Material Irregularity At Creditors Meeting: Court Says Creditor Did Not Get Their Choice Of Liquidator

In the case of Bhundia v Dhar (Re Five Delta Ltd – Insolvency Act 1986) [2025] EWHC 1227 (Ch) (23 May 2025), the Court held there was a material irregularity at the creditors meeting which resulted in a creditor not having their choice of liquidator:

… in light of my findings and conclusions as set in this judgment, I confirm that I am in any event satisfied that the circumstances which led to this appeal do give rise to material irregularity. As I have found, the Applicant was not admitted to vote in the correct sum and the Respondent was admitted to vote when he should not have been. In light of my findings, the Applicant enjoyed significantly more than 50% in value of the vote and the outcome of the creditors’ meeting ought to have been that his choice of liquidator was appointed. In such circumstances, the circumstances which led to the appeal plainly do in my judgment give rise to a material irregularity.

The judge who dealt with this case was the same as in another matter when voting at a creditor meeting was changed by the Court, highlighted in the article Creditor Claim Decision Reversed By The Court After Creditors’ Meeting.

Outcome Of The Creditors Meeting

As is commonly the case in creditors voluntary liquidations the member’s liquidator had their appointment ratified by creditors at the meeting of creditors. 

This case came to Court because a creditor applied to challenge the outcome of the meeting chaired by the company’s sole member.

For simplicity, the applicant shall be referred to as the creditor (who challenged the chair’s decision on their voting rights) and the respondent to the application, referred to as the member.

Creditor Court Application On Voting Rights

The creditor challenged the member’s rejection of certain of their claims. This affected the creditor’s voting rights at the creditors meeting with the creditor’s Court application following shortly after the meeting was held. The trial did not arise for over a year, with judgment handed down yesterday.

The creditor’s application led to consideration not only of their claim but also the claims of the member and the company’s accountant. 

Of the creditor’s claim, the biggest element that was successfully appealed related to an overpayment claim. Sufficient elements of the creditor’s claim were accepted by the Court to render the outcome of the meeting incorrect and therefore, it seems based on what the Court said in the end, a material irregularity:

In my judgment, for the reasons set out in paragraphs [108] to [204] of this judgment, the Applicant’s proof should have been admitted in the total sum of £225,287.26, comprising:

(1) £104,426.19 (adjudication award);

(2) £110,643.36 (overpayment claim);

(3) £5,940.00 (Camerich claim, or additional overpayment); and

(4) £4,277.71 (Gaggenau claim, or additional overpayment).

I would observe that, even if (3) and (4) were left out of account completely, the Applicant would still comfortably clear the voting threshold for the appointment of his chosen liquidators by reason simply of the adjudication award at (1) and the overpayment claim at (2).

Late Proof Of Debt Not Fatal To Creditor Voting

The court accepted the accountant’s claim notwithstanding that their proof of debt was received late because there remained a discretion for the chairman of the meeting to consider it:

In my judgment, the Respondent did have a discretion to admit Kajaine Accountants’ proof for voting purposes, notwithstanding its late arrival. This discretion was not, as Mr McNeil submitted, conferred by rule 14.32(2) IR 2016. Rule 14.32(2) applies in the context of proofs lodged for dividend and accordingly is of no relevance in this case. Instead, the discretion was retained by the Respondent by virtue of paragraph 15 of the Notice of Virtual Meeting itself. In this regard I reject Mr Gupta’s submissions on construction, as summarised at paragraph 47 of his skeleton argument. Whilst the covering letter from Kallis used different language, and the Notice of Invitation to form a Liquidation Committee used different language, in my judgment it is the language of the Notice of Virtual Meeting itself which must prevail in this context. The covering letter merely inaccurately summarised the contents of the Notice of Virtual Meeting. On a true construction of that Notice, and in particular, the inclusion of the word ‘may’ in paragraph 15 of the same, it is in my judgment clear that the Respondent did retain a discretion to allow a late proof to vote. In my judgment it was an entirely appropriate use of that discretion to allow Kajaine Accountants’ proof in late, in light of the extenuating circumstances.

I reach these conclusions on Issue 7 notwithstanding the concessions made in cross-examination by the Respondent and Mr Shah, who each (when put) accepted in oral testimony that the proof should not have been allowed in late. The Respondent and Mr Shah were each witnesses of fact. The issue of whether on a true construction of the Notice of Virtual Meeting and in the events which have occurred the Respondent retained a discretion to allow in a late proof is a point of construction/legal principle for the court.

For all these reasons Kajaine Accountants has discharged its burden of proof on the evidence before me. It has made out its claim to be a creditor of the Company in the sum of £11,700 and was properly admitted to vote in that sum, notwithstanding the late arrival of its proof.

Director’s Loan Account Claim Rejected

However, the Court rejected the member’s claim concerning the director’s loan account:

In my judgment the Respondent has not discharged his burden of proof on this item. There is no board minute in evidence to confirm that a director’s loan account was even authorised and the only documentary evidence produced in support of the Respondent’s claim was a three-page petty cash printout running from 3 June 2021 to 27 November 2023. I was taken to no documentary evidence establishing on a balance of probabilities that the Respondent personally paid any of the petty cash items. At paragraph 59 of his witness statement, the Respondent had claimed that ‘There were receipts that I produced for expenses that I paid when there was a shortfall in the sums advanced by the Funders’. At paragraph 60 of his statement, the Respondent continued: ‘This debt was admitted on review of the invoices that substantiated the debt’. Yet none of these invoices and receipts have been produced in evidence, still less any documentary evidence to support the Respondent’s claim to have paid them himself from his own funds.

The Respondent also proffered no persuasive explanation regarding why a petty cash summary would span a period of two and a half years when professionally prepared accounts were filed for the Company for given accounting years in the meantime. His explanation that he was waiting to reimburse himself from a VAT rebate did not make any sense, given that a number of VAT rebates were made along the way within the two and a half year period, including, by way of example, a VAT rebate on 3 March 2023 of £95,788.71, which brought the balance sitting in the Company’s main bank account ending 837 to £123,857.21. At that stage the petty cash summary records a balance outstanding of £5,782.54. Shortly thereafter, on 3 April 2023, the Company’s bank balance on the same account had increased to £363,109.39 following a payment into the account on the Applicant’s behalf of £299,783. At or about that stage (as at 4 April 2023), the petty cash summary records a balance owing of £9,211.66.

Moreover, the petty cash printout relied upon by the Respondent ends on 27 November 2023 with a balance of zero. The balance as at 31 October 2023 was £15,027.20 but the final entry, dated 27 November 2023, bears a reference ‘Petty Cash Jnl to DCA’, records a ‘deposit’ of £15,027.20 and brings the balance to nil. In this regard I note that notices went out to creditors for the decision procedure in early December 2023, very shortly after this credit entry.

The Respondent had no good answer in cross-examination for the final balance of zero on the spreadsheet which he relied upon. He said that it was ‘obviously some accounting entry’. He said that he ‘didn’t receive these funds’ and was ‘not sure where the netting off came from’. When pressed further, he said that he could not ‘provide illumination’.

In submissions Mr McNeil argued that there could be a number of reasons for the ‘zero-ing out’ of the petty cash summary. I accept that. The difficulty for the Respondent however is that he has adduced no evidence of what the reason was in this case. If the balance was simply moved to another journal, that does not assist, as the journal in question has not been produced in evidence.

On the evidence as a whole, the Respondent has failed to satisfy me on the balance of probabilities that he is owed the sum of £16,434.94 on his director’s loan account. I conclude that the Respondent’s own claim of £16,434.94 should not have been admitted for voting purposes. The Respondent’s decision to admit that proof shall be reversed and the Respondent’s votes based on that proof shall be declared invalid.