UK: Insolvency Litigation: Recent Cases And Issues - August 2017

The Court of Appeal has confirmed that a term could not be implied into a conditional fee agreement between a liquidator and solicitors, and that the solicitors would only be paid out of recoveries made. However, the liquidator was not liable for the fees because of a common understanding between the parties. We cover this, and other issues affecting the insolvency and fraud industry, in our regular update:

Liquidator not liable for fees despite wording of CFA

The Court of Appeal in Stevensdrake Limited v Stephen Hunt and Stephen Hunt as Liquidator of Sunbow Limited [2017] has held that a term could not be implied into a conditional fee agreement (CFA) between a liquidator (Hunt) and solicitors (Stevensdrake) acting on his behalf, and that the solicitors would only be paid out of recoveries made, as this contradicted an express term in the CFA to the contrary.

Despite that, Hunt was held not liable for those fees as there was clear evidence of a shared common understanding, acted on by both parties, that payment would only be made out of any recoveries.

Background

The full details of the background to this case can be seen from our coverage of the first instance decision in which the court held that there was a necessary and implicit term in the agreement between Stevensdrake and Hunt that payment would be made on a recoveries basis only. Stevensdrake appealed.

The Court of Appeal, allowing the appeal in part, held there was no justification for going outside the terms of the CFA and making it subject to contrary terms founded on other agreements which may have been made. The CFA was a short, coherent and comprehensive agreement clearly imposing a responsibility for payment regardless of recoveries that worked perfectly well without the need for any implied term.

As per the Supreme Court decision in Marks and Spencer plc v BNP Paribas Securities Services Trust co (Jersey) Ltd [2015], a term will only be implied into a contract if:

  • It does not contradict any express term in the contract - the term sought to be implied did.
  • It is necessary to give business efficacy to the contract - it was not as the CFA worked perfectly well without it.
  • It is so obvious that it 'went without saying' - that was not the case here as it was contradicted by an express term of the contract.

The Court of Appeal concluded that it did not matter how strong the contemporaneous evidence was, it is a cardinal rule that no term can be implied into a contract if it contradicts an express term of that contract. Under the CFA, personal liability for payment by Hunt arose once "success", as defined, was achieved and so was an immediately enforceable liability, regardless of whether any recovery had been made.

However, the court went on to uphold the finding at first instance that there was a shared common understanding that the fees would be paid from recoveries and that Hunt would not be personally liable for any shortfall. An estoppel by convention arose. There was ample evidence in the correspondence between the parties of a shared common understanding and of it being communicated, shared and acted upon by both parties to the CFA. It would be unconscionable for Stevensdrake to resile from the parties' shared common understanding as Hunt would undoubtedly have withdrawn his instructions from Stevensdrake and found solicitors prepared to do the work on a recoveries only basis.

Comment

It is of course very common for professionals to be engaged in insolvency cases on the basis that payment of fees will be made from assets recovered into the insolvent estate. This decision is therefore a good overall result in that it recognises this principle, which is widely accepted in the industry.

Insolvency practitioners should, however, ensure that any arrangements re payment of fees and disbursements are clearly and accurately set out in the engagement terms or any CFA, rather than in an informal agreement. Unless the evidence is as clear cut as in this case - and each case will be fact specific on this point - arguing estoppel by convention will be difficult and costly and so is best avoided.

Settlement agreement applies to all claims arising from individual's employment, but not to claims arising out of his obligations as a director

In the case of Officeserve Technologies Limited (in liquidation) and another v Anthony-Mike [2017], the High Court was asked to consider whether a settlement agreement (the Settlement Agreement) entered into between a company (Officeserve) and its former director and employee (AM) applied to claims against AM arising out of his obligations as a director, as well as claims by AM arising in relation to his employment. In the event that it did so apply, the court was then asked to consider whether the Settlement Agreement was void under section 127 of the Insolvency Act 1986 (IA 1986).

Background

AM was a former director and employee of Officeserve as well as an 80% shareholder in it. Officeserve acquired two companies with the intention of expanding its business. Payment in relation to those acquisitions was delayed in part and Officeserve began to suffer financial difficulties before the outstanding payments were made. In respect of those outstanding payments a statutory demand for some £3.7 million was issued, followed by a winding up petition.

A review of Officeserve's finances was then undertaken by members of the board. That review highlighted significant expenditure committed by AM which, they alleged, was related either to AM's personal affairs or to matters unrelated to the business. AM's employment was terminated shortly thereafter.

Officeserve and AM entered into the Settlement Agreement which provided (among other things) for AM to transfer 8.325 million ordinary shares (comprising his 80% shareholding) as directed by Officeserve for nil consideration. AM also agreed to further provisions (such as returning company property) and those provisions, along with the share transfer, were expressed in the Settlement Agreement to be in full and final settlement of:

  • his employment claims and any other claims AM may have arising out of his employment or its termination, his holding of office or any connected matter; and
  • any claims Officeserve may have against AM in connection with or arising from his employment.

In both cases the release covered known and unknown claims.

Prior to execution of the Settlement Agreement, a winding up petition had been presented in relation to Officeserve, with the winding up order being made after its execution. The liquidators applied for declarations that AM had misapplied monies in his capacity as director of Officeserve and that certain payments made to him were void under S127 IA 1986, and an order that AM repay the sum of approximately £535,000.

AM argued that the Settlement Agreement had compromised any claims that Officeserve could make against him; it acted as a total bar to any future claims of any sort.

The liquidators argued that the Settlement Agreement only covered claims arising in relation to AM's employment and not to claims against him arising out of his actions as a director. If the Settlement Agreement did include 'director' claims it should be void under s127 IA 1986 and the court should not exercise its discretion to validate the agreement.

Decision

The court held that the Settlement Agreement only compromised any employment claims AM may have against Officeserve.

The ordinary and natural meaning of the words used was to release AM from any claims connected with or arising out of his employment. None of the evidence before the court supported AM's position that the Settlement Agreement released him from any claims connected with or arising out of his actions as a director. On its true construction the Settlement Agreement did not protect AM against the claims being made against him in these proceedings.

The court went on to confirm that if its decision on the Settlement Agreement was wrong, the Settlement Agreement would be void under s127 IA 1986 in any event. If the Settlement Agreement did operate to release AM from any liability for the liquidators' claims - or to create an enforceable promise not to sue on them - it would be caught by s127 IA 1986.

S127 IA 1986 works to void any disposition of a company's property that is made after the commencement of winding up proceedings to ensure that property is available for distribution to creditors. 'Property' is wide enough to include money, things in action and obligations arising in relation to property. The court held that the release of contractual rights, such as a debt by a creditor company in favour of the debtor, will constitute a disposition of the property of the company within the meaning of s127 IA 1986.

The Settlement Agreement did not release AM from his obligations to Officeserve in his capacity as a director. Even if it did, the settling of Officeserve's claims against AM as a former director would be a disposition of property and the Settlement Agreement would therefore be void. The court also went on to say that it would not exercise its discretion to retrospectively validate the Settlement Agreement; it would not be in the interest of Officeserve and its creditors to do so.

Comment

While the primary focus of this case was whether the Settlement Agreement, on its terms, applied equally to 'employment' and 'director' claims, the decision provides some helpful guidance on whether the settlement of a company's claims against a former director would be a disposition of property and therefore void under s127 IA 1986.

Floating charge valid even where company has no (un-charged) assets at time of creation

The Court of Appeal has recently confirmed that whether or not a company has assets when a floating charge is created is irrelevant to its validity and that an administrator can be properly appointed under such a charge.

Background

In Saw (SW) 2010 Ltd and another v Wilson and others [2017], a loan was advanced in 2007 by a lender (CHL) to a company (the Company) secured by fixed and floating charges. The security included a prohibition against giving any other security without CHL's prior written consent. The charge also contained a clause providing that if any of the Company's property subject to the floating charge was encumbered in any way without CHL's prior consent, the floating charge would automatically take effect as a fixed charge.

In 2008, the Company entered into a further loan with another lender (NBS) granting security by way of a debenture and a legal charge. CHL's prior consent was not sought or obtained with the effect that CHL's floating charge automatically crystallised.

The Company experienced financial difficulties and NBS purported to exercise its right to appoint an administrator under its debenture pursuant to paragraph 14 of Schedule B1 (para 14) to the Insolvency Act 1986 (IA 1986). NBS obtained CHL's consent to do so as required under paragraph 15 of the same provision.

The administrators' appointment was challenged by shareholders and creditors of the Company. They argued that the appointment was not valid because:

  • The debenture was granted without the prior written consent of CHL with the result that CHL's floating charge crystallised when the debenture was granted.
  • This meant the debenture itself could not constitute a floating charge because when it was granted the Company did not have any property to which it could attach and the directors of the Company had no power to acquire any property for the Company to which it could attach in the future.
  • The debenture was not enforceable at the time of the administrators' appointment as there remained no property of the Company to which it could attach.

The Court of Appeal's decision

The Court of Appeal held that the administrators were validly appointed.

The court considered the provisions of para 14 and s251 IA 1986 together with the leading cases examining the nature of floating charges, namely re Yorkshire Woolcombers Association Limited [1903] and re Spectrum Plus Limited [2005]. It held that whether a charge created a qualifying floating charge had to be assessed at the time of its creation and did not depend on a company having uncharged assets when it was created or the power to acquire uncharged assets in the future. It is a matter of construction of the instrument itself and, on its true construction, the debenture manifested the essential characteristics of a floating charge.

The court also found that the argument that the floating charge was unenforceable when the administrators were appointed, again because there were no assets to which the charge could attach, was misconceived. It is not a statutory requirement that there are assets available to enforce against. A floating charge simply has to be enforceable i.e. any condition precedent to enforcement has been satisfied and there must be a debt for which it stands as security.

Further, the court found that although there was neither authority nor academic writing precisely on the point, such as there was tended to affirm the view that the effect of the automatic crystallisation of CHL's earlier floating charge affected only the priority, rather than the validity, of the later NBS debenture.

Comment

The case confirms that so long as the consent of prior ranking creditors has been obtained, and the charge has become enforceable, administrators can be appointed pursuant to a second or subsequent qualifying floating charge, regardless of the issue of available assets on creation. Whether there will be any ultimate benefit in the appointment will depend on whether there is an excess of realisable assets once prior charge holders have been paid and administrators' costs and expenses met.

Binding articles of association prevents sole director from appointing administrators

The Court of Appeal in Randhawa and anor v Turpin and others [2017], held that administrators were not validly appointed by a sole director where the company's articles of association required a quorum of two directors for board meetings. The Duomatic principle, which allows members of a company to reach an agreement without the need for strict compliance with the formal procedures, could not rectify the position as one of the two registered shareholders was a dissolved company which was unable to consent to a change in the articles of association.

Background

The shareholders of BW Estates Ltd (the Company) were S who held 75% of the shares and B, a dissolved company, which held 25% of the shares. B was never removed from the Company's register of members. S was the sole director and acted on the instructions of his father who was the beneficial owner of S's shares.

The Company suffered financial difficulties and S purported to appoint the defendants as joint administrators of the Company pursuant to paragraph 22(2) of Schedule B of the Insolvency Act 1986 (para 22(2)). The claimant creditors of the Company challenged the validity of that appointment as the Company's articles of association provided for a quorum of two for both a directors' and shareholders' meeting.

The defendants argued their appointment was valid under the Duomatic principle (Re Duomatic Ltd [1969]), which provides that where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be.

First instance decision

The High Court held that the administrators' appointment was valid as there had been a consistent course of conduct under which S (and his father) had informally sanctioned the exercise of all the directors' powers by a single director and that operated as an informal variation of the company's articles. The consent or acquiescence of the only existing registered shareholder (S) was sufficient to trigger the Duomatic principle. It held the shares held by the dissolved B could be disregarded.

The claimants appealed.

Court of Appeal decision

Before the Court of Appeal the defendants also argued that on B's dissolution, the Company became a single member company for the purposes of s381(1) of the Companies Act 2006 (CA 2006) allowing S alone to constitute a valid quorum for a members' meeting. The Duomatic principle then operated to validate the appointment of the administrators.

The Court of Appeal held that the defendants' appointment was invalid.

It found that the Company had never become a single member company. The meaning of the word 'member' in the Companies (Tables A to F) Regulations 1985 Sch 1 para 40 and relevant parts of the CA 2006 was a matter of construction in the particular context. Here, 'member' included any member registered on a company's register of members whether alive or dead, in an insolvency procedure or dissolved. B remained on the Company's register of members despite its dissolution. It was appropriate to construe 'member' as encompassing the member's successor in title where the member was dissolved, rather than to deem the company transformed into a single member company upon the dissolution.

The court's findings in relation to the Duomatic principle were:

  • The assent of all the shareholders who have the right to attend and vote at a general meeting of a company is required and not simply those shareholders who may be available at the time. B was still a registered member (albeit it was dissolved) and had not been given notice of, nor had it assented to, the appointment of the defendants. B could not simply be ignored.
  • The principle cannot be engaged where one of the registered shareholders is a corporation which no longer exists as it requires the consent of all registered shareholders and a dissolved company is incapable of consenting.
  • On dissolution, B's property passed to the Crown and the Crown had not consented to the appointment.
  • The Company's articles of association could not be amended by a course of conduct by S (and his father) without invoking the Duomatic principle and which again failed for the reasons above as all registered shareholders had not consented.

Further, the court also held that that there was no separate, inalienable right of a company's director to appoint administrators pursuant to para 22(2), which could not be restrained by the quorum provisions in the articles. Directors had to act in accordance with a company's articles by which it had agreed to be bound.

Comment

The court found that the director's resolution to appoint was incurably invalid. The articles were not followed and were not capable of being informally varied. Checking the resolution passed to appoint them against the articles of association will help ensure there are no inaccuracies and that administrators are validly appointed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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