Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Lean pickings from recent High Court decisions

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My lack of blog postings has been bugging me over the past couple of weeks, but I regret that, despite my best efforts, I have failed to spot any earth-shattering news (for which we should be grateful, I guess).

Over the past weeks, I have made my personal submission to the Government’s Red Tape Challenge on insolvency (but I did not think that readers would be interested in that) and I have been exploring the thorny issues of PPI claims in IVAs, but every time I look at the issues, more questions pop up.  Nevertheless, I hope to post something on this subject shortly.

I have also been reviewing the High Court decisions as they have been released, but in my view there have been few of any particular interest to insolvency practitioners.  For the more curious amongst you, here are my lean pickings:

  • Both Odyssey and Ross River consider directors’ pre-liquidation duties.
  • Clyde & Co considers whether LLP members can be employees.
  • Tinseltime considers solicitors’ liabilities to non-party costs orders in some CFA situations.

Odyssey Entertainment Limited v Kamp & Ors (09/08/12)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/2316.html

The court found that a director (“D1”) had broken his duty of good faith under S172 of the CA 2006 towards the company (now in liquidation) (“C”): “In a nutshell, I find that (1) by 4.1.09, D1 had decided that C would not provide him with the route to a capital profit which he had hoped for and that he would have better prospects in that respect working on his own account; (2) thereafter, D1 influenced the board’s stage by stage decision making process which led to the winding down of C’s business, the termination or surrender of its contracted rights, and the liquidation of C; (3) over the period 4.1.09 to 31.8.09, D1 misled C’s board as to his own true intentions and kept secret the work he undertook on his own account as a film sales agent, whilst still a director and an employee of C, as part of his plan to bring those intentions to fruition. In so doing, D1 continued to mislead C’s board (and therefore C) as to C’s true viability and prospects; (4) had C’s board not been misled by D1, C’s board would probably not have made the decisions that it did leading to its winding up on 9.9.09; and, (5) in consequence, D1 and/or D2 and/or D3 as a result of D1’s efforts secured sales agent’s rights in films that (a) would otherwise probably not have reverted to the rights owner in the case of film rights already under contract to C and (b) would otherwise probably have been acquired by C in the case of other films on which D1 had been working while a director of C” (paragraph 204).

The only point of interest I gleaned was the comment of HHJ Simon Barker QC on the position of the co-directors: “What emerged from both the written evidence and the cross-examination of [the co-directors] is that they all deferred to D1’s long experience and expertise as a film sales agent (the expert witnesses were agreed that D1 is a leading individual UK film sales agent) for guidance as to C’s sales prospects and, more generally, the market for independent sales agencies. In so doing, they were not simply accepting whatever D1 might say in disregard of their own powers of thought nor were they in dereliction of their duties as directors. Rather, they were giving due weight to the one of their number who could speak with particular authority on the general market for sales agents and the specific position of C” (paragraph 94).

Ross River Limited & Anor v Waveley Commercial Limited & Ors (06/09/12)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/2487.html

The main issue before the court was the possible liability of a director (Mr Barnett) to pay a sum to RossRiver by way of equitable compensation for alleged breaches of fiduciary duties that he owed to RossRiver.  Amongst the considerations was whether the director should have wound up the company (“WCL”) earlier and before WCL had used its assets (including revenues from a joint venture with Ross River) to defend an action brought by Ross River for payment of monies due under the joint venture agreement.

Morgan J concluded that RossRiver had failed to prove entitlement to equitable compensation from the director.  In so doing, he seems to have put some weight behind the director’s consultation at an early stage with accountants, who reflected on the option of liquidation: “Mr Barnett did take advice on whether WCL should be wound up or, possibly, whether it was in Mr Barnett’s separate interests for WCL to be wound up. There is no evidence as to the advice which Mr Barnett received. In these circumstances, I consider that I ought not to decide that it was a breach by WCL or by Mr Barnett of a fiduciary duty owed to Ross River to omit to take steps to wind up WCL in early 2009” (paragraph 74), although the fact that the allegation was not pleaded nor put to the director when cross-examined may have had something to do with the judge’s decision.

Morgan J also commented: “On the face of it, WCL was entitled to defend itself and to use its own assets to do so, even though the use of those assets might produce the result that it used up all of its available funds and ended up being unable to pay any sum found to be due to RossRiver… In my judgment, both WCL and Mr Barnett were real and substantial defendants. Both were entitled to defend the claims brought against them without there being a breach of fiduciary duty owed to RossRiver. The fiduciary duties which, in my earlier judgment, I found to exist do not go so far as to restrict either WCL or Mr Barnett from putting forward their chosen stance in litigation brought by RossRiver against them. It would be a very onerous fiduciary duty which prevented a party to adversarial litigation from defending itself” (paragraphs 67 and 69).

[UPDATE 08/09/2013: For the sake of completeness, I thought I ought to report that Ross River’s appeal was allowed (http://www.bailii.org/ew/cases/EWCA/Civ/2013/910.html), although the appeal didn’t really touch on the insolvency-relevant bits of the earlier judgment.

Briefly, the difficulty that Lord Justice Lloyd had with the previous judge’s reasoning was that the funds that Waveley Commercial Limited (“WCL”) had used to defend the action were subject to a Joint Venture Agreement, which prohibited WCL from paying itself, or using for its own benefit, any part of the proceeds of the development other than in payment of proper expenses of the development or as agreed with Ross River. Lloyd LJ felt that it was sufficient that Ross River had cast doubt on the legitimacy of some of the payments and that it was for WCL and Mr Barnett to prove that payments were proper, not for Ross River to prove the contrary.]

Clyde & Co LLP & Anor v Bates Van Winkelhof (26/09/12)

http://www.bailii.org/ew/cases/EWCA/Civ/2012/1207.html

The main question before the court was: can a member of an LLP be a worker within the meaning of S230 of the Employment Rights Act 1996?

Whilst “workers” have limited rights under the ERA and do not extend to the rights to insolvency qualifying liabilities (as far as I can see) as is the case for “employees”, Elias LJ did include consideration of an LLP member’s rights as an employee also.  He commented: “I would be minded to hold [and he did so conclude in paragraph 74] that the member of an LLP would not by virtue of that status alone constitute either an employee or a worker. Whether the member could enter into some separate employment relationship with the partnership, rather in the manner that a company director can do, would be a different question. There would be no employment status arising out of the simple status of member of the firm” (paragraph 73).

(UPDATE 26/05/14: the Supreme Court issued judgment on an appeal on this case on 21 May 2014: http://www.bailii.org/uk/cases/UKSC/2014/32.html. The Supreme Court decided unanimously that the LLP member was a “worker” under the ERA96. They were not required to consider, and they declined to express an opinion on the question “of some complexity and difficulty”, whether she was also an “employee” and indeed whether members of an LLP (or a traditional partnership) could enter into an employment contract effectively with themselves, which would have made the decision more relevant to insolvency situations.)

Tinseltime Limited v Roberts & Ors (28/09/12)

http://www.bailii.org/ew/cases/EWHC/TCC/2012/2628.html

This is one more for insolvency solicitors than practitioners: does a solicitor who takes on a case for an impecunious claimant under a conditional fee agreement (CFA) where there is no after the event (ATE) insurance policy in place, and who also agrees to fund the disbursements necessary to allow the case to proceed, thereby constitute himself a non-party funder and render himself liable to a non-party costs order in the same way as if he was a commercial non-party litigation funder?

Solicitors who are alert to this issue will have been watching the progress of an appeal on another case, Flatman v Germany & Ors ([2011] EWHC 2945 (QB)), in relation to which the Law Society asked to intervene.  The judge, HHJ Stephen Davies, and the parties in this case did not find compelling reasons to wait for the outcome of that appeal (expected in December 2012).  Although it seems possible that the appeal may proceed on grounds different to those already advanced, it is interesting that HHJ Davies, after acknowledging that there may be particular aspects of the other case that led Eady J to allow the appeal, stated that “if however Eady J was holding that it would be sufficient to make a non-party costs order that the solicitor was acting under a CFA without there being an ATE policy in place under which he agreed to fund the disbursements because the client was unable to do so and in order to ensure that the client could bring his claim, then I respectfully disagree with him. I consider that something more is required to justify the making of such an order, in circumstances where it is perfectly proper for the solicitor to agree to fund the disbursements under a CFA, even if he may be taken to know that unless he agrees to do so the claim cannot proceed” (paragraph 60).

On the facts of this case, HHJ Davies concluded: that there was nothing in the evidence indicating that the solicitor (Mr Edmonson) viewed the case as a business proposition under which he could receive a substantial fee; rather, that the solicitor had failed to understand how complex and costly the case might be; that in no way can it be considered that the solicitor controlled the litigation; and that “finally, but extremely significantly in my judgment, when I come to consider the overall justice of the matter, this is a case where there is contemporaneous evidence that Mr Edmondson was not motivated solely by financial self-interest in taking on this case, but with the laudable aim of providing access to justice to Tinseltime… Mr Edmondson was prepared to provide that assistance, where other solicitors were not. He may well have been naive as matters turned out, and Mr Ridgway may well not have been deserving of the assistance which Mr Edmondson provided. But that does not detract from the fact that Mr Edmondson cannot in my judgment be criticised, let alone made personally liable for costs, for taking on a case on a basis permitted by the law in order to ensure that Tinseltime was able to present what Mr Ridgway clearly believed was a genuine claim to the court” (paragraph 67).

Earlier in the judgement, HHJ Davies had stated: “So far as I am aware there are no reported cases in which a solicitor acting under a CFA has had a non-party costs order made against him on the basis of control, but I can see how there might be circumstances where the court was able to conclude that the solicitor’s desire to achieve a successful outcome had caused him to in effect take over the running of the litigation for his own ends, and that this would justify the making of a non-party costs order against him. One example might be where the damages claimed were, or had become, modest in comparison to the costs already incurred, so that the client had for all practical purposes lost any real interest in the pursuit of the proceedings but the solicitor was wedded to pursuing them to recover his costs” (paragraph 58).

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