A Registrar in the High Court recently considered the issue of the debtor’s consent to modifications in an unreported judgement.
In an IVA the meeting of creditors can approve the proposals with or without modifications. However, the meeting may only approve the proposals with modifications if the debtor consents to each modification. The Court concluded that failure to comply with the requirements of s258 relating to debtor consent has the effect of voiding the arrangement as it was not properly approved, such that creditors are not bound by the proposals.
The Court focused on the issue of the debtor’s consent, stating that for a chairman to be entitled to use a proxy in favour of modifications he must already have “received agreement or permission or concurrence or approval of the debtor to each modification. Alternatively, the chairman needs to demonstrate that he has the authority either expressly or impliedly to bind the debtor to each modification.” In other words, the debtor has to consent to modifications at or prior to the meeting, and cannot do so retrospectively. In the case in question the nominee had discussed some, but not all, of the modifications with the debtor. In particular he had not discussed the standard “non-commercial” modifications proposed by the VAS, ie those relating to tax returns, claims, removal of the trust clause and revised default terms. The court indicated that the debtor had to consent to all of the modifications.
The issue of how to evidence the debtor’s consent to the modifications was considered by the Court, and it concluded that the decision in Reid v Hamblin, whereby the debtor’s consent had to be written consent, was incorrect and that written consent was not required by the legislation. The Court concluded that written consent would undoubtedly be the best evidence of such consent and that “in the absence of consent in writing consent can only be concluded if the debtor was fully apprised of each modification by the nominee and the debtor had authorised the nominee to signify consent to the meeting of creditors.” In other words, the nominee has to explain all the modifications to the debtor and get them to consent to each one prior to, or at the meeting, and whilst the consent does not have to be in writing there must be some way of evidencing that the debtor has consented.
The outcome of the unreported case was that on the evidence the debtor had not consented to all of the modifications prior to, or at, the meeting, such that the arrangement had never come into being and neither the debtor nor creditors were bound by the modified proposals supposedly approved at the meeting of creditors. It was then a matter of having to unravel the monies received and remuneration and expenses drawn during the course of the arrangement.
Where does this leave IPs? Some suggested solutions are:
* ideally the IP should provide a copy of the modifications in writing to the debtor prior to the meeting and get them to initial each one and also sign and date at the bottom of the page to signify consent. In practice though, since modifications may not be received until the last minute then this approach will lead to a large number of adjourned meetings, at cost to the IP;
* ideally, get the debtor to attend the meeting of creditors and give written consent to the modifications prior to, or during, the meeting. In practice though, this would not be physically possible where a large volume of IVAs are being processed for debtors throughout the country;
* contact the debtor whenever a modification is received (as envisaged by SIP 3) and discuss the modification with them, preparing a contemporaneous file note or recording the telephone conversation and informing the debtor that they will be asked to give written confirmation of their verbal agreement after the meeting by signing a copy of the modifications post meeting. As additional evidence of consent the IP could contact the debtor at the time of the meeting and seek global consent to the modifications already discussed and approved by them. Again a contemporaneous file note or recording of the telephone conversation would be appropriate;
Three further risk areas on consent are that:
* if it is not possible to get definitive consent prior to the meeting, then the meeting should be adjourned. This will also allow written consent to be obtained;
* if there is any doubt that the debtor fully understands the modifications, then written consent should be obtained prior to the meeting, with the meeting being adjourned if necessary; and
* for joint IVAs, the consent of both debtors must be obtained and evidenced.
