed to make any payments into the arrangement. He failed to continue to make payments under an income payments agreement. These failures coupled with the decision of OBN not to vote in favour of an arrangement at any further meeting and the failure of Mr Jonns to demonstrate he is a creditor of Mr McCarthy leads me to conclude that the cost and time of convening a new meeting of creditors would be pointless.

Pursuant to Rule 15.35 (3) I shall reverse the decision at the meeting.

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Disclaimer: Material Irregularity At Creditors Meeting

This page Material Irregularity At Creditors Meeting is not legal advice and should not be relied upon as such. This article Material Irregularity At Creditors Meeting is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.

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