Voluntary arrangements - the failures

Registrar Stephen Baister provides a guided tour of an important but sometimes misunderstood area of insolvency law

While the overwhelming majority of voluntary arrangements - whether company voluntary arrangements (CVAs) under part I of the Insolvency Act 1986 or individual voluntary arrangements (IVAs) under part VIII of the Act - proceed smoothly to a successful conclusion, some do not.

Interim order refusal

There are a number of reasons why the court may decline to grant an interim order, which is a necessary prerequisite for an IVA, since an IVA unsupported by an interim order is a nullity, even if all the other procedures governing it have been adhered to (Fletcher v Vooght [2000] BPIR 435).

The most common reason is that the court believes that the debtor's proposal is doomed to fail from the outset.

This may be because it is clear that the requisite majority for its approval under rule 5.18 of the Insolvency Rules 1986 cannot be attained at any meeting of creditors (Re Cove [1990] 1 All ER 949) or because for some other reason the IVA does not appear to be viable (Hook v Jewson Ltd [1997] 1 BCLC 664; Cooper v Fearnley [1997] BPIR 20).

Recent authority (Re Julie O'Sullivan [2001] BPIR 534) has established that the court may decline to make an interim order if it believes that the nominee's fees are excessive, whether or not the amount of them affects the viability of the debtor's proposal.

No doubt the court could refuse to make an interim order on the ground of failure to comply with any of the substantive provisions regarding IVAs set out in part VIII of the Act or any of the procedural and other requirements set out in part 5 of the Insolvency Rules 1986.

The court would, for example, have to be satisfied that the debtor was proposing to make a proposal to his creditors for a composition in satisfaction of his debts or a scheme of arrangement within the meaning of section 253(1) of the Act.

Paid up? Too late

A debtor who applies for an interim order must be in a position to assert that he is an undischarged bankrupt or that he is able to petition for his own bankruptcy (rule 5.5(1)(c) of the Insolvency Rules 1986).

It follows that a debtor who has obtained his discharge (see section 279 of the Insolvency Act 1986) and is consequently released from his bankruptcy debts (see section 281 of the Act) is no longer able to propose an IVA in relation to those debts since he is not entitled to seek an interim order (Wright v Official Receiver [2001] BPIR 196).

Creditors unimpressed

Even if an interim order is granted and a meeting of creditors is convened, an IVA (or CVA) can fail at or after the meeting for a number of reasons.

It may fail to secure the requisite majority at the meeting or meetings (see rules 1.18 and 1.19 of the Insolvency Rules 1986 in relation to CVAs and rule 5.18 in relation to IVAs).

However, a voluntary arrangement can fail at this stage on other procedural bases.

Any meeting of creditors convened to consider a voluntary arrangement may be adjourned but only to a day no later than 14 days after the date on which it was originally held (rule 1.21(3) and rule 5.19(3)).

If following any final adjournment the proposal is not agreed (by both the meeting of creditors and members in the case of a CVA) it will be deemed rejected (rule 1.21(6) and rule 5.19(5)).

Failure to summon a meeting of creditors for an IVA in accordance with the order made by the court will result in an IVA which is to all intents and purposes a nullity.

Section 257(1) provides that the nominee shall, unless the court otherwise directs, summon the meeting of creditors for the time, date and place proposed in his report to the court.

The statutory binding (which is the object of an IVA (see section 260(2) of the Insolvency Act 1986)) can only be achieved where a meeting of creditors has been so convened.

Section 258(1) provides: 'A creditors' meeting summoned under section 257 shall decide whether to approve the proposed voluntary arrangement'.

Only such a meeting can approve an IVA if it is to be effective.

Although a CVA does not require the making of an interim order, there are corresponding provisions in the Act which would indicate that a CVA may similarly be ineffective if it is not approved at meetings convened in accordance with the report made to the court (sections 3(1) and 5 of the Insolvency Act 1986, but note the freedom given to a liquidator by section 3(2)).

Arrangement fails

Failure of a debtor or company to comply with the terms of a voluntary arrangement will normally result in the presentation of a bankruptcy or winding-up petition.

The making of a winding-up or bankruptcy order following the failure of a voluntary arrangement remains a matter of discretion.

Much may depend on the construction of the terms of the proposal in question.

However, the authorities tend to show that the courts will be astute to make winding-up or bankruptcy orders when a voluntary arrangement has failed by reason of non-compliance with its terms, even where, for example, a voluntary liquidation is contemplated and where the petition has been presented by a supervisor after the apparent 'death' of a CVA (Re Arthur Rathbone Kitchens Ltd [1997] 2 BCLC 280).

In Souster v Carman Construction Co Ltd [2000] BPIR 371 Peter Smith QC, as he then was, making a winding-up order on a petition based on a failed CVA, referred to the 'legitimate expectation' of creditors that if a CVA failed 'the company would then be the subject matter of a compulsory winding-up order'.

Similarly, the supervisor of an IVA that has expired is entitled to petition for a bankruptcy order where there has been a default (Harris v Gross [2001] BPIR 586).

The order may be made even though it might result in delay or extra costs (one of a number of factors considered in Re Arthur Rathbone Kitchens Ltd) and even though no purpose is likely to be achieved.

As Judge Maddocks pointed out in Harris v Gross: 'The underlying basis of a voluntary arrangement is that if it is not properly carried out by the debtors then the insolvency must proceed by way of the alternative route of bankruptcy.

The middle course of refusing an order must be exceptional'.

A debtor's failure to comply with the terms of his IVA is a matter which the court will consider objectively.

It is not necessary to establish that the debtor has behaved culpably (Re Keenan [1998] BPIR 205).

Where the debtor seeks to put right breaches in his voluntary arrangement his proper course may be to propose a fresh IVA for consideration by his creditors (see Re a Debtor (No 8278 of 2001) [2002] All ER (D) 155 (May)).

A disaffected creditor may also seek to bring a voluntary arrangement to an end.

He may do so by mounting a challenge on one of the grounds set out in sections 6 (in the case of a CVA) or 262 (in the case of an IVA) of the Insolvency Act 1986.

Stephen Baister is a bankruptcy registrar at the Royal Courts of Justice and a member of the Association of District Judges