UK: Insolvency Litigation - Recent Cases And Issues - July 2018

In our update this month we take a look at some of the recent cases that will be of interest to those involved in insolvency litigation. These include:

  • another decision which deals with an application for security for costs where the claimant was in liquidation;
  • a Court of Appeal decision providing guidance on the effect of an unanticipated claim emerging after the approval of a company voluntary arrangement; and
  • confirmation that a director will not be in breach of fiduciary duty if he or she has acted in the best interests of the company.

Our insolvency litigation experts have reviewed the decisions and tell you what you need to know.

Security for costs? No - if saying yes will stifle a genuine claim.

In the case of Absolute Living Developments Ltd (in liquidation) v DS7 Ltd & Others (2018) the Chancery Court held that it was not appropriate to make an order for security for costs where it would stifle a serious or genuine claim, even if there was reason to believe the claimant would be unable to pay the defendant's costs.

Background

The Claimant company (A) had issued proceedings against the defendants (D), alleging that D had paid money away from A in breach of duty. A was insolvent and D issued an application seeking security for costs from A in the sum of £500,000.

A successful security for costs application requires satisfaction of a two-stage test under the Civil Procedure Rules (CPR) 25.13(1) and (2)(c);

  1. there must be reason to believe that the Claimant would be unable to pay the Defendant's costs; and
  2. whether it is, in all the circumstances, just that an order for security for costs be made.

A conceded that the first requirement was met, however, it argued that the second limb should fail because it would not be just (in all the circumstances) for an order for security for costs to be made.

Decision

The court accepted A's assertions and held that it was not appropriate to make an order for security for costs. In reaching this decision the court followed long established guidance in the exercise of its discretion:

  • Whether the claim is bona fide and not a sham.
  • The court was prepared to accept (and it was conceded by D) that the claim was bona fide, genuinely brought and clearly not a sham. In an interlocutory application the court needed to be wary about being drawn into an analysis of the merits. The question of whether there is a high chance of success was therefore left open.

  • Whether the Claimant's want of means has been brought about by the conduct of the Defendants;
  • On the facts of the case as asserted by A this would appear to be true. However, as with the first consideration, it was not appropriate for the court to conclude (at this stage), whether the fact A is in liquidation is down to D.

  • Whether the application for security for costs has been brought too late;
  • In light of the conclusion reached by this stage there was no need for the Court to address this factor. Notwithstanding this, the court confirmed that D could not be criticised for the timing of the application and the application would not have been rejected because of it.

The critical factor would be whether making the order would stifle a serious or genuine claim? The application would therefore turn on the last factor to be considered:

  • Whether the application for security for costs is being used oppressively to stifle a serious or genuine claim;
  • There was a clear risk that making an order for security for costs would stifle a bona fide and genuine claim. There was no prospect of the claimant itself being able to pay any sum by way of security. There was also no prospect of the litigation being funded by the liquidator, which would be contrary to normal practice. The claimant and the liquidator had also given a credible explanation for not approaching A's creditors for funding - they were not wealthy and would be unlikely to be in a position to provide the funding required.

    A balancing exercise had to be conducted between the interests of D and A. As A was in liquidation the interests of A's creditors had to be considered and it was clear in that regard that the balance favoured the liquidator continuing with the claim for the benefit of its creditors.

As a result no order for security for costs was granted.

Comment

Security for costs will not always be ordered where an insolvent entity is unable to pay any costs order that may be made against it. If there is evidence that a genuine claim may be stifled, if security is ordered, that may be enough to successfully resist an application - even if it is clear that an insolvent claimant will be unable to pay any costs order that may subsequently be awarded against it .

There is a mature market for after the event (ATE) legal expenses insurance which many insolvency practitioners will be aware of. Such ATE policies can defeat a security for costs application if they are properly drafted, are from a reputable insurer and they are considered to provide sufficient protection in all the circumstances of the case.

See our February 2018 update for more on security for costs applications involving insolvent companies.

Unanticipated claims emerging after the approval of a CVA - will they stop the CVA becoming effective?

The Court of Appeal has considered the terms of a company voluntary arrangement (CVA) in light of a significant claim emerging after the CVA had been approved.

Following an expedited appeal the Court of Appeal overturned the earlier decision made by the High Court in the case of Richard Heis and others v Financial services Compensation Scheme and another (2018).

Background

The case involved a CVA for a company that had been in administration for a number of years. Most creditors had already received dividends of 90pence for each pound. The CVA would allow a small number of participating creditors to buy out the exiting creditors for £64 million. The exiting creditors would walk away with a further dividend, the participating creditors would remain in the insolvency proceedings and benefit from any future recoveries.

The CVA had been approved but before the bar on new claims came into effect a significant contingent claim was made in the sum of £126.7 million.

The administrators had not anticipated the claim and they disputed it. The bank (who had made the claim) appealed, but the appeal would not have been heard before the time stipulated for the CVA to be implemented. If the CVA was not implemented by that date it would lapse.

The CVA contained conditions precedent that had to be met - or waived by the CVA supervisors - before it could take effect. One of those conditions provided that "if there are disputed claims after the Challenge Period has ended, the Administrators have confirmed that this should not preclude the CVA from becoming effective".

The participating creditors argued that the drafting of the CVA required the administrators to state that the new disputed claim precluded the CVA from becoming effective. The claim was of such a magnitude that they would not be getting what they thought they would when they voted for the CVA.

The exiting creditors on the other hand argued that the CVA had been clear there was always a risk of fresh claims being made before the bar on any new claims came into effect. The commercial bargain encapsulated by the CVA had not changed.

The administrators did think that the CVA was still capable of being implemented, however they adopted a neutral stance and sought directions from the court in how clause 3.1(e) should be interpreted and how they should exercise their discretion under it.

The High Court held that clause 3.1(e) could not be interpreted to mean that the administrators had the right to terminate the CVA because the original commercial bargain was no longer possible. This interpretation would give the better commercially sensible result and would save the CVA and preserve its other advantages. Furthermore the court did not have the power to order that the CVA should not come into effect on the grounds of fairness.

The participating creditors appealed.

Court of Appeal decision

The Court of Appeal was very critical of the High Court decision, it went as far as stating that no reasonable person would have understood clause 3.1(e) to mean what the High Court had held that it did.

The Court of Appeal did have some concerns about the alternative interpretation put forward by the participating creditors. However, despite those concerns they held that as drafted the reasonable person would have little doubt its intention was to give the administrators discretion not to implement the CVA if disputed claims had materially changed the commercial landscape.

That interpretation also made commercial common sense - the gap between the date of approval and the date from when any further claims would be barred allowed time for new claims to be made that would dilute CVA recoveries. The value of the disputed claims was so materially different it affected the premise on which the creditors had voted for the CVA. If the claim was allowed in full and the CVA went ahead as drafted the effective recovery of the participating creditors would be drastically reduced. The fairest position, and therefore the judgment made, was that the administrators should be directed to confirm that the CVA was precluded from becoming effective.

Comment

The CVA was silent on what should happen in the event a claim was made after it had been approved but before it was implemented. The Court of Appeal used the normal principles of contractual interpretation to decide what would be the fairest outcome. Practitioners should ensure any CVA is clearly drafted and reflects what the parties have agreed. To avoid any uncertainty the CVA should state what impact the submission of a new claim should have in the period after approval until the bar on new claims is in force.

Acting in the best interests of creditors - a subjective or objective test

The Chancery Court has confirmed a director of a company had not breached his fiduciary duties to the company where he honestly believed he was acting in the best interests of the company's creditors.

In (1) Francis Wessley (2) Peter Hughes-Holland (Joint Liquidators of Laishley Ltd, in Liquidation) v Richard White (2018) the liquidators applied for equitable compensation in respect of alleged breaches of fiduciuary duty by the managing director (MD) of the company (C).

C ceased trading during the week of May 2010, went into administration on 9 June 2010 and then into creditors voluntary liquidation on 13 May 2011. At the time it ceased trading C was engaged as a building contractor and was performing a number of building contracts.

In relation to two of those contracts MD executed a deed of release, under which the employer and C were released from future performance and under which the employer was released from liability in respect of accrued but unpaid payment obligations. The liquidators alleged that MD's insistence that C enter into these deeds was a breach of his duties owed to C. The breach caused C to suffer losses, firstly as a result of losing the contract and secondly losing the right to any stage payments or retentions to which C had by then become entitled.

Decision

The Chancery Court found that in entering into the two deeds of release MD had not acted in breach of duty.

MD gave evidence that he had received advice from insolvency practitioners. They had advised MD about the possibility of a pre-pack sale of the company's business and also about novation of C's contracts. They explained that novation was a way of avoiding termination of C's contracts and bringing in a new company to take over their performance.

MD thought this would be the best result in all the circumstances. However, he did not really understand the process of novation. He did not appreciate that any novation had to take place before deeds of release were executed. Once the deeds of release had been executed there were no longer any contracts to novate.

The court held that the test to establish whether a director had acted in the best interests of the company - or the creditors of the company - is an objective test where there is no evidence of actual consideration of the best interests of the creditors, or where a material interest has been overlooked. In circumstances where there is evidence of actual consideration of the best interests of the creditors the test to be applied was a subjective one.

The court accepted the evidence given by MD that he had considered the best interests of the creditors of C. He genuinely thought that novating the contracts would be best for everyone and he did not realise that deeds of release should not be executed first. His conduct must be judged at the time he took the actions he did. He might have acted naively and he may have been mistaken but judged subjectively he had not acted in breach of his duties.

Comment

This decision stresses that the interests of creditors are paramount when a company is in an insolvent position. However, if the director can show that he acted that way because he genuinely thought that was in the company's best interests he will not be in breach of duty if the course of action chosen is not successful.

That is in keeping with the statutory discretion afforded to the Court under section 1157 of the Companies Act 2006, to excuse or relieve an officer of the company for negligence, default, breach of duty or breach of trust where the officer acted honestly and reasonably, having regard to all the circumstances of the case. Such cases turn on their facts and for larger companies directors should obtain not just the views of an insolvency practitioner but also legal advice to ensure that they are acting reasonably in all the circumstances before a decision is made.

Read the original article on GowlingWLG.com

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions