Golstein v Bishop

Failure by debtor to disclose disciplinary proceedings against him constituted a material irregularity

Bankruptcy – individual voluntary arrangements – material irregularity – revocation – s.262 Insolvency Act 1986

Mr Golstein and Mr Bishop had been in partnership together as solicitors. Mr Bishop put forward proposals to enter into an IVA. In these proposals he failed to disclose that he was subject to disciplinary proceedings before the Solicitors Disciplinary Tribunal for dishonestly attempting to assist a client evade the terms of a restraint order made under the Proceeds of Crime Act 2002.

Mr Golstein made an application under section 262 Insolvency Act 1986 seeking an order revoking the approval of the IVA on the grounds that the failure to disclose the disciplinary proceedings constituted a material irregularity.  The district judge dismissed this element of the application, finding that Mr Bishop had been guilty of non-disclosure but concluded that this was not material for the purposes of section 262 since the IVA would have been approved in any event.  Mr Golstein appealed.

Mr Justice Warren held that given the seriousness of Mr Bishop’s non-disclosure and the need for a proper investigation of his financial position, it would be a great injustice to Mr Golstein if no remedy was available to him. Mr Bishop’s conduct had led to serious circumspection about his disclosure of his assets and had caused the supervisor of the IVA to serve a Notice of Breach.

The starting point when considering an application under section 262 was that an order should be made where material irregularity was established.  Special circumstances may dissuade the court from making an order. However, Mr Bishop had not established any such circumstances. There was no detriment to the other IVA creditors in revoking the approval since they stood to gain very little in the IVA, indeed, revocation was likely to be in their interests as their rights as creditors would revert to them.

The decision shows that an order may be made under section 262(4) even if the ‘material irregularity’ would not have affected the outcome of the original vote.  Once a ‘material irregularity’ has been established, in the absence of special circumstances an order should usually be made.