The case of EFG Private Bank Ltd v Babaee (Re Insolvency Act 1986) [2024] EWHC 444 (Ch) highlighted how it might be an IVA proposal fails to stop bankruptcy.
It is an interesting case, not least because Insolvency and Companies Court Judge Barber said this was the sort of IVA proposal that should be filtered out “at the earliest opportunity”.
Whilst an Individual Voluntary Arrangement (“IVA”) is a major alternative to bankruptcy it needs to be based on a proposal that is ‘serious and viable’.
The bank in this case succeeded in obtaining a bankruptcy order against the debtor.
Contents
What Is An Interim Order?
An interim order is a court order (for a period of time) provided under Section 252 of the Insolvency Act 1986 which prevents an individual who intends to put an IVA proposal to creditors (subject to court permission otherwise) from:
- being presented with a bankruptcy petition
- being evicted from premises let to the debtor
- being subject to legal proceedings
In effect, an interim order acts as a freeze on certain legal processes and provides an individual with a breathing space to put IVA proposals to their creditors so they can be considered and if approved put into effect.
Court Discretion To Grant Interim Order
An IVA proposal needs to be serious and viable:
Under s255(2) IA 1986, the court has a discretion whether to make an interim order. The subsection provides that the court may make an order if it thinks that it would be appropriate to do so for the purpose of facilitating the consideration and implementation of the debtor’s proposal. It is decided by established authority (see Hook v Jewson 1997 BPIR 100) that, in determining the appropriateness, or otherwise, of making an interim order, the court will consider whether the debtor’s proposal is ‘serious and viable’.
The Court’s discretion is to fetter the deployment of an IVA proposal that is not serious or viable so that creditors are not disadvantaged. However, whilst the Court has discretion, nevertheless a decision on an IVA proposal is for creditors. In Shah v Cooper [2003] BPIR 1018 the Court said:
[76] Whilst it is not the function of the court when considering an IVA proposal to simply ‘rubber stamp’ everything a debtor says, it is equally not the court’s function to usurp the function of the creditors’ meeting and to pre-empt the creditors’ decision by itself deciding whether an offer is adequate (so as to render a proposal ‘not’ serious.
[77] I agree with Mr Collings that this does not mean that everything should be left to the creditors. In the first instance it is the function of the court to assess the questions of seriousness and viability, in effect to decide whether the proposal is fit to be put to the creditors. If the proposal is fit to be put to the creditors it is for them to decide whether the offer on the table is acceptable whether in financial terms or for other reasons.’
What Is A Serious And Viable IVA Proposal?
Perhaps this question might be more easily answered by looking at the authority the Court considered when a proposal was not deemed viable.
The judge in this case did not seem enthusiastic about the Debtor’s IVA proposal which appears to have been rooted in anticipated future income to make contributions to the IVA:
The Debtor again confirms the contingent nature of his proposed contributions into the arrangement at section 7.1 of his proposal, where he states (with emphasis added):
‘My income will be dependent on my ability for structuring property deals and rebuilding a property development portfolio and I will make contributions into the Arrangement from this source.’
The judge said the proposal appears to have rested on hope:
The proposal does not set out a satisfactory basis for a trading IVA. In this regard I note that, in Re a Debtor (No 2389 of 1989) [1991] Ch 325 Ch D, the debtor similarly proposed an IVA resting largely on monthly instalments from income which he hoped to earn, without any adequate information regarding where the income would come from. Sir John Vinelott said this of the proposal:
‘… the benefit of the proposed arrangement rests almost wholly on the … debtor’s ability to pay £1500 per month to the supervisor. There is not one scrap of evidence as to how he proposes to set himself up in business, how he would finance it, what the gross income would be and what the expenses of the business would be, or indeed the source of the earnings….
I simply do not understand how, in the circ*mstances, it can be said … that the proposals gave a reasonable prospect that if the debtor was given a chance he would in time be able to meet his debts in full. The proposals, to my mind, are little more than a fairy story. It is not enough, in my judgement, for a debtor to say that if his hopes are realised the position under a proposed arrangement is likely to be better than if a bankruptcy were to ensue….’
…
Somewhat troublingly, the proposal also envisages that the Debtor will carry on borrowing on a largely unsupervised basis. Section 32.1 of the proposal states that:
‘I do propose to arrange credit facilities during the course of the Arrangement as and when required in connection with my business activities’.
Contrary to the requirements of rule 8.3(s) IR 2016, the proposal includes no information on how any further debts run up by the Debtor are to be paid.
The proposal envisages that the Debtor would have a high degree of autonomy in relation to any credit facilities he might wish to set up. He would only be required to refer to the Joint Supervisors for permission if he (rather than any company) wished to give any security for borrowing. The only blanket prohibition was against the granting of any personal guarantees of third-party liabilities.
In short, the Debtor, freed from (on his case) £25m worth of debt and any legal proceedings by his existing creditors in exchange for (at best) 1p in the £, would be permitted under the terms of the proposed arrangement to run up further debts of unlimited amounts on a largely unsupervised basis for the duration of the arrangement, with no indication as to how such further debts would be repaid or how the servicing of any such debts (if they were serviced) would impact on returns within the arrangement.
The judge seemed to have concerns about the effect the IVA proposal might have on the Debtor’s wife:
At section 5 of his proposal, prepared with the assistance of Begbies Traynor and reviewed by Mr Birne before preparing his Nominee Report, the Debtor states (with emphasis added):
‘It is understood that Matrimonial judgements remain due and payable by the debtor even if made bankrupt or entering into an IVA’
It is correct that matrimonial judgments will ordinarily survive bankruptcy. The suggestion that matrimonial judgments remain due and payable by a debtor even if the debtor enters into an IVA, however, is at best a highly questionable proposition and at worst simply untrue: see Re a Debtor: JP v A Debtor [1999] BPIR 206. Having read the proposal and the standard terms and conditions incorporated into it with some care, I could see nothing which would unequivocally exempt the matrimonial debts from the arrangement in this case. The proposed arrangement therefore risks significant prejudice to the Debtor’s wife when compared with bankruptcy. It is plain from the Nominee Report that Mr Birne has not looked into this aspect at all, but has simply left it to the Debtor to take his own advice.
The Court here did not consider the proposal serious or viable:
For an IVA proposal to be serious, it must have substance and be one which is capable of serious consideration by the creditors: Shah at [67]. For an IVA proposal to be viable, it must be realistic and capable of being implemented: Shah at [74].
I also remind myself of the guidance given by Sir John Knox in Knowles and Others v Coutts & Co [1998] BPIR 96:
‘… if the proposals are merely designed to put off the evil day and are unlikely to be effective in the way in which they are stated to be going to operate, they deserve to be put an end to by the court ….’
Standing back, I ask myself whether this proposal is serious and viable. In my judgment it is plainly neither serious nor viable. The income projections are entirely speculative. To adopt with gratitude a phrase employed by Blackburne J in Davidson at [42], the income projections are ‘an essay in make-believe’. The only other source of funds (the legal claims) are woefully under-particularised and, again, entirely speculative; given the Debor’s past track record in litigation, realistically, they are unlikely to bear any fruit. Even if they were to bear fruit, no explanation is given in the proposal of why the creditors should be expected to accept 30%, in place of the 100% entitlement which would arise in favour of the estate in bankruptcy.
In my judgment this is exactly the sort of proposal that the court should filter out at the earliest opportunity. As put by Scott V-C in Hook v Jewson [1997] 1 BCLC 664 Ch D:
‘Judges must, I think, be careful not to allow applications for interim orders simply to become a means of postponing the making of bankruptcy orders, in circ*mstances where there is no apparent likelihood of benefit to the creditors from such a postponement’.
In my judgment the court should adopt a similar approach on an application for a stay under s.254 in clear cases where it is readily apparent from the proposal and the Nominee Report that the proposal is neither serious nor viable. No good purpose would be served by staying the bankruptcy proceedings to allow a further hearing at which the application for an interim order is considered in such a case. The court has already had sight of the proposal and the Nominee Report. This is the fourth hearing of a petition presented the best part of a year ago. In my judgment the court should now act swiftly and decisively as a filter, to avoid any further waste of court time and the costs and expenses of a creditors’ decision procedure. The evidence before me strongly supports the conclusion that the interests of the creditors as a whole are best served by the making of an immediate bankruptcy order, thereby enabling a full investigation of the Debtor’s affairs by an officer of the court without further delay.
The judgment can be downloaded here.
