Insolvency Oracle

Developments in UK insolvency by Michelle Butler


Leave a comment

Mopping Up: courts clarify “apparent bias”, “fair and proper price”, and “unfair harm”, but blur “debenture”

IMGP2958

Oh dear, I’m slacking – even the R3 Technical Bulletin has beaten me to it this time! I will try to avoid much of the same ground in this batch of judgment summaries…

Pathania v Adedeji – lack of evidence as regards an OR becoming trustee calls into question when the bankrupt’s estate vested
Dryburgh v Scotts Media Tax – if a company does not know it has a claim against a director, does the clock tick?
Northern Bank v Taylor – where an IP is free of actual bias, how important is apparent bias?
O’Connell v Rollings – what makes a “fair and proper price” obtained for fixed-charge assets?
Fons HF v Corporal – court’s definition of “debenture” brings into question unregulated lenders’ and borrowers’ activities
Registrar of Companies v Swarbrick – under what circumstances can replacement Administrators’ Proposals be filed?
Top Brands v Sharma – can a former liquidator apply to have an adjudicated creditor’s claim expunged?
Eastenders v HMRC – can HMRC detain goods pending investigations into their duty status?
Hockin v Marsden – can an administrator cause “unfair harm” to creditors’ interests and be acting reasonably?

Scanty OR records leave estate-vesting shrouded in mystery

Pathania v Adedeji & Anor (21 May 2014) ([2014] EWCA Civ 681)
http://www.bailii.org/ew/cases/EWCA/Civ/2014/681.html

Mr Pathania obtained judgment against Dr Adedeji at a time when the court did not know that Mr Pathania had been made bankrupt six months earlier. Dr Adedeji appealed on the ground that a bankrupt claimant cannot maintain legal proceedings under his own name, but these should have fallen to his trustee.

Although the bankruptcy order had been made in June 2010 – and the judgment made in December 2010 – it was not until April 2011 that an IP was appointed. The questions arise: what was the status of the OR in December 2010? Was he a trustee or simply the receiver and manager of the estate pending appointment of a trustee? The questions are important, as S306(1) provides that the bankrupt’s estate vests in the trustee on his appointment or when the OR becomes trustee. S293(3) provides that the OR becomes trustee when he gives notice of his decision not to convene a meeting of creditors. So when did the OR give such notice, if he ever did?

Lord Justice Floyd, using “moderate language”, stated that it was “highly unsatisfactory that the question of whether or not Mr Pathania’s assets had vested in a trustee should still be shrouded in any degree of mystery” (paragraph 50). Granted, it seems to have taken three or four years for the importance of the timing of the vesting of the bankrupt’s estate to have been appreciated; this seems to have been time enough for holes to develop in the OR’s records. The OR’s system suggested that he became trustee of 28 August 2010 and the file contained an undated report to creditors (although it seems that it may have been under cover of a letter dated 23 August 2010), which referred to a notice ‘attached’ but there was no attachment, leading the judge to states that “there is, as it seems to me, still no clear evidence that the formalities necessary for the appointment of the official receiver as trustee were complied with in this case” (paragraph 51). He also noted other indications in the case that he was not so appointed, including the document appointing the IP as trustee, which “contains no reference to a previous trustee or his discharge” (- does it ever?).

Although the judge was not persuaded on the evidence that the OR had become trustee around August 2010, he noted that this was not the be-all and end-all: Dr Adedeji “must show that Mr Pathania knew that the official receiver had become trustee, that his estate had become vested in the official receiver and that he knew that was so before judgment on the claim was entered” (paragraph 53). He also observed that, had Mr Pathania’s bankruptcy been disclosed before judgment, the action likely would have been stayed and, given that the (IP) trustee later assigned the action to Mr Pathania, the chances are that he would have been authorised to continue with it sooner or later. Consequently, De Adedeji’s appeal seeking to have the judgment set aside was dismissed.

Error or deliberate contrivance: either way, the clock didn’t tick whilst the director withheld information from his company

Dryburgh v Scotts Media Tax Limited (In Liquidation) (23 May 2104) ([2014] CSIH 45)
http://www.bailii.org/scot/cases/ScotCS/2014/2014CSIH45.html

The liquidator brought proceedings against the company’s two directors for breach of fiduciary duties in depriving the company (“SMT”) of c.£750,000 and breach of the common law duties to exercise reasonable skill, care and diligence in relation to the SMT’s payment of a dividend at a time when it had insufficient distributable assets to justify it.

SMT had ceased trading in late 2001, but it had not been placed into liquidation until September 2005 (as an MVL, which converted into CVL in March 2007). The transactions challenged by the liquidator occurred in September and November 2001. The liquidator had been given leave to bring proceedings in January 2009. At first instance, although the Lord Ordinary had held that the director/respondent had been in breach of his duties, he dismissed the principal action as he had concluded that the claims “had prescribed”, i.e. they were out of time as a consequence of the Prescription and Limitation (Scotland) Act 1973, which provides a time limit of 5 years.

Section 6(4) of the 1973 Act states: “In the computation of a prescriptive period in relation to any obligation for the purposes of this section: (a) any period during which by reason of
(i) fraud on the part of the debtor or any person acting on his behalf, or
(ii) error induced by words or conduct of the debtor or any person acting on his behalf,
the creditor was induced to refrain from making a relevant claim in relation to the obligation… shall not be reckoned as, or as part of, the prescriptive period”.

The Inner House judges concluded that this section applied in this case: SMT had been induced to refrain from making a claim by error induced by the director’s conduct and also by fraud on his part. Therefore, the commencement of proceedings in January 2009 was well within the period of 5 years from the winding-up in 2005. The judges added that it was also possible that the delay during which SMT was induced not to make a claim continued throughout the MVL until it had been converted into CVL.

The court explained it this way: “if the respondent was unaware of SMT’s right to make a claim for breach of fiduciary duty, the result following the rules of attribution is that the company was in error as to its legal rights and section 6(4)(a)(ii) applies. If the respondent was aware of SMT’s right to make a claim against him, his failure to alert to the company to its right was a deliberate contrivance to ensure that his breach of fiduciary duty was not challenged… That in our opinion falls within the concept of fraud, in the sense of a course of acting that is designed to disappoint the legal rights of a creditor, SMT. In our view that falls squarely within the underlying purpose of section 6(4), namely to excuse delay caused by the conduct of the debtor. As a result of the respondent’s failure to draw attention to SMT’s rights, SMT was induced to refrain from making a claim. It follows that either SMT’s inaction was the result of an error induced by the actings of the respondent, or it was the result of the respondent’s failure to inform the company of its rights (“fraud” in the technical sense described above). Either way, the prescriptive period does not run” (paragraph 31).

Apparent bias works against nominee’s appointment as administrator

Northern Bank Limited v Taylor & Donnelly (4 April 2014) ([2014] NICh 9)
http://www.bailii.org/nie/cases/NIHC/Ch/2014/9.html

Two IPs were prepared to act as administrator of a partnership: one was the nominee of the partners’ proposed interlocking IVAs that had been rejected; and the other was the choice of the largest creditor. There are no prizes for guessing which of the two IPs had the court’s favour, but I thought this case serves a useful reminder.

Although it could be argued that the nominee had acquired valuable knowledge of the partnership and its assets, the judge did not feel that the costs of getting the other IP up to speed was going to make a fundamental difference. He considered that “the choice of the only (or main) creditor should carry great weight” (paragraph 16).

The judge wanted to emphasise that there was no suggestion of actual bias on the nominee’s part, but he felt that apparent bias did exist. He described this generally (per Porter v Magill (2002)) as “‘where the fair-minded and informed observer, having considered the facts, would conclude that it was a real possibility of bias’… In some cases the circumstances may be such where the directors’ nominee is in a position where the issue of apparent bias can arise because of his previous dealings with the directors. In such circumstances, even where he has acted blamelessly, he should stand down” (paragraph 15).

Court satisfied that Administrators’ marketing and sales process led to fair and proper price

O’Connell v Rollings & Ors (21 May 2014) ([2014] EWCA Civ 639) (Re Musion Systems Limited (In Administration))
http://www.bailii.org/ew/cases/EWCA/Civ/2014/639.html

Online articles (e.g. http://www.mercerhole.co.uk/blog/article/administration-fixed-charge-creditors-rights) have highlighted the key outcome of this case: the dismissal of the charge-holder’s appeal against the order under Para 71 permitting Administrators to sell assets as if they were not subject to the fixed charge. The judgment is valuable in illustrating how the court measures the fine balance between the prejudice to the charge-holder caused by an order and the interests of those interested in the promotion of the purposes of the administration.

The other points that I found interesting in the judgment are:

• The judge had to be (and was) satisfied that the Administrators were proposing to sell the assets for a “proper price” (paragraph 49). Absence of reference to “best price” is interesting to me, in view of the fact that the Administrators did not pursue a somewhat tentative sale to a party, who on the face of it was offering a larger sum (but which would have involved deferred consideration due from an overseas company). Personally, I have never liked the concept of achieving a “best price” sale; apart from the practical difficulties of measuring against a superlative “best”, it’s not just about the quantum.
• In the circumstances – limited cash, ongoing liabilities to 17 employees, and quarter-day rent looming – the Administrators could not be criticised for deciding to pursue a sale by means of a contract race.
• Although the appellant argued that the company’s intellectual property rights were valued at “very substantially more than the Administrators achieved” (paragraph 62), the judge was “satisfied that the Administrators did ascertain the value of the business and assets of the company, including its intellectual property rights, such as they were, by testing the market, and doing so in a perfectly sensible and adequate way. Faced with rising costs and diminishing assets, they were naturally concerned to secure a sale as soon as reasonably possible. That is precisely what they did and I am satisfied that, in doing so, they obtained a proper price” (paragraph 63).
• Although the judge recognised “that the urgency of the situation and commercial pressures will sometimes require administrators to make a decision before a meeting [of creditors] can be convened. But in any such case it may still be possible for the administrators to consult with the creditors and, so far as circumstances permit and it is reasonable to do so, that is what they should do” (paragraph 80).

Implications of apparent widening of “debentures” definition

Fons HF (In Liquidation) v Corporal Limited & Anor (20 March 2014) ([2014] EWCA Civ 304)
http://www.bailii.org/ew/cases/EWCA/Civ/2014/304.html

Fons made unsecured loans to Corporal Limited under two shareholder loan agreements. The question for the Court of Appeal was: did the loans fall under Fons’ charge-holder’s security, either as “debentures” or “other securities” under the charge’s definition of “shares” (“…also all other stocks, shares, debentures, bonds, warrants, coupons or other securities now or in the future owned by the chargor in Corporal from time to time or any in which it has an interest”)?

Having reviewed the historic use of the word debentures, Patten LJ concluded: “As a matter of language, the term can apply to any document which creates or acknowledges a debt; does not have to include some form of charge; and can be a single instrument rather than one in a series” (paragraph 36). It seems that the previous judge gave “debentures” a narrower meaning because it appeared in a list ending: “other securities”. However, Patten LJ pointed out that other items in that list may be considered a security, if “securities” is synonymous with “investments” and thus he could not see why a reasonable observer should regard “other securities” as limiting “debentures” to a meaning that would exclude the shareholder loan agreements. The appeal judges were unanimous in the decision to allow the appeal.

The implications of this judgment have been summarised in a letter from the City of London Law Society to HM Treasury dated 4 June 2014 (http://goo.gl/2F9tpH). The Society wished to raise its “serious concerns in respect of the significant legal uncertainty” caused by this decision: “In holding that loan agreements are debentures in that, whether or not the relevant loan is drawn, the agreements acknowledge or create indebtedness, the judgment appears to have the effect of regulating loans in a manner not previously adopted.”

The Society’s key concern is that, if loan agreements are debentures, then they could be caught as regulated investments under the Financial Services and Markets Act 2000 (“FSMA”). If this is the case, then unless a party is authorised or exempt under the FSMA, they are at risk of criminal sanctions – this might apply, not only to unregulated lenders, but also borrowers as well as secondary traders of loans.

Consequently, the Society has asked the Treasury to “take action (a) immediately to clarify HM Treasury’s policy intentions on this topic and (b) as soon as practicable act so as to provide clarity in law.”

(UPDATE 25/08/14: The Society has released a copy of the FCA’s response to the Loan Market Association (17/07/14), which states that the FCA has considered the judgment in this case and, in the FCA’s view, it does not impact the regulatory perimeter prescribed by the FSMA: http://goo.gl/vO99NT )

(UPDATE 31/08/14: well, it was there!  It seems to have been pulled down again; I don’t know if that means the FCA has had second thoughts…)

(UPDATE 20/11/14: the letter is back at http://goo.gl/ek9Td6 )

Registrar of Companies’ resistance to file replacement Proposals overcome

The Registrar of Companies v Swarbrick & Ors (13 May 2014) ([2014] EWHC 1466 (Ch)) (Re Gardenprime Limited (In Administration))
http://www.bailii.org/ew/cases/EWHC/Ch/2014/1466.html

11 Stone Buildings has produced a good summary of this case: http://www.11sb.com/pdf/insider-rewriting-the-register-gardenprime-sc-may-2014.pdf.

The Registrar of Companies (“RoC”) applied to set aside an order that the administrators’ original Proposals be removed from the register and replaced with another set of Proposals, which omitted certain information in view of a confidentiality clause in a share purchase agreement.

The RoC’s central challenge was whether, and to what extent, the court could intervene in the performance of the RoC’s duties and powers: the RoC had carried out its duty in registering the Proposals that had been delivered to it and the original Proposals had not been found to be non-compliant or containing “unnecessary material” (per S1076 of the CA 2006) and thus in want of removal and replacement. Accordingly, it was argued, the RoC had no statutory power to accept the amended Proposals as a replacement and could not be required to do so.

Does R2.33A, which provides for an administrator to apply for an order of limited disclosure in respect of Proposals, only apply in advance of filing? In other words, once Proposals have been filed, is it too late to apply for a R2.33A order? The judge stated: “in my judgment on the correct construction of Rule 2.33A the jurisdiction of the court to make an order limiting disclosure of the specified part of the statement as otherwise required by Paragraph 49(4) is not exhausted the moment the statement has been sent. On the contrary, an application for such an order may be made even after that event, and an order may be made with retrospective effect” (paragraph 52).

But how does such an order fit in with the RoC’s powers under the CA2006 as regards removing documents containing “unnecessary material” from the register? The judge’s conclusion was that the effect of the R2.33A order was to render the disputed material as “unnecessary material” under the CA2006 and thus the RoC was empowered to remove it.

Technicality blocks IP’s attempts to reverse her decision

Top Brands Limited & Anor v Sharma (8 May 2014) ([2014] EWHC 1454 (Ch)) (Re Mama Milla Limited (In Liquidation))
http://www.bailii.org/ew/cases/EWHC/Ch/2014/1454.html

I have seen other commentaries on this case focus on the repercussions of being slow in dealing with court matters, but I will look at the case’s once-in-a-blue-moon technical intricacy.

A liquidator rejected a creditor’s claim, the creditor appealed to court, and then the two of them submitted to a consent order by which the liquidator reversed her decision to reject and agreed to admit the claim. The liquidator, having been replaced by another IP at a creditors’ meeting, now faces a S212 action. The (now former) liquidator sought to adjourn the trial so that she could pursue a claim to set aside the consent order on the basis that it was procured by fraudulent misrepresentation. If the creditor’s claim were to be rejected, then its standing to pursue the S212 application might be thwarted.

The difficulty for the former liquidator was that R4.85 sets out who can apply to have a claim expunged: the liquidator or (where the liquidator declines to act) the creditor. As the former liquidator was neither, she had no jurisdiction. Simon Barker HHJ accepted that “such a conclusion would be troubling in the light of there being a real prospect that neither [of the two applicants] are creditors” (paragraph 48), but for the facts that the current liquidator, who was still investigating matters, had jurisdiction and the former liquidator had “a reasonable window of opportunity” to take action under R4.85 after the S212 application had commenced but before she had been removed as liquidator. He also stated that, even in the event that the current liquidator did not intend to investigate the matter (although, of course, the liquidator will be duty-bound to satisfy himself that any distributions made by him are made to genuine creditors), “the court simply does not have jurisdiction to act in disregard of R4.85”.

Lack of hindsight does not hamper HMRC’s powers of detention

Eastenders Cash and Carry Plc & Ors v The Commissioners for HM Revenue & Customs; First Stop Wholesale Limited v The Commissioners for HM Revenue & Customs (11 June 2014) ([2014] UKSC 34)
http://www.bailii.org/uk/cases/UKSC/2014/34.html

HMRC detained the companies’ goods, citing S139(1) of the Customs & Excise Management Act 1979 as their authority for doing so, but they later returned some of the goods when the officers’ enquiries as regards the goods’ duty status proved inconclusive. In the Eastenders case, the court had previously found that the officers had had reasonable grounds to suspect that duty had not been paid on the goods, but in First Stop’s case, the goods were detained pending investigations into whether duty had been paid. The question arising was: could only goods that were actually liable to forfeiture be detained, i.e. was it unlawful for HMRC to detain goods that turned out not to be (or not proven to be) liable to forfeiture?

The Supreme Court judges all agreed that S139(1) of the 1979 Act should be interpreted so that “detention of goods is unlawful whenever the goods are not in fact liable to forfeiture” (paragraph 24). The difficulty flowing from this is that, of course, at the time of detention, officers may well suspect that the goods are liable to forfeiture, but further enquiries sometimes will establish that this is not the case. Hindsight is a wonderful thing!

But does this mean that the officers had no statutory power at all to detain the goods? In creating the S139(1) power of detention, was the power to detain, which had previously been held to arise by necessary implication from statutory powers of examination, abolished? The judges could not see “why Parliament should have conferred upon the Commissioners and their officers a wider range of intrusive investigatory powers than any other public body, but should at the same time have chosen to deprive them of a means of preventing goods from being disposed of until they have completed their examination and decided whether the goods should be seized” (paragraph 45).

Consequently, the Supreme Court judges concluded that the limited circumstances in which goods could be detained under S139(1) was not the only source of the officers’ powers of detention. In the Eastenders case, “since the officers were carrying out a lawful inspection of the goods for the purpose of determining whether the appropriate duties had been paid, and had reasonable grounds to suspect that duty had not been paid, they were in our view entitled by virtue of section 118C(2) to detain the goods for a reasonable period in order to complete the enquiries necessary to make their determination” (paragraph 49). Even in the First Stop case, the judges considered that “the examination was not completed until the necessary enquiries had been made, and that the power of examination impliedly included an ancillary power of detention for a reasonable time while those enquiries were made” (paragraph 49).

Administrators compelled to assign mis-selling claim

Hockin & Ors v Marsden & Anor (19 March 2014) ([2014] EWHC 763 (Ch)) (Re London and Westcountry Estates Limited (In Administration))
http://www.bailii.org/ew/cases/EWHC/Ch/2014/763.html

The R3 Technical Bulletin 107 has covered this case, which resulted in a direction that administrators assign potential mis-selling claims to the shareholders (one of which was also a creditor). As the Bulletin pointed out, the judge did not criticise the administrators for declining to pursue the claims themselves, but he felt that, as the terms of the proposed assignment included that the estate would share the benefit from any success, it would unfairly harm the creditors if the claims were simply lost and thus he felt that there was a basis to the creditor’s Para 74 claim.

A further point that I found interesting in this case was the judge’s reaction to the administrators’ criticism of the consideration offered under the proposed assignment. The judge could see no practical alternative to effecting the assignment in the terms proposed: once the court had expressed itself in favour of an assignment, faced with no other potential assignees the administrators had no real negotiating position, and the court could not compel the shareholders/creditor to fix the consideration at a higher figure.


Leave a comment

The case of an OR’s resources under pressure and another gap in the Rules

Oh dear, the Official Receiver cannot seem to get it right.  In the first case, his swift handover of an appointment left the Trustee with outstanding costs and no bankruptcy, but in the second case, his delay in getting to grips with a new case that clearly warranted an IP’s appointment jeopardised the continuance of an action commenced by the Provisional Liquidators.  Is this “a reflection of the enormous pressure on resources, both financial and human, under which the OR is working” (TAG Capital Ventures v Potter, paragraph 31)?

The circumstances of the Appleyard case were unique (as demonstrated by the fact that it revealed a previously unreported lacuna in the 1986 Rules) and therefore I do not think that they serve as an argument for an OR to delay passing a case to an IP.  However, I would suggest that the TAG Capital Ventures case demonstrates a more obvious downside of such a delay.  To ensure the most beneficial outcome for creditors, I would have thought that a swift review of each case as soon as it comes into the OR’s hands – to identify the cases that are more appropriate for IPs and to get those shifted asap – surely is the best way to work, particularly with limited resources, isn’t it?  Of course, it’s easy to see what needs to be done, but not so easy to do it when one is fire-fighting and this may be a one-off, but such ‘endemic, notorious, delays’ surely warrant attention.

Appleyard v Wewelwala [2012] EWHC 3302 (Ch) (23 November 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/3302.html

Summary: An unfortunate train of events left the Trustee in Bankruptcy with outstanding costs after the debtor’s bankruptcy was overturned on appeal.  The judge’s view was that the Trustee had been “unjustly left out in the cold”; he decided that the debtor’s property should stand charged with payment of the Trustee’s costs incurred up to the point when he learned that the bankruptcy order had been set aside; and he recommended amendment to the Insolvency Rules to deal with this lacuna.

The Detail: The debtor appealed the bankruptcy order on the grounds that the petitioning creditor had unreasonably refused to accept her offer to make payments by instalments.  On 14 December 2011, the court provided that the bankruptcy order be set aside and that the hearing of the petition be adjourned for twelve months on the debtor’s undertaking to pay instalments to the petitioner.  The order made no provision for the Trustee’s release from office or for payment of his expenses.  In fact, it may have been the case that the judge did not even know that a Trustee had been appointed.

Appleyard had been appointed Trustee by the Secretary of State – the Official Receiver believing, correctly at the time, that the debtor had been refused permission to appeal.  Appleyard had not been notified of the hearing – there is no provision in statute or the CPR requiring him to be notified – and he only learned of the setting aside of the bankruptcy order when the debtor telephoned him in January 2012.  The Trustee had progressed the case in the usual manner, incurring costs of some £6,500.

Mr Justice Briggs felt that, as the Trustee was simply doing his job, there was no reason in principle why the Trustee’s expenses – up to the point when he learned of the successful appeal – should not be paid.  In considering from whom those expenses ought to be paid, Briggs J drew on the judgment in Butterworth v Soutter, an annulment case: if the ground for annulment was where the order ought not to have been made (S282(1)(a)), then “there must be strong argument for saying that the petitioning creditor should pay the trustee’s costs” (paragraph 25), but if it were on the ground of payment/securing of the bankruptcy debts, then there is strong argument that the bankrupt should pay.  This, and the decision in Thornhill v Atherton, led Briggs J to conclude that “Mr Appleyard’s right as trustee to recover his expenses, having acted entirely properly and innocently at least until January 2012, must prevail over Mrs Wewelwala’s right to enjoy to the full her estate upon its re-vesting in her as a result of the setting aside of the bankruptcy order. This is so even if, as between her and Davenham [the petitioner], it may be Davenham which was largely to blame for the circumstances leading to those expenses being innocently incurred…  I do not think that it would be right to make an order against her personally, since this is more than Mr Appleyard would have been entitled to, had he remained her trustee. Nonetheless I should direct that her property… stand charged with payment of Mr Appleyard’s reasonable expenses down to January 2012, leaving him to obtain execution in that respect in such manner as he should think fit, in the absence of agreement with Mrs Wewelwala” (paragraphs 32 and 33).  The judge left it open to the debtor whether she might challenge the reasonableness of the Trustee’s fees and/or to pursue a claim for compensation against the petitioner.

However, in relation to the Trustee’s costs incurred after he had learned of the setting aside, Briggs J “reached the opposite conclusion”.  It seemed to him “that he [the Trustee] should have incurred no further expense without first applying to the court for directions” (paragraph 34).

Briggs J concluded: “it is most unfortunate that it was not appreciated by either of the parties to Mrs Wewelwala’s appeal last December that Mr Appleyard’s expenses need to be addressed. A trustee in bankruptcy’s expenses are as important a matter to be dealt with on an appeal against a bankruptcy order heard after his appointment, as they are in any application for rescission or for annulment. To the extent that the Insolvency Rules fail to make this clear, consideration should be given to their amendment, or to the issue of an appropriate practice direction. In any event, it is to be hoped that the reporting of this judgment may draw this aspect of bankruptcy practice and procedure to the attention of litigants and their professional advisors” (paragraph 37).

TAG Capital Ventures Limited v Potter [2012] EWHC 3323 (Ch) (23 November 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/3323.html

Summary: The fact that the Official Receiver had not been in a position to continue an action commenced by Provisional Liquidators and a four month delay were insufficient to conclude that continuance of the action would amount to an abuse of process of the court or to discharge a freezing order made at the outset of the action.

The Detail: Immediately following their appointment, the Provisional Liquidators applied for a freezing order against director, Potter, and commenced an action against him.  A trial timetable was agreed, although neither party complied with disclosure.

Hot on the heels of the OR’s appointment as Liquidator on 25 June 2012, Potter’s solicitors asked the OR about his intentions with regard to the action.  They asked again on 3 October and received the response: “Based on the information we have, and the fact that the provisional liquidators have not provided the records to date, the Official Receiver is not in a position to continue this action”.

Around the same time, the OR sent a report to creditors confirming that he did not intend calling a meeting of creditors.  Shortly on receipt of this report, on 5 October, the petitioners’ solicitors contacted the OR’s office and put in train the process to have one of the former Provisional Liquidators appointed as Liquidator by the Secretary of State.

On 8 October, the date for filing the pre-trial questionnaire, Potter’s solicitors notified the OR’s office that failure to discontinue the proceedings would result in their client’s own application to have the proceedings struck out.  No response was received and thus the application was made.

The IP was appointed Liquidator on 23 October and was now keen on continuing the action.

Mr Justice Warren commented that, without the OR’s statement on 4 October that he was “not in a position to continue this action”, Potter’s application would be “hopeless” (paragraph 37) and that the evidence (emails between the OR and the IP) suggested that up until the end of September “the OR had made no decision at all, a fact consistent with the suggestion made by Mr Wolman [for the claimant] that there are endemic, and he would say notorious, delays within the OR’s office” (paragraph 39).  The judge suggested that, even if the conclusion were that on 4 October the Company did not intend to intend to pursue the action (a conclusion on which the judge cast significant doubt), it would be “an entirely disproportionate response” to strike out the action (paragraph 45).

In considering whether any delay in progressing the action supported the discharge of the freezing order, Warren J took no account of any delay prior to the appointment of the OR, as the Company was not in a position to act prior to this point.  He also stated that “the OR must, on any footing, have been given a reasonable time after his appointment in which to consider his position in relation to the proceedings.  I do not say that in all cases involving an insolvent company as claimant that a defendant simply has to accept the delays caused by the insolvency process.  But in the present case, Mr Potter was the controlling mind and owner of the Company and ultimately responsible in practical terms for its demise…  It would be wrong, I think, for Mr Potter to be able to rely on delay resulting from the orderly implementation of an insolvency process in order to obtain the discharge of the freezing order” (paragraph 48).

However, Warren J did observe that there seemed to be a delay over and above the “proper time for those matters” of some two months and that it may have been reasonable to expect the OR to have decided in July that, in view of the existing litigation, it would have been appropriate to hand the case to an IP, but nevertheless this small delay did not warrant the discharge of the freezing order.

The judgment includes details of exchanges between the OR’s office and the Provisional Liquidators, which demonstrate that there was no constructive dialogue between these parties throughout the OR’s term of office (which was not entirely due to delays by the OR) and leaves me wondering why the OR did not conclude swiftly on his appointment that an IP should be appointed (particularly given this case’s profile) or, failing this, why it took over three months for him to issue a Notice of No Meeting to creditors.