What constitutes unfair prejudice to a creditor in an individual voluntary arrangement?

In the case of Re a Debtor No 101 of 1999, the Inland Revenue made a successful application (on appeal) under section 262 of the Insolvency Act 1986 on the grounds that an independent voluntary arrangement (IVA) unfairly prejudiced its interests as a creditor.

The Inland Revenue had issued a bankruptcy petition against the debtor but, shortly before the bankruptcy petition was due to be heard, an IVA was approved by a majority of his creditors. At that time, his Crown creditors were in the region of GBP 77,000 (with about GBP 59,000 being owed to the Inland Revenue) and friends of the debtor were in total owed GBP 444,000. The debtors friends voted in favour of the proposal and it was accepted.

The debtor assets were valued at under GPB 25,000. The terms of the IVA provided that GBP 20,000 would be made available by a third party. After payment of various fees and expenses this would leave approximately GBP 15,000 for the Crown creditors. The rights of the other creditors would be "deferred". The Inland Revenue applied to the Court on the grounds that it was unfairly prejudiced by the IVA.

At first instance, the Judge dismissed the application on the basis that the Inland Revenue stood to receive a better dividend than it would in a bankruptcy. On appeal, the Court held that the existence of differential treatment of creditors was not necessarily sufficient to support a finding that a dissenting creditor had been unfairly prejudiced. It was held, however, that to consider bankruptcy as the only other alternative was too narrow. In the absence of the IVA, the Inland Revenue, like the other creditors, would retain all its rights in respect of the debtor. The effect of the IVA was to force the Crown creditors to accept a reduced payment in satisfaction of their debts while leaving the position of the majority creditors unchanged or even improved because competing debts had been eliminated.

For further information please contact Janet Brier on 020 7367 2326 or e-mail: [email protected]