Cadbury Schweppes Plc v Somji

This is an appeal, with the permission of the deputy judge, from an order of Mr Anthony Boswood QC made on 20 July 2000 when he was sitting as a deputy judge of the Chancery Division of the High Court. The order was a bankruptcy order in respect of Mr Alimudin Somji, the petitioning creditor being Cadbury Schweppes plc ("Cadbury"). Cadbury had previously been a dissentient creditor in relation to an individual voluntary arrangement ("IVA") which was proposed by Mr Somji and was the subject of a controversial creditors' meeting finally held, after adjournments, on 20 December 1999. The appeal raises questions of some general importance as to how votes at creditors' meetings under Part VIII of the Insolvency Act 1986 ("the Act") can be challenged, either directly under s.262 of the Act, or indirectly by a bankruptcy petition under s.276(1)(b) of the Act.

Part VIII of the Act contains a new regime for IVAs, adopting most but not all of the recommendations of the Review Committee on Insolvency Law and Practice, chaired by Sir Kenneth Cork, which reported in 1982 (Cmnd 8558). The general scheme of the legislation was described by Peter Gibson LJ in Raja v Rubin[2000] Ch 274, 283:

"As is well known, Part VIII of the Act of 1986 enacted wholly new provisions. The obvious intention was that debtors should conclude arrangements with their creditors outside formal bankruptcy. To that end the Act laid down a statutory procedure by which an insolvent individual can obtain from his creditors or a specified majority of them an agreement binding them to an arrangement with himself which he has proposed. If the statutory procedure is duly observed and a meeting of creditors approves the arrangement, with or without modifications, then by section 260(2):

"(2) The approved arrangement (a) takes effect as if made by the debtor at the meeting, and (b) binds every person who in accordance with the rules had notice of, and was entitled to vote at, the meeting (whether or not he was present or represented at it) as if he were a party to the arrangement."

There can be a challenge to the decision of the meeting by means of an application to the court under section 262. The supervisor is charged with implementing and supervising the voluntary arrangement once approved, subject to the court's powers on an application to it under section 263."

Section 262 of the Act (headed 'Challenge of meeting's decision') contains the following provisions relevant to this appeal:

"(1) Subject to this section, an application to the court may be made, by any of the persons specified below, on one or both of the following grounds, namely -

(a) that a voluntary arrangement approved by a creditors' meeting summoned under section 257 unfairly prejudices the interests of a creditor of the debtor;

(b) that there has been some material irregularity at or in relation to such a meeting.

(2) The persons who may apply under this section are -

(a) the debtor;

(b) a person entitled, in accordance with the rules, to vote at the creditors' meeting;

(3) An application under this section shall not be made after the end of the period of 28 days beginning with the day on which the report of the creditors' meeting was made to the court under section 259. (4)

Where on an application under this section the court is satisfied as to either of the grounds mentioned in subsection (1), it may do one or both of the following, namely -

(a) revoke or suspend any approval given by the meeting;

(8) Except in pursuance of the preceding provisions of this section, an approval given at a creditors' meeting summoned under section 257 is not invalidated by any irregularity at or in relation to the meeting."

By the combined effect of ss.264(1)(c) and s.276(1) of the Act a creditor bound by an IVA may present a bankruptcy petition, but only (so far as is now relevant) if the court is satisfied (s.276(1)(b))

"that information which was false or misleading in any material particular or which contained material omissions -

(i) was contained in any statement of affairs or other document supplied by the debtor under Part VIII to

any person, or

(ii) was otherwise made available by the debtor to his creditors at or in connection with a meeting

summoned under that Part,"

The primary facts of the case are not in dispute, although there is acute controversy as to how they should be characterised (the judge accepted Cadbury's submission that there was a secret deal to influence the vote at the creditors' meeting; on behalf of Mr Somji it is said, with some support from the supervisor, Mr Neil Cooper of Kroll Buchler Phillips, that it was a proper commercial transaction in the developing market for distressed debt).

Mr Somji is a businessman who was engaged in international trade, especially with Russia. In 1999 he was admittedly insolvent and was facing a bankruptcy petition. His statement of affairs as at 20 October 1999 disclosed assets of US $1000 and creditors' claims of US $8,381,000. He was indebted as guarantor of corporate indebtedness to a number of banks including Barclays Bank plc, London Trust Bank, Belgolaise SA, Byblos Bank Europe SA ("Byblos"), Banque Traditionel-Credit Lyonnais, Banque Francais de l'Orient ("BFO") and Credit Lyonnais Russia. He was also indebted to Cadbury and its Portuguese subsidiary (which can for the present purposes be equated with Cadbury) in the total sum of US $1.717m.

On 20 October Mr Somji proposed an IVA with Mr Cooper as supervisor. The proposal was that Mr Somji's father would contribute to the IVA by a gift of US $300,000, payable by three instalments over two years. Mr Somji himself would not make any contribution out of his salary of �36,000 a year. The expected dividend to the creditors was approximately four cents in the dollar.

A creditors' meeting was called for 6 December 1999. On 24 November Mr Cooper sent a letter to creditors increasing the father's offer to US $380,000, with a forecast dividend of approximately 5 cents in the dollar. The meeting was attended by representatives of (among other creditors) Byblos, BFO and Cadbury. Cadbury was represented by Mr Tim Owen, Cadbury's Director of Treasury. Mr Cooper held various proxies in favour of the resolution to approve the proposed IVA, but it became apparent that there was only about a 55 per cent majority in favour, as against the 75 per cent majority required by rule 5.18 of the Insolvency Rules 1986. The opposition consisted of Byblos (with 8.48 per cent of the votes), BFO (with 13.68 per cent) and Cadbury (with 22.7 per cent). These creditors' representatives urged Mr Somji to come up with a better offer, and the meeting was adjourned.

The date for the adjourned meeting was postponed until 16 December, when Mr Somji put forward the offer of a further contingent contribution (contingent in part on a Somji family company being successful in litigation against Cadbury). This offer was not acceptable to the three dissentient creditors, Byblos (which attended the meeting by Mr Elias Abousleiman), BFO (which attended by Mr Martin Lynch) and Cadbury (which attended by Mr Owen). The meeting was again adjourned until 4 pm on Monday 20 December 1999, which was the very last day on which a meeting could be held to approve the proposed IVA, unless an extension of time were to be obtained.

By this time Mr Naushad Jivraj had come to be playing an important part in the matter. He has said in his witness statement that he and Mr Somji had been social acquaintances for many years, and that in May 1999 he approached Mr Somji with a view to cooperation in possible business ventures, the nature of which has not been specified. By September 1999 one particular opportunity had been identified and appeared likely to be profitable. When Mr Jivraj discussed it with Mr Somji, the latter said that he was threatened with bankruptcy. The proposal for an IVA was mentioned.

Mr Jivraj (who had a good relationship with Byblos) has described in his witness statement how initially he tried to persuade Byblos that it was "inappropriate, unnecessary and commercially pointless" to reject the IVA and see Mr Somji go bankrupt. At that stage (in October 1999) there was no suggestion of an assignment of Byblos's debt. But this suggestion emerged, Mr Jivraj has stated, on 15 December. He wanted to help because he valued the Somji family interest (through a company called Shallan (UK) Ltd) as a future joint venture partner. He obtained particulars of the creditors from Mr Somji and (as he has stated in his witness statement):

"It was clear to me that in order for the requisite majority of creditors to approve the voluntary arrangement, both Byblos and BFO or Cadbury Schweppes alone would have to vote in favour of the proposal. In a further conversation with Byblos, I learned that Byblos and BFO had been acting mainly in concert in relation to the voluntary arrangement and Byblos agreed to act as a go-between with BFO.

Byblos confirmed to me that BFO was in agreement with the concept of selling its debt. Initially, Mr Lynch of BFO wanted to meet...