Bhundia v Dhar (Re Five Delta Ltd - Insolvency Act 1986)

Factual and Procedural Background

This application concerns creditors' voting rights in a creditors' voluntary liquidation of Company A. The Applicant, a creditor of Company A, appealed the Respondent's decisions at a creditors' meeting held on 12 December 2023 to admit only part of the Applicant's proof of debt for voting purposes and to admit proofs of debt from the Respondent and two other entities for voting purposes. The Respondent is the sole director and chair of the creditors' meeting. The Applicant contended that correct admission of proofs would have given him a majority vote, enabling appointment of his chosen liquidators.

Company A was incorporated in April 2019 to trade in property development and construction. The Respondent was the sole director and shareholder. The Applicant, a solicitor specialising in construction law, had a longstanding working relationship with the Respondent. The parties entered into a contract in September 2021 for renovation works on a property ("the Project"), with payments structured in milestones.

The Project faced delays, cost overruns, and disputes. Payments were made by the Applicant into Company A's bank accounts, but the Respondent admitted to cashflow difficulties and irregular payments, including payments to third parties and the Respondent’s family members. The Applicant terminated the contract in August 2023 due to non-performance and sought damages through adjudication, which awarded liquidated delay damages of £104,426.19.

Following the adjudication, Company A was placed into liquidation. Notices for a creditors' meeting were issued, with proofs of debt submitted by the Applicant and others. The Respondent, as chair, admitted only part of the Applicant’s proof for voting, excluding significant claims, while admitting other proofs in full. The Applicant appealed those decisions.

Procedurally, the application was issued in December 2023 and proceeded through directions hearings and evidence filing. A trial was scheduled for February 2025. The Respondent sought specific disclosure shortly before trial, which was opposed and eventually withdrawn. Evidence was heard over two days, with closing submissions adjourned to April 2025.

Legal Issues Presented

1. Whether the Applicant's claim for overpayments of £266,456.43 (or any part thereof) should have been admitted for voting purposes.
2. Whether the Applicant's claim for £5,940 paid to a furniture supplier should have been admitted for voting purposes.
3. Whether the Applicant's claim for £7,930.86 for replacement appliances should have been admitted for voting purposes.
4. Whether the Applicant's claim for £6,750.50 for snagging costs should have been admitted for voting purposes.
5. Whether the Respondent's claim of £16,434.95 for a director's loan account should have been admitted for voting purposes.
6. Whether Reliable Housing's claim for £113,760 should have been admitted for voting purposes.
7. Whether Kajaine Accountants' claim for £11,700, submitted after the deadline, should have been admitted for voting purposes.
8. Whether the circumstances leading to the appeal amount to unfair prejudice and/or material irregularity and what order should be made accordingly.
9. The appropriate costs order relating to the Respondent's disclosure application.

Arguments of the Parties

Applicant's Arguments

• The Applicant argued that the full amount of his proof of debt, including overpayments, furniture, appliances, and snagging costs, should have been admitted for voting purposes.
• He maintained that the Respondent failed to provide adequate documentation to justify excluding large sums from the proof of debt.
• The Applicant contended that the adjudication award did not extinguish his other claims by merger or res judicata, as the adjudication was limited to liquidated delay damages.
• The Applicant asserted that Kajaine Accountants' late proof should not have been admitted as the deadline was strict.
• He submitted that the Respondent's disclosure application was unreasonably late and should be dismissed.

Respondent's Arguments

• The Respondent admitted only part of the Applicant's proof of debt for voting purposes, limiting the admitted sum to the adjudication award.
• He argued that the Applicant's other claims had been extinguished under the doctrines of merger and res judicata by the adjudication award.
• The Respondent claimed that some payments were made for other clients and not the Project, contesting the Applicant's overpayment and specific claims.
• He submitted that he had discretion to admit late proofs, justifying admission of Kajaine Accountants' claim despite its late submission.
• The Respondent sought specific disclosure of documents shortly before trial, including legal advice relating to the creditors' meeting.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Revenue and Customs Commissioners v Maxwell [2010] EWCA Civ 1379	Standard for court appeal under rule 15.35(1) IR 2016; court forms own view rather than merely reviewing chair's decision.	Court applied this principle to assess proofs of debt on balance of probabilities rather than deferring to chair's decision.
Re McNally [2013] EWHC 1685 (Ch)	Test for proving indebtedness on balance of probabilities in appeals against voting decisions.	Court held Applicant must establish debt on balance of probabilities; evidential burden shifts if creditor has respectable valuation.
Karapetian v Duffy [2022] EWHC 1053 (Ch)	Burden of proof for creditor to establish debt and chair's duties in admitting or rejecting claims.	Court confirmed chair must admit claims if satisfied on evidence; on appeal court assesses balance of probabilities.
Re Globe Legal Services Ltd [2002] BCC 858	Criteria for excluding or reducing proofs improperly admitted.	Court considered whether proof was improperly admitted and whether to exercise discretion to expunge or reduce it.
Richmondshire DC v Dealmaster Ltd [2021] EWHC 2892 (Ch)	Distinction between unfair prejudice and material irregularity in creditor meetings.	Court applied guidance to find material irregularity based on improper admission of votes.
Narandas-Girdhar and another v Bradstock [2016] EWCA Civ 88	Material irregularity must be more than de minimis to warrant intervention.	Court found irregularity in admission of votes was material and not trivial.
Harris v The Society of Lloyds [2008] EWHC 1433 (Comm)	Lateness of application may undermine necessity for disclosure.	Court considered lateness in opposing specific disclosure application.
Clark v In Focus Asset Management & Tax Solutions Ltd [2014] EWCA Civ 118	Doctrine of merger and res judicata; finality of judicial decisions and estoppel from re-litigating same cause of action.	Court held adjudication award did not extinguish further claims; merger and res judicata not engaged by adjudication alone.
Alexander Brothers Ltd (Hong Kong SAR) v Alstom Transport SA [2020] EWHC 1584 (Comm)	Extent of res judicata in arbitration enforcement and finality of tribunal decisions.	Court noted limited scope to reopen issues decided by competent tribunal unless special circumstances.
Johnson v Gore Wood & Co [2002] 2 AC 1	Abuse of process and Henderson principle; finality and preventing vexatious litigation.	Court applied principles to assess whether raising claims in later proceedings was abusive.
Herschel Engineering Ltd v Breen Property Ltd 2000 BLR 272	Finality of adjudication awards and their temporary binding nature.	Court confirmed adjudication awards are not final and do not engage merger until enforced by court order.
Exyte Hargreaves Limited v NG Bailey Limited [2023] EWHC 94 (TCC)	Multiple adjudications on the same contract are permissible and common.	Court acknowledged serial adjudications as part of adjudication process design.
Beck Interiors Ltd v Eros Ltd [2024] EWHC 2084 (TCC)	Right to commence multiple adjudications and injunctions restraining such proceedings.	Court confirmed parties may have multiple adjudications on same contract issues.

Court's Reasoning and Analysis

The court applied the insolvency rules governing creditors' voting rights, focusing on rule 15 of the Insolvency Rules 2016, which requires the chair of a creditors' meeting to admit or reject proofs of debt based on whether the debt is established on a balance of probabilities. The legal burden rests on the creditor to prove the debt, with the evidential burden shifting to the debtor once a respectable case is made.

The court examined the Applicant's claims in detail, finding that the Applicant had paid a total of £1,003,238 into the Company's accounts for the Project. The court accepted the Applicant's accountant's reconciliation showing a shortfall of £110,643.36 not accounted for by invoices. The Respondent failed to produce supporting documentation for this shortfall despite repeated requests, leading the court to draw adverse inferences from the absence of documentation.

The court found the Applicant's claims for furniture (£5,940) and appliances (£4,277.71) credible and supported by evidence, rejecting the Respondent's explanations that these were for other clients. The snagging costs claim (£6,750.50) was not supported by sufficient evidence and was rejected. The Respondent's own claim for a director's loan account (£16,434.95) was not substantiated and was rejected.

The court accepted Reliable Housing's claim (£113,760) as supported by timesheets, invoices, and payment records. Kajaine Accountants' claim (£11,700), though submitted late, was admitted as the Respondent retained discretion to admit late proofs under the terms of the creditors' meeting notice.

Regarding merger and res judicata, the court held that the adjudication award for liquidated delay damages did not extinguish the Applicant's distinct claims for overpayment and other losses. The adjudication process is temporary and limited in scope, allowing multiple adjudications on discrete claims. The Respondent failed to prove that the Applicant's remaining claims were barred by merger or res judicata.

The court found material irregularity in the voting process due to incorrect admission and rejection of proofs, which affected the outcome of the creditors' meeting. The Applicant's correct voting entitlement would have exceeded 50%, enabling appointment of his chosen liquidators.

On the Respondent's specific disclosure application, the court found it was made unacceptably late and vacated the hearing by consent. The court also addressed witness credibility, accepting the Applicant and his accountant as honest and reliable, while treating the Respondent's evidence with caution due to inconsistencies and untruths.

Holding and Implications

The court held that:

• The Applicant's claim for overpayments should have been admitted in the sum of £110,643.36.
• The Applicant's claims for furniture (£5,940) and replacement appliances (£4,277.71) should have been admitted for voting purposes.
• The Applicant's claim for snagging costs (£6,750.50) should not have been admitted.
• The Respondent's claim for a director's loan account (£16,434.95) should not have been admitted, and votes based on it declared invalid.
• Reliable Housing's claim (£113,760) was properly admitted for voting purposes.
• Kajaine Accountants' claim (£11,700), though late, was properly admitted at the Respondent's discretion.
• The circumstances leading to the appeal constitute a material irregularity affecting the creditors' meeting outcome.

The direct effect of this decision is to correct the admitted proofs of debt, thereby altering the voting proportions at the creditors' meeting. The Applicant would have held a majority vote, enabling appointment of his chosen liquidators. The court will hear further submissions on whether to order a new decision procedure or make other just orders. No new legal precedent was established beyond application of existing principles to the facts.