Principle of good faith between creditors in UK insolvencies clarified

Facts

CFL and Kaupthing Bank ("Kaupthing") were both creditors of Mr Gertner. Mr Gertner proposed an Individual Voluntary Arrangement ("IVA").Before the meeting to vote to approve the IVA, unknown to the other creditors, Kaupthing entered into a settlement agreement with Mr Gertner. Kaupthing then used its majority vote to approve the IVA. CFL argued that this settlement agreement meant that Kaupthing should not have been admitted to vote as a creditor.

Decision

The Court of Appeal found that the settlement agreement was deliberately drafted so that Kaupthing was still a creditor for the purposes of voting on the IVA, despite receiving a separate benefit from a third party. The issue was the significant financial advantage it had received under the settlement agreement, which appeared to induce its support for the IVA. This had not been disclosed to the other creditors.

The Court found that this non-disclosure had breached the duty of good faith between creditors. The failure to disclose the settlement agreement and the inducement to support the IVA put Kaupthing in a position of conflict with the other creditors, which breached the good faith principle. As a result of this, the creditors were not on an equal footing in the consideration of the merits of the IVA proposal over other options such as bankruptcy and so the Court disqualified Kaupthing from voting.

Comment

This decision confirms the principle of "good faith" between creditors to avoid conflicts of interest in situations where, for example, they are voting on a settlement proposal.

Gertner v CFL Finance Ltd and another