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22 May 2020

Good faith, bankruptcy and the role of the court when creditors can’t agree: Gertner & Laser Trust v CFL


One of the largest bankruptcy orders ever made in the English courts (in the region of £870 million) has been set aside to allow a creditors’ meeting to take place in order to consider an individual voluntary arrangement.  In (1) Gertner (2) Laser Trust v CFL Finance Ltd [2020] EWHC 1241 (Ch), Mr Justice Marcus Smith has held that unless a breach of the good faith rule can be established, it is inappropriate for the court to refuse an application supported by a majority of creditors to stay a bankruptcy petition. The court accepted the evidence of Laser Trust (the majority creditor and second appellant) that if the proposal were put to creditors, it would be accepted. It also rejected the first instance conclusion that allowing Laser Trust to vote on the proposal would be a breach of the good faith principle.  In overturning the decision of Chief Insolvency and Companies Court Judge Briggs, the High Court considered a wide range of issues including the good faith rule in insolvency and, crucially, the scope of judicial discretion to stay proceedings under section 266(3) of the Insolvency Act 1986 (the “IA86”).


The procedural history to this dispute is complex but relevant to the analysis of the court in this decision. Mr Gertner is a businessman. CFL is a provider of short-term finance. In 2015, following a breach by Mr Gertner of a settlement agreement between the parties, CFL petitioned for Mr Gertner’s bankruptcy. Mr Gertner made a proposal for an individual voluntary arrangement, which would have resulted in a dividend to unsecured creditors of 0.07p in the pound. The bankruptcy petition was stayed and the creditors approved the proposal (the “First IVA”).  At the time, one creditor, Kaupthing hf (an Icelandic public limited company) constituted 90.43% of the creditors by value.

Successful challenge to the First IVA

CFL was dissatisfied with the outcome of the First IVA and challenged it under s262 of the IA86 (Laser Trust was not party to those proceedings). During the course of those proceedings it was disclosed that, unbeknownst to CFL, Kaupthing had entered into a settlement agreement (the “KSA”) with Mr Gertner and Laser Trust (amongst others) prior to the First IVA. Pursuant to the KSA, Laser Trust would pay Kaupthing US$6 million in return for Kaupthing’s agreement to assign its debt to Laser Trust.  Kaupthing would also be given an interest in the outcome of an Israeli arbitration relating to the Gertner family and companies controlled by it.  However, by the time of the First IVA, Kaupthing had not yet assigned its debt to Laser Trust.

CFL contended that the KSA effectively gave Kaupthing an undisclosed advantage over other creditors. The High Court and subsequently the Court of Appeal upheld CFL’s challenge and the First IVA was therefore revoked under s262 of the IA86. The court held that Kaupthing’s undisclosed interest under the KSA induced it to vote in favour of the First IVA and that this had been contrary to the good faith principle.

Following the revocation of the First IVA, CFL applied to restore the bankruptcy petition. At the same time, Mr Gertner proposed a second IVA to his creditors (the “Second IVA”). By this time, Kaupthing had assigned its debt to Laser Trust and Laser Trust had become Mr Gertner’s largest creditor (holding over 90% of Mr Gertner’s debt by value). Laser Trust indicated its intention to vote in favour of the Second IVA. CFL opposed the proposal and issued an application for the creditors’ meeting (at which the Second IVA was likely to have been approved) to be adjourned until after the hearing of its reinstated bankruptcy petition. The court ordered that the bankruptcy petition be heard on an expedited basis. Laser Trust (as opposing creditor) sought a stay of the petition.

Chief ICC Judge Briggs’ decision rejecting a stay of the hearing of the bankruptcy petition (the decision being appealed)

CFL argued that the petition should not be stayed in favour of the creditors’ meeting because: 1) Laser Trust should not be permitted to vote at it (for similar reasons to Kaupthing under the First IVA, i.e. that it would breach the good faith principle) and / or that 2) it would be an abuse of process for Mr Gertner to propose the Second IVA after the First IVA had been successfully challenged in court. Mr Gertner also raised additional challenges to the petition on the grounds that: 1) the underlying Settlement Agreement with CFL contravened the Consumer Credit Act and was unenforceable; and 2) the debt itself was unenforceable as it amounted to a penalty.

Chief ICC Judge Briggs rejected the arguments of Mr Gertner and Laser Trust in their entirety. He concluded that he would not exercise his discretion to adjourn the bankruptcy petition under s266 of the IA86, for the following reasons:

  • The CFL debt was not disputed on genuine or substantial grounds (the Consumer Credit Act did not apply to the Settlement Agreement and the interest rate was not a penalty).
  • Mr Gertner’s failure to raise those arguments in the original proceedings and/or at the statutory demand stage precluded him from raising them now in any event.
  • The Court of Appeal had previously held that it would be a breach of the good faith principle for one creditor to vote in favour of a proposal in which it had different commercial interests from other creditors. The assignment from Kaupthing to Laser Trust did not prevent the continued application of the good faith principle in circumstances where Laser Trust was also obtaining a collateral advantage not available to other creditors.
  • It was to be inferred that Laser Trust was not wholly independent of Mr Gertner.
  • Approval of the proposal would put investigation of Mr Gertner’s interests at an end.
  • In the exercise of its discretion, the court must take into account the class remedy nature of insolvency and consider all the circumstances of the case. Although Laser Trust was the largest creditor, its influence should be discounted in favour of the “independent” petitioning creditor, CFL.

Notwithstanding this, Chief ICC Judge Briggs granted Mr Gertner and Laser Trust permission to appeal his decision in relation to the good faith principle.  Following this, Mr Justice Marcus Smith granted permission to appeal in respect of the parties’ additional grounds.

The Appeal

On appeal, Mr Justice Marcus Smith concluded that Chief ICC Judge Briggs had erred in the exercise of his discretion. While s266 of the IA86 confers on the court a general power to stay proceedings on such terms and conditions as it thinks fit, Mr Justice Marcus Smith concluded that Chief ICC Judge Briggs had taken immaterial factors into account when reaching his decision. Specifically, the court held:

  • Where a creditor with sufficient votes to approve an IVA seeks the stay of a petition to allow such IVA to be approved, it is not for the court to stand in the way of that approval unless – by reason of the good faith principle – “that approval would be tainted”.
  • Where it is clear that approval of an IVA will be given by the majority of unsecured creditors, the court should not “second-guess” that approval by making value judgments on the level of dividend and / or the benefit of a detailed investigation into the debtor’s affairs.
  • The fact that a creditor is an assignee of an earlier creditor who breached the good faith rule, or that it has given an unsatisfactory account of its circumstances, or has alternative means of satisfying the debt owed to it, is not relevant unless it means the good faith rule will be engaged/breached.
  • The good faith rule is not a self-standing common law concept but an aspect of the court’s powers to police approval of voluntary arrangements under the IA86. In this context, it means that approving creditors must act in the interests of the class of unsecured creditors. However, it remains the creditors, and not the court, who determine whether a proposed arrangement should succeed or not, and the IA86 confers considerable latitude in this connection.
  • In the present case, the fact that Laser Trust was party to an agreement with Kaupthing under which it was held that Kaupthing had breached the good faith rule, did not mean that Laser Trust itself had itself infringed the good faith rule.


In the current climate, insolvency and personal bankruptcies are on the rise.  Inevitably, in the resolution of such situations there are winners and losers. The history of Mr Gertner’s personal insolvency shows, however, that the courts will be slow to intervene in arrangements made to avoid bankruptcy unless there is evidence of a procedural or legal irregularity (such as a breach of the good faith principle) in the exercise of those arrangements. Chief ICC Judge Briggs’ decision was overturned not because he was not entitled to consider all the circumstances of the case in exercising his discretion, but because in this case, absent a finding of a breach of the good faith rule, it was for the majority of unsecured creditors to exercise their discretion to agree the proposal, and not the court.  On appeal, the court held that there was simply no evidence that Laser Trust was obtaining a collateral advantage over other creditors. It had taken an assignment of a debt and had become an unsecured and unassociated creditor of Mr Gertner within the meaning of the IA86. This meant that it stood in the same position as CFL and as the majority creditor was entitled to vote on the proposal as it saw fit. Given the Second IVA was estimated to provide a dividend to unsecured creditors at 0.43p in the pound, whereas the dividend in a bankruptcy was put at nil, the commercial appeal of the proposal was objectively clear.

Stephenson Harwood LLP (Julian Cahn and Jeremy Livingston) represented Laser Trust in these proceedings.