CMEC v Beesley: CMEC not a creditor capable of being bound by IVA

For the facts of this case and the High Court decision see this previous post. Briefly, the NRP had entered into an IVA under which his creditors would receive a total of 27p in the pound over a period of 5 years, in full and final settlement of his liabilities. 94% of his debts were represented by arrears of child maintenance. The High Court declared that CMEC was a creditor for the purposes of the IVA, but made an order pursuant to s.262 of the Insolvency Act 1986 revoking the IVA on the ground that it was unfairly prejudicial to the interests of the Commission. CMEC appealed.

In the Court of Appeal Lord Justice Etherton found (at paragraph 50) that the Judge had been wrong to conclude that the Commission was a creditor entitled to participate in, and that it was bound by, the IVA. He said (at paragraph 53) that it was "clear that the legislative policy is to exclude liability to pay child support from the consequences of bankruptcy". Arrears of child support are not a provable debt in bankruptcy, and: "The liability to pay child support, and any arrears of child support, are not released by discharge from bankruptcy". He found (at paragraph 54) that there was "no discernible reason for a different policy in the case of an IVA".

He went on (at paragraph 57):

"In my judgment, it is only possible to make sense of the provisions of IA Part VIII, against the statutory background of the insolvency regimes of bankruptcy and debt relief orders, the discernible policy of the state in relation to the support and welfare of children which I have mentioned, the purpose of an IVA and its function as a consensual agreement of creditors (bound by the decision of the requisite majority), if the creditors entitled to participate in the IVA, and who are bound by it, are restricted to creditors with the capacity to make compromises of debts and liabilities."

Accordingly, he concluded (at paragraph 63) that the Commission was not a creditor entitled to participate in the IVA, and was not capable of being bound by the IVA, because the Commission was not capable of compromising the NRP's liability in respect of arrears of child support.

The appeal was therefore allowed and the declaration in the Judge's order was replaced by a declaration that the Commission was not a creditor of the NRP capable of being bound by the NRP's IVA.

The full report of this case can be found on Bailii, here.