UK: Insolvency Practitioners Should Strike Early To Strike Out

Last Updated: 5 December 2006
Article by Richard Curd

Following a liquidation or other insolvency procedure, insolvency practitioners may find themselves in the line of fire from disappointed claimants. As a result IPs, are often the targets for complaints and subsequently, litigation; in many respects this goes with the territory. Defending such litigation is, however, demanding of resources which could be deployed more usefully elsewhere. Two recent judgments which demonstrate the potential value of an early strike out application will, therefore, be welcomed.

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Following a liquidation or other insolvency procedure, insolvency practitioners may find themselves in the line of fire from disappointed claimants. As a result IPs, are often the targets for complaints and subsequently, litigation; in many respects this goes with the territory. Defending such litigation is, however, demanding of resources which could be deployed more usefully elsewhere. Two recent judgments which demonstrate the potential value of an early strike out application will, therefore, be welcomed.

In Re International Championship Management Ltd, Cohen .v Davis & Others [2006] EWHC 768(CH), the liquidator commenced proceedings against two corporate hospitality companies which had sold packages for the World Cup in France in 1998 but, in the event, had been unable to supply tickets. The liquidator brought a claim against the directors and alleged shadow directors of the companies.

Tan & Co, a firm of accountants had been retained by the companies (and the directors) on the day before the World Cup kicked off when it became clear that there was a problem with the proposed source of supply of match tickets. Tan & Co advised that the companies could continue trading if the directors believed that they could find tickets elsewhere. Twelve days later it emerged that no tickets could be found and Tan & Co advised that the companies should stop trading. Shortly thereafter, the companies went in to voluntary liquidation. IPs from Tan & Co and another firm were appointed as joint liquidators.

Disqualification proceedings against the directors followed which concluded in them giving disqualification undertakings in 2003. The following year - just 2 days before the relevant limitation period was to expire - the then sole liquidator of the companies commenced proceedings against the directors under

Section 214 Insolvency Act 1986 -

for wrongful trading on the grounds that they should have realised by 10 June 1998 (when the World Cup started) that the companies would be unable to avoid insolvent liquidation.

Section 238 / Section 239 -

in respect of alleged transactions at an undervalue/voidable preferences in respect of certain transactions on 6 May 1998 (i.e. before Tan & Co were retained)

Section 212 -

for misfeasance in respect of £3 million of payments made between March and June 1998 (i.e. both before and after Tan & Co had been retained to advise)

Part 20 proceedings were commenced against Tan & Co by the directors/shadow directors in 2005 (i.e. after the primary period of limitation had expired and, possibly, for this reason the claim against Tan & Co was confined to a claim for contribution within the Contribution Act 1978); Tan & Co could therefore only be liable to make a contribution if they had a common liability to the companies themselves for the same loss as alleged to have been caused by the directors/shadow directors.

Tan & Co applied to strike out the claims and were substantially successful; as to the claims under Section 214, 238 and 239 brought by the liquidator against the directors/shadow directors, these could not be treated as claims by the companies (by whom Tan & Co had been retained) and, therefore, Tan & Co could not be liable to contribute; this was because the ability to make such claims was conferred by statute on the liquidator and

  • in respect of Section 214 (voidable trading) could be made by a liquidator against a director or a shadow director (i.e not against Tan & Co);
  • in respect of Section 238 (transactions at an undervalue)Tan & Co was not a person with whom the companies had entered into the relevant transactions for the purposes of making such a claim;
  • in respect of Section 239(wrongful preferences) Tan & Co was not a creditor of the companies, or the surety or guarantor of the companies’ debts, for the purposes of a claim under that provision.

As to Section 212 (misfeasance) the position was not as straight forward; the Court accepted that a professional advisor could be liable for the same damage as the directors if a company entered into a loss making transaction following advice from the professional.

That said, the claim for contribution against Tan & Co in relation to alleged misfeasance by the directors prior to 10 June 1998 (when Tan & Co had first advised) was, unsurprisingly, struck out; in relation to the alleged misfeasance by the directors after that date, the Court thought that it was conceivable that such a claim could be properly pleaded although it expressed scepticism that it could be in this case on the basis of the materials which were available. Whether or not such a claim would be permitted to go forward would be determined in the event that the directors made an application for permission to amend and decided to have another go.

In Bezant .v Cork [2006] All ER (D) 19 (Aug) the claim against the experienced insolvency practitioner in question was struck out in its entirety.

The Claimant, Dr Bezant had been an employee and was (at least at the outset of the proceedings) a creditor of Tertiary Enterprises Limited (in liquidation) in respect of a sex discrimination claim. She applied for an order under Section 212 that the liquidator (who had closed the liquidation and been released from office) should contribute to the assets of the company. The application followed numerous complaints made during the course of the liquidation in respect of which the Court struck a welcome chord and recognised that the liquidator had shown "considerable restraint when dealing with the persistent accusations of the complainants and that this should be commended".

Part of the application under Section 212 was almost immediately summarily dismissed and the liquidator subsequently applied to strike out the rest; the application succeeded on the grounds(as had emerged shortly before the application was heard) that Dr Bezant, although a creditor at the outset, had had her claim settled by a third party, Professor Hans Rausing, following other proceedings which she had commenced to which the liquidator was not a party; as the Court made clear, the ability to make an application under Section 212 is dependent not only on the applicant being a creditor at the time the application is made, but also throughout the proceedings until the application was heard. The Court made clear that this is not a mere technicality given that if the applicant is not a creditor, he or she has suffered no loss.

Although strictly and not necessary to do so, the Court went on to make it clear that Dr Bezant’s claim would have been struck out in any event on grounds which included numerous defects in the attempts which she had made to particularise her claim but also with a re-statement of principle with regard to a liquidators’ obligations to recover assets from others which may well be helpful to other IPs faced with such claims.

Dr Bezant had argued that the liquidator had failed to recover assets from the directors and others concerned with Tertiary Enterprises Limited who, so she alleged, were guilty of various forms of misconduct including false representations to creditors (Section 211), fraudulent trading (Section 213), wrongful trading (Section 214), transactions at an undervalue (Section 238) and unlawful preferences (Section 239).

In essence, the complaint was that the liquidator failed in his duty to take every possible step to pursue those parties to make a recovery; the Court made clear that this characterisation of the duty was going too far and found as follows:

"Any decision to take proceedings against directors or others must be rooted in the Liquidator’s duty to take reasonable care and skill; exercising his discretion whether or not take proceedings, and the Court will not lightly interfere with the Liquidator in the exercise of his discretion. Insofar as Dr Bezant’s application is based on absolute duty on the part of the Liquidator to take every possible step to recover assets and to take proceedings against directors and others, it is obviously unsustainable".

Conclusion

These decisions are welcome news for IPs and the lessons are that:

  • the Court will recognise the often difficult reality of the context in which they work; and
  • IPs should review carefully and promptly any proceedings which are commenced against them to establish the extent to which an early strike out application may be sustainable; and
  • consideration must be given to the impact of possible limitation issues; and
  • that the Court will be prepared to deal with such claims quickly and robustly saving both time and resources.

CMS Cameron McKenna acted for the liquidator in Bezant v. Cork

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 05/12/2006.

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