Varden Nuttal Ltd v Michelle Louise Baker (2016)

It was decided that a bankruptcy order should have been made in circumstances where the debtor had misled the creditors when agreeing and entering into an Individual Voluntary Arrangement (“IVA”).

Background

Pursuant to section 264(1)(c) Insolvency Act 1986, the Appellant supervisors of the IVA had petitioned for the Respondent’s bankruptcy, on the basis that she had breached the terms of the IVA by failing to (1) disclose, at the time of entering into the IVA, the existence of another unknown creditor and (2) re-mortgage her property. The Appellant and other creditors had become aware that the other (undislosed) creditor had a charging order over the Respondent’s jointly-owned property, and further that the Respondent had paid him £25,000 out of a redundancy payment which instead should have been paid into the IVA. The Respondent had previously informed the Appellant of this payment but gave evidence stating that she was not asked to pay it into the IVA until such time as the IVA had failed.

In the first instance, the judge criticised the Appellant’s conduct but used her discretion not to grant a bankruptcy order. The Appellant appealed against the dismissal of its petition.

On appealing, the Appellant said that the judge had erred in exercising her discretion in this way. In support of this argument they said that the correct question to ask was whether the Respondent had been in breach of the IVA and whether the information regarding the unknown creditor would have made a difference to the creditors when they voted for an IVA. The question was not whether the Appellant had acted badly.

Judgment

In the appeal judgment, Mrs Justice Proudman held that despite the granting of a bankruptcy order being a discretionary power, discretion had to be exercised in accordance with legal principles.

She said that the primary concern lay in the interests of the creditors and that the debtor’s transparency was essential. Unless considering exceptional circumstances, generally a debtor would be made bankrupt if they defaulted on payments. In this case, the Respondent had persuaded the creditors to agree to the IVA and had then misled them. The judge in the first instance should have therefore exercised her discretion not based on the position between the Appellant, the creditors and the Respondent, but should have focused on what was in the interest of the creditors. Had the creditors known the full circumstances before agreeing the IVA, they would have very seriously considered the unknown creditor’s alleged debt. Looking at the case from this perspective, the court reversed the first instance judge’s decision and accordingly made an order for bankruptcy against the Respondent.

This decision serves as a reminder of the importance of ensuring that IVA’s are entered into with transparency and that both parties are open as to their respective obligations and circumstances.