MR JUSTICE SNOWDEN :
INTRODUCTION
- The applicants are the joint liquidators (the "Liquidators") of Longmeade Limited (in liquidation) ("Longmeade"). They seek directions pursuant to s.168(3) of the Insolvency Act 1986 (the "IA 1986") in relation to a potential claim which they have identified that Longmeade could bring in negligence against the Secretary of State for Business Innovation and Skills ("BIS") for about US$26 million ("the Claim").
- The Liquidators have been advised by counsel that the Claim has a good prospect of success and have arranged for a litigation funder to finance the pursuit of the Claim on terms that mean there will be no cost and no financial risk to the insolvent estate in doing so. If successful, even allowing for the share of recoveries payable to the funder, the Claim would double the likely return to creditors in the liquidation. The Liquidators therefore believe that the Claim should be pursued, and under the new IA 1986 regime in force since 26 May 2015 they do not need the sanction of the liquidation committee or the court to bring such a claim.
- The application for directions has been made because in spite of the ability to pursue the Claim without risk and the significant financial benefits that the Claim might bring for Longmeade's insolvent estate, over 99% by value of Longmeade's creditors have indicated, for a variety of reasons, that they are opposed to the Claim being pursued.
- The Liquidators therefore seek directions as to whether they should convene a meeting of creditors pursuant to section 168(2) IA 1986, or whether they should cause Longmeade to pursue the Claim.
- None of the creditors of Longmeade to which I shall refer later in this judgment are parties to the application, but the two largest creditor groups (HMRC and Lehman Brothers Holdings Inc ("LBHI") and its affiliates) were provided in advance with copies of the application and evidence. A solicitor for LBHI was also present as an observer during the hearing.
BACKGROUND
- Longmeade was a company in the UK Lehman Brothers group. It went into compulsory liquidation in England on 24 November 2010, whereupon the Official Receiver, based at the Insolvency Service's Bloomsbury office in London, was appointed liquidator pursuant to section 136(2) IA 1986.
- Prior to the liquidation of Longmeade, in October 2008 a US corporation called Lehman Commercial Paper Inc ("Commercial Paper") had entered proceedings under Chapter 11 of the United States Bankruptcy Code. Commercial Paper was a member of the US group headed by LBHI and it was Longmeade's principal debtor.
- On 31 August 2011, various US Lehman Brothers entities including LBHI and Commercial Paper entered into a plan in the US called "The Modified Third Amended Joint Chapter 11 Plan of LBHI and its Affiliated Debtors" ("the Plan"), which was confirmed by the United States Bankruptcy Court for the Southern District of New York. The Plan is being administered by LBHI, and a New York entity known as Epiq Bankruptcy Solutions LLC ("Epiq") acts as LBHI's agent for these purposes. In the UK, LBHI and its controlled affiliates receive financial advice and assistance from Alvarez & Marsal Europe LLP ("A&M").
- Under the Plan, Longmeade was admitted as a creditor of Commercial Paper in the sum of US$130,404,439.21. By an email dated 6 December 2011 to Mr. Abdullah Said, who was an examiner employed by the Insolvency Service, a Mr. John Keen of A&M confirmed that Longmeade's claim against Commercial Paper had been provided for in the Plan. The Insolvency Service is an executive agency of BIS, and Mr. Said had been appointed by BIS to assist the Official Receiver in the carrying out of his functions as liquidator of Longmeade pursuant to section 401(4) IA 1986. By an email later the same day, Mr. Said acknowledged Mr. Keen's email and commented that the Official Receiver might cause an independent liquidator to be appointed to Longmeade, depending on the prospects of making a realisation under the Plan.
- Some time later, on 14 March 2012, Mr. Keen wrote a further email to Mr. Said which stated,
"In order for Longmeade Limited to receive distributions on its claim, it has to provide a tax form(s) and sign what's called an OFAC certification. I understand we have sent these to you but received no response.
….
Please can you get these forms in as soon as possible."
The tax forms were for the purposes of US tax, and the OFAC certification was required by the Office of Foreign Assets Control of the US Department of the Treasury. Under the terms of the Plan, such US tax forms and OFAC certifications (the "Tax and OFAC forms") were required to be filed within a designated "Response Period" in order for creditors to be entitled to participate in distributions. Mr. Keen's email to Mr. Said included details as to how the Tax and OFAC forms could be completed and filed online
- The Official Receiver did not, however, file the Tax and OFAC forms on behalf of Longmeade during the relevant Response Period. Distributions to creditors under the Plan were then made in April and October 2012, but Longmeade did not receive any such distributions and irretrievably lost its entitlement to the same under the terms of the Plan. If the Tax and OFAC forms had been filed on time, Longmeade would have received a total of about US$26 million in the two distributions made in 2012.
- The Liquidators were eventually appointed to replace the Official Receiver on 13 March 2013. On discovering further notices which had been received from Epiq requiring submission of Tax and OFAC forms for distributions scheduled for 2013, the Liquidators promptly took steps to file the necessary forms. That having been done, Longmeade participated in subsequent distributions under the Plan, receiving payments of about US$35 million.
LONGMEADE'S PROPOSED CLAIM
- The Liquidators have investigated whether or not a claim is available against anyone in respect of the losses to Longmeade arising from the failure to file the Tax and OFAC forms in 2012. Attention has focussed on the potential liability of BIS, which was the appointor and employer of the Official Receiver (see sections 399(2) and 400(1) IA 1986) and the appointor and employer of Mr. Said (see section 401(4) IA 1986).
- The Liquidators have obtained advice from Counsel who concluded that claims with at least a 60% prospect of success lie against BIS either on the basis of vicarious liability for the negligence of the Official Receiver and/or Mr. Said, or on the basis of a direct duty of care by analogy to the duty of care owed to registered companies by Companies House (also an executive agency of BIS). Counsel considered cases dealing with the extent of the immunity from suit of the Official Receiver (such as Burr v Smith [1909] 2 KB 306, Re John Tweddle & Co. Ltd [1910] 2 KB 698, Mond v Hyde [1999] QB 1097, and R (Howard) v Official Receiver [2013] QB 930) as well as the recent decision of Edis J in relation to Companies House: see Sebry v Companies House [2015] 1 BCLC 670.
- As a result of discussions with the creditors (to which I shall return below), the Liquidators have also sought to make it as attractive as possible for Longmeade to bring the Claim against BIS.
- First, it has been accepted that no claim should be pursued against Mr. Said personally: it was thought to be unnecessary and oppressive to do so.
- Secondly, the Liquidators approached a litigation funder, Manolete Partners ("Manolete"), and have obtained a firm offer to provide 100 per cent funding for the Claim, together with a deposit of £1 million to provide cover against any adverse costs orders, in return for a substantial share of any recoveries. Subject only to Manolete meeting its obligations, and any adverse costs not exceeding £1 million, Manolete's offer is designed to eliminate all financial risk to Longmeade's estate in pursuing the proceedings.
- Thirdly, to deal with a further concern raised by one of the creditors, Manolete's offer also includes an indemnity in relation to the additional management costs of keeping the Longmeade liquidation open to pursue the Claim.
- In short, the position has been reached that the litigation could be pursued at no financial cost or risk to Longmeade, albeit that if successful, Longmeade would be required to pay Manolete a significant share of the recoveries.
- During discussions with creditors, the Liquidators produced and up-dated a schedule showing that the projected future dividend in the liquidation if the Claim was not pursued would be 9.4 pence in the £. This would be the same in the event that the Claim was pursued with funding provided by Manolete but was ultimately unsuccessful. If, on the other hand, the Claim was pursued with funding from Manolete and was successful in recovering US$26 million, then after allowing for Manolete's share, the projected dividend to creditors of Longmeade would more than double to 20.3 pence in the £. If the Claim was pursued without funding from Manolete, the estimated dividend would increase further to 27.4 pence in the £, if the claim was successful but would fall to 7.1 pence in the £ if the Claim failed.
- On this basis, the Liquidators formed the firm view that on any straightforward analysis of the commercial risks and benefits, the appropriate course for them to take in the interests of Longmeade and its body of creditors as a whole would be to accept Manolete's offer of funding and cause Longmeade to pursue the Claim in negligence against BIS.
- Although, for reasons that I shall explain below, the Liquidators do not now need sanction to cause Longmeade to commence the Claim against BIS, at the time that the Liquidators first considered the matter in 2014, they required sanction from the court to bring the Claim. Accordingly, the Liquidators gave the creditors of Longmeade a number of briefings, held a number of meetings with creditors, and engaged in correspondence to ascertain the views of creditors as to whether the Claim should be pursued.
THE VIEWS OF CREDITORS
- There are nine creditors of Longmeade whose debts total some £93.57 million, made up as follows:
| |
£ |
% |
| HMRC |
46.12 m |
49.29 |
| Property Asset Management Inc ("PAMI") |
31.16 m |
33.31 |
| LBHI |
11.73 m |
12.54 |
| Eldon Street Holdings Limited ("Eldon") |
3.79 m |
4.05 |
| Mable Commercial Funding Limited ("Mable") |
345,128 |
0.37 |
| Lehman Brothers Bankhaus AG("Bankhaus") |
220,592 |
0.24 |
| Lehman Brothers Europe Limited ("LBEL") |
150,529 |
0.16 |
| Lehman Brothers Holdings plc("LBHplc") |
30,000 |
0.03 |
| Lehman Brothers Limited ("LBL") |
11,313 |
0.01 |
- Of these creditors, LBHI and PAMI are both companies in the same US group being advised by A&M. Eldon, LBHplc and LBL are all companies in the UK Lehman Brothers group and are in insolvency proceedings under the control of insolvency practitioners from PriceWaterhouseCoopers. The position of each of the creditors is as follows.
- HMRC HMRC, which is the largest creditor, originally expressed an intention to support proceedings against BIS (but not Mr. Said personally). However, it then changed its stance, indicating in an email of 28 October 2014 that the litigation was,
"…too politically sensitive to run with no independent creditor of standing supporting it".
- HMRC's fullest and formal expression of its position was contained in a letter dated 17 September 2015. That letter stated:
"…While HMRC would not be a party to this litigation, and our support is not needed for it to be taken forward, you have asked for our view, as a creditor, on the proposed funding arrangement with a third party.
HMRC would not want to support litigation against another Government department, but should it proceed, HMRC's strong preference is that the action be funded out of Longmeade Limited's own funds rather than through the funding arrangement with the third party…Since HMRC is the largest creditor in Longmeade Limited, entitled to 49.29% of the company's assets, there would be a large reduction in the sum recovered for the public purse as a consequence of successful action against a Government Department."
In a further letter of 23 October 2015, HMRC explained that:
"As we have previously stated we would prefer that this litigation did not go ahead."
- The opposition of HMRC to the litigation being pursued is, of course, entirely rational if regard is had to HMRC's particular interest as a Government department. Viewed from the perspective of the public purse, it makes no sense to litigate to force BIS to pay 100% of the damages to Longmeade, but for HMRC only to recover an enhanced distribution of 49.29% of the net balance of those damages (after deduction of irrecoverable costs or Manolete's share of recoveries). But such considerations have nothing to do with HMRC's position as a creditor of Longmeade per se or the merits of the Claim against BIS.
- If anything, HMRC's observation that if the litigation is to proceed, the costs should be borne by Longmeade rather than funded by Manolete, suggests that HMRC think that the prospects for the Claim are good and/or that the costs of the litigation would not be too great, because they would prefer to risk a diminution in the current assets of the estate rather than take no risk but have to share the proceeds of the Claim with the funder.
- The LBHI Parties The position of LBHI and its controlled affiliates (including PAMI) has been one of unremitting opposition to the litigation. From the start, their lawyers, Weil Gotshal, expressed substantial doubts about the merits of the litigation, concern over the costs of pursuing the litigation, and on one occasion threatened that if the Liquidators were to pursue the litigation, their clients would "have to consider what remedies are available to them".
- As I have indicated, however, the Liquidators' advice as to the merits of proceedings against BIS is positive, and LBHI concerns over funding and the costs to Longmeade have now been addressed by Manolete's enhanced offer.
- Nonetheless, LBHI and A&M have maintained their steadfast opposition, offering further reasons why the claim should not be pursued. In a letter of 8 July 2015 Weil Gotshal indicated that their clients,
"are in the process of trying to close their various insolvency proceedings, but the proposed litigation would inevitably extend the liquidation of [Longmeade] by several years".
That does not seem to me to be a coherent reason for opposing the litigation. If LBHI and its affiliates are seeking to close their insolvency proceedings, they could easily crystallise the position by causing the relevant companies to sell their claims in the Longmeade liquidation to a third party for a cash sum.
- At a meeting on 30 September 2015, the same Mr. Keen who had been involved in communications with Mr. Said in 2012 was in attendance for A&M, together with a representative from LBHI and a lawyer from Weil Gotshal. They gave a further reason for their opposition to the Claim, which was essentially that they would be perceived as an insolvent US bank suing a UK Government department and that they were concerned about the risk of bad publicity.
- I do understand that the consequence of the alleged negligence of the Official Receiver was that US$26 million was retained and not paid out by LBHI and its associated companies under the Plan. It might therefore appear that if the Claim was to succeed, the creditors of LBHI and its associated companies in the US would indirectly stand to benefit both from a redistribution of the original US$26 million and a further distribution of another significant amount from Longmeade which had ultimately been paid for by the UK Government.
- That said, it is far from obvious to me what further reputational damage could be inflicted upon those companies which were part of the US Lehman Brothers group that collapsed into insolvency procedures over 7 years ago, have not traded since and will not trade again. Nor is it apparent to me why reputational damage could attach to the creditors of those companies simply because they would ultimately benefit from any recoveries. This reasoning seems to me to be entirely dependent upon the particular position and sensitivities of LBHI and its associated companies, and not to have anything to do with their rights and interests as creditors of Longmeade in their capacity as such.
- On 26 October 2015, Weil Gotshal wrote again to the Liquidators, supporting the position of HMRC and reiterating opposition to the pursuit of litigation. Weil Gotshal suggested that if (contrary to their primary position) the court directed that the Liquidators should bring the Claim, then,
"…LBHI objects to [Longmeade] using Manolete to fund the litigation and the ongoing costs of keeping the estate open. If the litigation is to be pursued at all, it should be funded from the estate so that creditors can share in all of the fruits of the litigation (if any)."
I would make the same observations in relation to that point as I made in relation to HMRC in paragraph 28 above.
- Weil Gotshal's letter also indicated that if there were concerns over the prejudice to other creditors if the Claim were not pursued, LBHI would buy out the debts of the smaller creditors who supported the litigation. LBHI followed through on that idea, because shortly before the hearing of the application, the Liquidators were notified that LBHI had taken an assignment of the debts of LBEL and Mable, two creditors which had earlier indicated their support for the litigation. LBHI has not, however, acquired the claims of, or agreed to compensate the other minority creditors who are not opposed to the Claim and who would potentially lose out if the Claim were not pursued.
- Eldon LBHI is the largest (indirect) beneficiary of the claims in Eldon's insolvency. At an early stage in discussions with the Liquidators in October 2014, one of the joint administrators from PwC indicated that she would vote on behalf of Eldon not to pursue the Claim. No reasons were given for that position, and nor has it been explored further in correspondence.
- LBHplc LBHplc is under the control of the same office-holders from PwC as Eldon. However, for a considerable time the attitude of LBHplc to the Claim was neutral, and it abstained from voting at meetings. That was still the position at the time of the hearing before me. Subsequently, however, I was sent a copy of a letter on behalf of the joint administrators of LBHplc. This letter is rather ambiguous because it refers only to a claim being brought against Mr. Said rather than against BIS, and it indicates that the administrators of LBHplc would now vote against such a claim being brought. The reason given was as follows:-
"The Administrators are concerned that, whilst the costs to the Longmeade estate are being met by Manolete Partners plc, any marginal benefit to LBHplc arising from a successful claim will be likely extinguished by the costs incurred in engaging with the Liquidators on this matter, which is far from clear cut in terms of prospects of success and is likely to be a drawn out process either way."
- The context for this comment is that LBHplc's claim in the liquidation is only £30,000. Accordingly, the projected benefits of a successful claim against BIS which would increase distributions by about 11p in the £ would result in a maximum net gain for LBHplc of only about £3,300. That said, it is not easy to see what engagement LBHplc might be required to have if Longmeade were to pursue the Claim. As to the suggestion that the Claim would be "a long drawn out process", I would also observe that whilst there would undoubtedly be opposition from BIS to the idea that it or the Official Receiver owed any duty of care, or that it was vicariously liable for the Official Receiver, these are fundamentally legal arguments. As I understand matters, the essential facts giving rise to the Claim would not seem to be complicated or capable of much dispute.
- Bankhaus Bankhaus was a German company in the wider Lehman Brothers group. It is in insolvency proceedings in Germany, under the control of partners in CMS Hasche Sigle. In an email of 31 July 2014 from Bankhaus to the Liquidators, a partner in CMS stated that Bankhaus "does not have an objection to" the pursuit of the Claim. On the eve of the hearing, and prompted by an email from LBHI which purported to explain the position of the other creditors, the partner sent an email to the Liquidators as follows:
"We would like to clarify that [Bankhaus] had not meant to affirmatively consent to litigation but rather to express that it has no objections to the approach suggested by the Liquidators. As a result, if it helps that [Bankhaus] takes the position as an abstention – likewise [LBHplc] – we should be comfortable clarifying our initial vote/statement. Such clarification could be made on the basis that now essentially all creditors are expressly against litigation, so developments have occurred in the meantime."
I do not find that email easy to understand, and it is not clear that the partner at CMS had understood the position of LBHplc accurately.
- As matters stand, therefore, all but two of the creditors, holding a total of 99.73% of the claims in the liquidation of Longmeade, are opposed to the Claim being brought by Longmeade. That majority is, however, made up of HMRC and companies in LBHI's group, together with Eldon, in which LBHI is interested and which has given no reasons for its opposition. The views of the two remaining creditors are unclear: but it seems that LBHplc may be opposed to the Claim being brought, and Bankhaus may be willing to fall into line with the others.
THE LAW
- Significant changes have recently been made to a liquidator's power to bring proceedings in the name of a company in compulsory liquidation by amendments to the IA 1986 introduced by the Small Business Enterprise and Employment Act 2015 ("SBEE 2015"). Those changes took effect on 26 May 2015 and should be considered against the background of the old law and authorities.
The old law
- Before 26 May 2015, the relevant powers of a liquidator in a compulsory winding up were set out in s.167 IA 1986 as follows:
"167 Winding up by the court
(1) Where a company is being wound up by the court, the liquidator may –
(a) with the sanction of the court or the liquidation committee, exercise any of the powers specified in Parts I and II of Schedule 4 to this Act…
…
(3) The exercise by the liquidator in a winding up by the court of the powers conferred by this section is subject to the control of the court, and any creditor or contributory may apply to the court with respect to any exercise or proposed exercise of any of those powers."
- So far as relevant to the Longmeade's case, prior to 26 May 2015 Schedule 4 to the IA 1986 ("Schedule 4") provided as follows:
"PART II"
POWERS EXERCISABLE WITHOUT SANCTION IN VOLUNTARY WINDING UP, WITH SANCTION IN WINDING UP BY THE COURT
4 Power to bring or defend any action or other legal proceeding in the name and on behalf of the company."
- There is no liquidation committee in the Longmeade liquidation, and accordingly, prior to 26 May 2015, sanction of the court would have been required for the Liquidators to cause Longmeade to bring the proposed action against BIS.
- In addition, section 168(2) IA 1986 provided that a liquidator in a compulsory winding-up, "may summon general meetings of the creditors or contributories for the purpose of ascertaining their wishes"; and section 168(5) IA 1986 provided that if any person was aggrieved by an act or decision of the liquidator, that person might apply to the court, which could confirm, reverse or modify the act or decision complained of and make such order in the case as it thought just.
- The leading authority in relation to the approach of the court to granting sanction for the exercise of powers under the old regime was Re Greenhaven Motors Ltd (in liquidation) [1999] 1 BCLC 635. In Greenhaven Motors, Chadwick LJ held, at pages 642h-643c:
"The decision whether or not to sanction the exercise of a power which falls within Pt I or Pt II of Schedule 4 to the Act is a decision for the court or for the liquidation committee. It is not a decision which the liquidator can take … It is because the decision whether or not to sanction the exercise of the power is a decision which is not entrusted to the liquidator that it is wrong in principle for the court to approach its task on the basis that the liquidator's wish to exercise the power should prevail unless it is satisfied that the liquidator is not acting bona fide or that he is acting a way in which no reasonable liquidator should act."
- That is not, however, to say that the views of the liquidator would be irrelevant, because Chadwick LJ continued, at page 643a-c,
"In my view, the correct approach in cases under s 167(1)(a) of the Act was identified by Lightman J in Re Edennote Ltd (No 2) [1997] 2 BCLC 89 at 92. He said:
'Where a liquidator seeks the sanction of the court and takes the view that a compromise is in the best interests of the creditors, in any ordinary case, where (as in this case) there is no suggestion of lack of good faith by the liquidator or that he is partisan the court will attach considerable weight to the liquidator's views unless the evidence reveals substantial reasons why it should not do so, or that for some reason or other his view is flawed.'"
- Chadwick LJ also considered how the court might take into account the interests of creditors (or contributories) who would be affected by the decision. Having observed that the court might have regard to the wishes of creditors or contributories if proved by sufficient evidence, or might summon meetings of creditors or contributories for the purpose of ascertaining their wishes (see section 195 IA 1986), Chadwick LJ stated, at page 643g-h,
"…the court will give weight to the wishes of creditors and contributories whose interests it has to consider, for the reason that creditors and contributories, if uninfluenced by extraneous considerations, are likely to be good judges of where their own best interests lie. For the same reason, the court will give weight to the views of the liquidators, who may, and normally will, be in the best position to take an informed and objective view. But, as I said, at the end of the day it is for the court to decide [whether or not to give its sanction]."
- In Greenhaven Motors, Chadwick LJ distinguished cases where sanction was required from cases where no sanction was required. In the latter type of case, the decision to be taken was entrusted to the liquidators' commercial judgment as to what was in the best interests of the insolvent estate. Authority in the area is sparse, but from the permissive words of section 168(2) IA 1986, it would seem that the liquidators in such a case would not be obliged to hold a meeting to ascertain the wishes of creditors before making their decision.
- Moreover, it would seem that determining the wishes of creditors in an insolvency is often not simply a matter of counting numbers or debts. In the context of support or opposition to a winding-up petition, for example, the court will expect creditors to put forward their reasons: see Re Vuma Ltd [1960] 1 WLR 1283, referred to by Dillon LJ in Re BCCI (No.3) [1993] BCLC 1490 at 1502. Further, although the reasoned views of the majority of creditors as to what is in their own best interests would ordinarily command great weight, a liquidator is not obliged to follow such views if there are "special circumstances" that dictate otherwise (see Re BCCI (No.3) [1993] BCLC 1490 at 1502-1503), or if the majority are "influenced by extraneous considerations" (see Greenhaven Motors at page 643g-h).
- The principle underlying these observations is clear. Liquidation is a class remedy to be conducted in the best interests of the general body of creditors as a whole. If creditors are not promoting a view based upon their capacity as such, but are doing so as the result of extraneous factors which are not shared by, or are even contrary to the interests of the remainder of the class, then such views should be discounted or not given effect: see, e.g., in the context of a creditor's winding-up petition, Re a Company [1983] BCLC 492, referred to in Ebbvale v Hosking [2013] 2 BCLC 204 (PC) at paragraph 28.
- The principles that I have outlined above presuppose a difference of opinion between the majority and minority of the members of the class. However, if all the persons having an interest in the insolvent company are fully informed and of the same view, then it seems to me that the liquidator would ordinarily be obliged to give effect to that view. That follows from the fact that liquidation is a statutory scheme under which the property of the company can is to be realised and distributed for the benefit of those entitled under the IA 1986: see Ayerst v C&K (Construction) Limited [1976] AC 167. The persons interested under the statutory scheme will be the unsecured creditors of the company, and, if there is a possibility of a surplus, the contributories. There is a clear analogy with the principle under which all of the beneficiaries of a trust can, if sui juris and together entitled to the whole beneficial interest, agree to put an end to the trust and direct the trustees to hand over the trust property (Saunders v Vautier (1841) 4 Beav. 115, affd, Cr & Ph 240); or all of the members of a solvent company bind the company by their unanimous agreement in a matter which is intra vires and lawful (Re Duomatic Limited [1969] 2 Ch 365 at 373).
- The latitude given to a liquidator to exercise commercial judgment without sanction under the old law was also reflected in the cases where the court was being asked to exercise control over the liquidator, either under section 167(3) or on an application by a person aggrieved under section 168(5) IA 1986. So, in Greenhaven Motors, Chadwick LJ said, at pages 643i-644a,
"Nothing that I have said is intended to cast doubt on the correctness of the approach in Leon v York-o-Matic … in cases under s 167(3) of the Act. In cases of that nature the court is asked to control the exercise of a power for which the liquidator does not require sanction or, exceptionally, for which he has obtained sanction from the liquidation committee. The liquidator has taken a decision which under the Act he is entitled to take. It is right that the court should not interfere in such a case unless the liquidator is acting mala fide or his decision is one which no reasonable liquidator could take."
- That approach was also confirmed in Mitchell v Buckingham International plc [1998] 2 BCLC 369, where Robert Walker LJ commented, at page 391f,
"When liquidators are exercising administrative powers to realise assets, the court will be very slow to substitute its judgment for the liquidators' on what is essentially a businessman's decision: see Re Edennote Ltd, Tottenham Hotspur plc v Ryman [1996] 2 BCLC 389 at 394."
The new law
- The amendments to the IA 1986 introduced by SBEE 2015 have removed the need for a liquidator to obtain sanction before causing the company to commence or defend legal proceedings.
- Since 26 May 2015, s.167 IA 1986 has provided as follows:
"167 Winding up by the court
(1) Where a company is being wound up by the court, the liquidator may exercise any of the powers specified in Parts 1 to 3 of Schedule 4."
And the relevant part of Schedule 4 now provides simply:
"PART II
4 Power to bring or defend any action or other legal proceeding in the name and on behalf of the company.
- The Explanatory Notes to the relevant provisions of the SBEE 2015 explained the thinking behind the amendment as follows:
"716. The amendment gives liquidators the ability to exercise any of the powers contained in Schedule 4 without the need to obtain sanction (approval) of either the court or a creditors' committee (or where there is none, the Secretary of State or a meeting of creditors).
717. Removing the requirement to obtain sanction brings the provisions for liquidations into line with administration, in that administrators do not need sanction for any of the acts, which if undertaken by a liquidator would require sanction."
- The Explanatory Notes to the Bill had included a further paragraph that was omitted from the Explanatory Notes to the 2015 Act itself,
"As regulated professionals, insolvency practitioners acting as liquidators are expected to act in the interests of creditors and should not undertake actions that are likely to have a negative financial impact on the estate. Such conduct may give rise to disciplinary concerns which may be addressed through the regulatory system. The requirement therefore imposes a burden which the Government considers adds no practical value to the conduct of a liquidation."
- There is no reason to suppose that the legislative removal of the need for a liquidator to obtain sanction was intended to signal a change to the established approach of the courts to the exercise of powers by liquidators that did not require sanction. I have already discussed that approach in paragraphs 50-55 above.
- Moreover, the reference in the Explanatory Notes to SBEE 2015 to bringing liquidators into line with administrators invites a comparison with the authorities on the approach of the courts to the exercise of powers by an administrator. In that regard, whilst the court has on occasions been prepared to sanction the exercise by administrators of powers in connection with complex compromises involving difficult legal issues, the court has generally not been willing to become involved with, or to interfere in, commercial decision-making by administrators.
- So, for example, in Re T&D Industries plc [2000] 1 WLR 646 at 657 Neuberger J commented that,
" … a person appointed to act as an administrator may be called upon to make important and urgent decisions. He has a responsible and potentially demanding role. Commercial and administrative decisions are for him, and the court is not there to act as a sort of bomb shelter for him."
- Likewise, in re MF Global UK Limited [2014] Bus LR 1156 at paragraph 41, whilst acknowledging the possibility that administrators might be given directions by the court in complex matters involving difficult legal questions where there are particular reasons to do so, David Richards J also referred to T&D Industries and observed,
"In commercial matters, administrators are generally expected to exercise their own judgment rather than to rely on the approval or endorsement of the court to their proposed course of action."
- That reluctance of the court to give directions to an administrator in commercial matters is reflected in the general deference shown by the court to such decisions by an administrator. So, in Re CE King Limited [2000] 2 BCLC 297 at 303, Neuberger J commented that,
" … at least in principle and in general, it is not for the court to interfere with such commercial decisions: those are to be left to the administrator….[but] if the administrators are proposing to take a course which is based on a wrong appreciation of the law and/or is conspicuously unfair to a particular creditor or contractor of the company, then the court can, and in an appropriate case, should be prepared to interfere."
- That approach was also adopted by Norris J when faced with a challenge to an administrator's conduct under paragraph 74(1) of Schedule B1 to the 1986 Act on the basis that he had acted so as unfairly to harm the interests of a creditor: see BLV Realty Organisation v Batten [2010] BPIR 277 at paragraph 22.
- I consider that the established legal principles outlined above can and should be applied to the modified regime concerning the commencement of proceedings by a company in compulsory liquidation post-26 May 2015. I would therefore summarise the position as follows:
i) a decision by liquidators appointed by the court as to whether to commence proceedings in the name of the company is essentially a commercial decision which the liquidators are entrusted to take without obtaining sanction from the court or the liquidation committee;
ii) in taking that decision, the liquidators should act in what they believe to be the best interests of the insolvent company and all those who have an interest in its estate;
iii) the liquidators may, but are not obliged to, consult the creditors (or contributories) who have an interest in the estate;
iv) the liquidators should normally give weight to the reasoned views of the majority of such creditors (or contributories), provided that they are uninfluenced by extraneous considerations;
v) if all those who are interested in the insolvent estate are fully informed and are unanimously of the same view, the liquidators should ordinarily give effect to their wishes;
vi) the court should not generally become involved in giving directions to liquidators as to how to make commercial or administrative decisions; and
vii) the court should not generally interfere with a commercial or administrative decision of liquidators after the event, unless it is a decision that was taken in bad faith or was a decision that no reasonable liquidator could have taken.
ANALYSIS
- In the instant case, the first point to make is that I do not think that the Liquidators are obliged to summon a meeting of the creditors of Longmeade under section 168(2) IA 1986. The wishes of most of the creditors have already been expressed through the process that I have described, and for reasons that I have already given, the Liquidators would not be bound by the vote at such a meeting.
- Further, I think that the Liquidators would in any event be entitled to discount the views of the two largest creditor groups, who are plainly influenced by extraneous and individual considerations. The position of HMRC is manifestly driven by concerns for BIS and the overall potential impact of the litigation upon the public purse; and to the extent that it has been explained, the approach taken by or on behalf of LBHI and its affiliates appears to reflect the particular position of those US Lehman Brothers companies.
- What, however, I think that the Liquidators ought to do, is to give Eldon, LBHplc and Bankhaus a last opportunity to clarify and explain their wishes in correspondence: Eldon's position has never been explained, and LBHplc's and Bankhaus' views are unclear. If these creditors clearly indicate that they do not wish the Claim to be brought, so that all of the creditors are agreed, then I do not think that the Liquidators should bring the Claim.
- If, however, any of the creditors remain either in favour of the Claim being brought or are simply neutral, it will be for the Liquidators to take a commercial decision in the interests of the creditors as a whole as to whether to commence the Claim and, if so, how to fund it.
- As regards the decision to commence litigation, although it is not for the Court to take that decision for the Liquidators, the circumstances of this case are highly unusual and I think that some reassurance for the Liquidators is appropriate. In my view, if there remain one or more creditors, even for comparatively small amounts, who would lose the opportunity for a materially increased distribution if the Claim were not to be pursued, then on the basis of counsel's advice and the other material placed before me which demonstrates that the majority of creditors are pursuing their own agendas, I think that a decision by the Liquidators that Longmeade should pursue the Claim at no financial risk with the assistance of funding from Manolete would be within the range of decisions that a reasonable liquidator could properly take.
- As regards funding, the preference of the larger creditors for using Longmeade's own funds if (contrary to their primary view) the Claim is to be pursued, is a majority view to which the Liquidators will doubtless wish to have regard in deciding what to do. As well as the merits, the Liquidators should also consider the adequacy of the funds available in the liquidation, the likely costs (and hence risk of diminution in future dividends) to which Longmeade would be exposed if the Claim were to fail, and the proportion of the damages to be shared with Manolete if the Claim were to be successful.
- What I might usefully add in this respect is that I do not think that the comment in the Explanatory Notes to the SBEE Bill that liquidators,
"…should not undertake actions that are likely to have a negative financial impact on the estate. Such conduct may give rise to disciplinary concerns which may be addressed the regulatory system"
should be read out of context or be taken to indicate that liquidators must always adopt the alternative that has the lowest risk of loss to the insolvent estate. The overriding requirement is for liquidators to exercise their professional judgment in what they believe to be the best interests of creditors. It is obvious that they should not voluntarily do something that is likely (i.e. more probable than not) to result in loss to the estate. But that does not mean that they cannot properly run some risk of loss: otherwise no liquidator could ever embark upon litigation without a 100% costs indemnity from a third party.
ASSIGNMENT OF THE CLAIM
- As a postscript, the Liquidators also raised the question of whether, if they were not to cause Longmeade to bring the Claim itself, they should, as a fall-back position, seek to sell it to a third party (including Manolete itself or some other entity that might be funded by Manolete).
- I apprehend that HMRC would be likely to oppose that course for obvious reasons, but it is less clear from the materials that I have seen whether the other creditors, who do not share the particular extraneous interests of HMRC, would also take the same view. Accordingly if the position that the Liquidators were to arrive at was that the Claim should not to be pursued by Longmeade, I think that the Liquidators should seek to clarify with the creditors whether they are also opposed to the sale of the Claim to a third party.
- In that regard, in the course of submissions, I was informed that Manolete had raised a legal uncertainty as to whether the Claim could lawfully be assigned by the Liquidators. This uncertainty would be likely to have the effect of depressing the price that any third party would be willing to pay for the assignment.
- The issue arises from a dictum of Peter Gibson LJ giving the judgment of the Court of Appeal in Re Oasis Merchandising, Ward v Aitken [1998] Ch 170. The question in that case concerned the validity of the assignment by a liquidator to a litigation funder of the benefit of a wrongful trading claim against the directors of the company under section 214 of the IA 1986. The directors sought to stay the claim on the basis that the liquidator had no power to assign the statutory cause of action, and that the agreement was therefore champertous.
- The Court of Appeal considered the statutory powers of a liquidator under the paragraph 6 of Schedule 4 to the IA 1986 to sell the company's property. The Court of Appeal held, at pages 180G-181F,
"… the provisions relating to company insolvency do not define the property of a company which liquidators can sell (save to the extent, already noted, that "property" is given an extended meaning in section 436). By section 143 the liquidator's functions in a compulsory winding up are to secure that the assets of the company are got in, realised and distributed. He is required to take into his custody or under his control "all the property and things in action" to which the company is or appears to be entitled (section 144(1)), but in addition and quite separately from that duty the liquidator is given certain powers to apply to the court, and if the application is successful there will be an increase in the distributable assets, even though the company as such was never entitled to make that application. The statutory provisions do not expressly state that such after-acquired assets are "the property of the company."
…..
….[we] consider whether a distinction should not be drawn between assets which are the property of the company at the time of the commencement of the liquidation (and the property representing the same), including rights of action which arose and might have been pursued by the company itself prior to the liquidation, and assets which only arise after the liquidation of the company and are recoverable only by the liquidator pursuant to statutory powers conferred on him. The scheme of the Act of 1986 suggests that only the former falls within "the property of the company" which an administrator or administrative receiver or liquidator can sell."
- At page 182F-G, the Court of Appeal summarised the distinction which it drew,
" … between the property of the company at the commencement of the liquidation (and property representing the same) and property which is subsequently acquired by the liquidator through the exercise of rights conferred on him alone by statute and which is to be held on the statutory trust for distribution by the liquidator."
- I am conscious that I have not heard full argument on this point, and certainly cannot express a concluded view. Nonetheless, it may assist the Liquidators and the creditors if I indicate my provisional view that Oasis Merchandising should not be taken to have decided that the Liquidators would be unable to sell the Claim to a third party.
- Oasis Merchandising did not concern a sale of a common law claim such as the Claim in the instant case: it concerned sale of a statutory cause of action vested in the liquidator alone. The essential distinction drawn in Oasis Merchandising was between "the property of the company at the commencement of the liquidation (and property representing the same)" on the one hand, and property arising from the exercise of rights conferred on a liquidator alone by statute. The former was held to constitute property of the company which could be sold by a liquidator; the latter was not.
- In the instant case, the "property" of Longmeade at the commencement of its liquidation undoubtedly included a debt owed to it by Commercial Paper. This subsequently gave rise to a right to claim under the Plan. I can see no reason why that subsequent right to claim under the Plan was not "property representing" the original debt so as also to form part of the property of Longmeade for the purposes of paragraph 6 of Schedule 4 to the IA 1986. I can also see no obvious reason why the right to claim damages from a third party to compensate Longmeade for the loss of such property should not comprise "property representing" the original debt or the right to claim under the Plan for the same purpose.
- It would, moreover, be very odd if such a claim could not be assigned by the Liquidators. In Oasis Merchandising, although deciding that a sale was not possible on the then wording of the IA 1986, the Court of Appeal indicated that as a matter of policy there was much to be said for allowing a liquidator to sell the fruits of a wrongful trading claim under section 214 IA 1986. Some years later, that policy has now been recognised and given effect by the recent changes introduced by SBEE 2015: see the new section 246ZD IA 1986 as introduced by section 118 SBEE 2015 with effect from 1 October 2015. Given that a wide variety of statutory claims are now capable of being sold together with any claims that the company had at the commencement of the liquidation, there is no obvious policy reason why the only type of claim not capable of being assigned by a liquidator should be a claim arising out of loss or destruction of the property of the company after liquidation has commenced.
CONCLUSION
- I invite counsel to consider whether it is possible to encapsulate the views that I have expressed in this judgment in the form of formal directions to the Liquidators. If so, counsel should prepare a suitable draft minute of order.
- At Mr. Curl's request, I certify, pursuant to paragraph 6.1 of the Practice Direction (Citation of Authorities) [2001] 1 WLR 1001, that although attended by one party only, this judgment extends certain pre-26 May 2015 principles to the new regime applicable under the IA 1986 after that date.
