England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
CHANCERY DIVISION
(MR JUSTICE PARK)

		Royal Courts of Justice Strand London, WC2
		14 October 2005

1. LORD JUSTICE LLOYD:  This appeal arises from an order of Mr Justice Park made on 17 May 2005 by which he struck out a winding up petition.  The petition relates to a limited liability partnership and is accordingly brought under the provisions of the Insolvency Act 1986 as applied to limited liability partnerships by the Limited Liability Partnership Regulations 2001, Regulation 5.  Although under the Insolvency Act, there is no suggestion that the partnership is insolvent.  No point turns on the fact that it is a  limited liability partnership rather than a company incorporated under the Companies Act.  A limited liability partnership is a corporate body, and the relevant provisions of the Companies Act and the Insolvency Act have been applied to these new entities with appropriate amendments. 
2. The petition was presented on, I think, 5 April 2005 and relies on the just and equitable ground, specifically on the contention that the object of the limited liability  partnership can no longer be achieved and has failed.  To use the language familiar in company law of the 19th century, it is said that the substratum of the enterprise has been lost. The judge considered that, as matters stood, it would not be possible to show that, and that the petition would not succeed.  In refusing permission to appeal, he said:

"The points of principle involved in my decision are quite evenly balanced, and I can imagine that a different judge could well have come to a different decision.  However, in my judgment an appeal would be wholly disproportionate in the circumstances, and would put the successful applicants to unreasonable and unnecessary expense.  My decision was that a winding up petition on the ground of the substratum of the business has disappeared is premature, because the substratum has not disappeared.  It might disappear in future if (1) present negotiations come to nothing, and (2) a specific performance action is not brought or, if brought, fails.  In those contingencies the petitioners  (respondents before me) can issue a new petition.  An appeal now is unnecessary and inappropriate."

3. The application for permission to appeal came in due course before me on paper, and I granted permission on 14 June.  I had some sympathy for the judge's comments which I have just quoted, but it seemed to me arguable that it was wrong for him to have struck out the petition at that stage.
4. Underlying the litigation is a falling out within the body of the members of the limited liability partnership.  It may be unrealistic or premature to hope that their differences can be resolved without further expensive proceedings, however unfortunate that may be.  Indeed we were told that further proceedings had been started since the judge's order, on the petitioners' part, to establish that they are members of the LLP as they contend and without which they would have, as I understand it, no status to present a petition.  Certainly the issue in the petition seems to be relatively narrow and confined. 
5. The object of the LLP is defined in the partnership agreement which is its constituent document, dated 4 December 2003.  Clause 2.2 is the relevant clause headed "Business of the LLP", which I will read:

"2.2 The LLP is incorporated solely to pursue the Business Purpose and to engage in any activities and  enter into any transactions in furtherance of the Business Purpose and for no other purpose whatsoever.  The business purpose may only be changed or amended by Unanimous Resolution.  In the furtherance of the Business Purpose and subject to any other express limitation set out in this Agreement, the LLP may do any lawful act or thing, and may enter into any agreement, instrument, deed or document whatsoever, as may be approved either by:

2.2.1  a 75% Vote;  or

2.2.2  the joint approval of the Board and Cabvision."

The business purpose which is central to that definition is  defined as follows:

"[It] means the purpose of carrying on a trade with a view to profit by acquiring certain ICT Software and seeking out all commercial opportunities to derive income from such ICT Software, including, but without limitation, advertising and ancillary income."

ICT Software, in turn, is defined as follows:

"[It] means the rights and other technology to be  acquired pursuant to the ICT Software Purchase Agreement."

The next definition is of that agreement [ICT Software Purchase Agreement]:

"[It] means the software exploitation agreement in the agreed form to be made between the LLP and others and Cabvision."

6. The limited flexibility of the LLP in a number of respects is apparent from other clauses, including, of some relevance to these proceedings, Clause 6.5 - Reserved Matters - under which certain actions (the actions set out in Schedule 2) are not, after 1 April 2004, to be undertaken without a unanimous resolution.  In Schedule 2 one of the things one finds at paragraph 8 is the commencement of any litigation or other legal proceedings, other than certain exceptions of no relevance to the present matter. 
7. The ICT Software Purchase Agreement was entered into on 5  December 2003 between the LLP, Cabvision and the other relevant parties.  Ancillary agreements followed, including one with a company called KPM (UK) Ltd for the supply of equipment.  In March 2004 the LLP obtained a loan facility from Lloyds TSB Bank for £67m or so to make payments under the Software Purchase Agreement.  Large sums have been paid under that agreement.  Meanwhile, KPM (UK) are said to have defaulted on its obligations under the supply agreement, and Cabvision has purportedly terminated the ICT Software Agreement.  Whether that is a valid operation is in dispute. There has already been some litigation between Cabvision and the LLP arising from that. 
8. The petitioners, Mr Marsden and Mr Smith, say that the objects of the LLP cannot be met without proceedings brought against Cabvision and, for good measure, against KPM (UK).  Such proceedings, they point out, require unanimous consent.  In the petition they say that such consent was sought, but not obtained, from the membership at meetings held on 6 December 2004 and 28 February 2005.  They say that conversely if the LLP were put into winding up a liquidator could bring proceedings for damages which would generate a surplus for members.  The petitioners were Board members of the LLP and  also they were a special category of member under the Act called "designated members" up to late March 2005.  At that stage they and Mr Feetum were removed from the Board by the appropriate majority vote and replaced by two of the  individual respondents at that stage.  No doubt the petition was, in effect, part of the response to this ouster. 
9. The respondents are the LLP itself and four members who are the current members of the Board. 
10. The evidence before the judge consisted of an affidavit, I think, and a witness statement made by Mr Shuttleworth of Jones Day (who are the solicitors for the respondents to the petition and the applicants before the judge) one dated 18 April and the other 27 April.  There was an affidavit of Mr Marsden in reply. 
11. Mr Shuttleworth says, among other things, that consent ro proceedings had been given, although the position was perhaps not altogether clear, but that litigation had not been commenced because negotiations were under way with Cabvision.  That was corroborated by a letter from the solicitors acting for Cabvision to confirm that negotiations were under way.  The detail of the negotiations was said to be confidential and accordingly nothing was said about it in evidence or otherwise to the judge.  In Mr Shuttleworth's short supplemental statement he said that it might not be necessary to litigate because there may be an agreed resolution of the dispute with Cabvision.  As a fall-back, he said that the consent to litigation had been given.
12. Mr Marsden, in his affidavit in answer, said that as to whether unanimous consent has been or can be obtained, this is by no means clear and initially it does not seem to have been the case when the petition was presented.  He also said that the petitioners have no confidence that the current Board, in their negotiations, are acting in the best interests of the LLP.  He does not say in that witness statement or affidavit that the petitioners do not and will not consent to litigation themselves.  Mr Oliver, on their behalf, says so now to us.  Of course we have to consider the position on the basis of the material before the judge. 
13. The application to strike out the petition is on the basis that the substratum has not gone because negotiations may secure the reinstatement of the agreement or, at any rate, the acquisition and the possibility of exploiting the ICT Software as defined in the agreement, and if negotiation fails, litigation may succeed and can be brought. 
14. The judge acceded to the application on the basis of Mr Shuttleworth's evidence, in particular his evidence which the judge said he had no reason to doubt in any significant respect, that negotiations were under way with Cabvision, supported, as it was, by a letter from Cabvision's solicitors.  The essence of the judge's conclusion can be taken from paragraph 9 (7) of his judgment:

"9 (7) In the circumstances, it appears to me that the petition was premature.  At the risk of repeating myself, a petition brought at a time when there was no prospect of the software purchase agreement returning into operation would in all probability have been well founded.  However, that was not the case when this petition was issued and it is still not the position now.  I do not think that it would be right for the petition to be left in existence in case future developments are such that it will be possible to say at some future time that the substratum of the business has gone.  I believe that the facts which needed to exist, to give a sound basis for the petition, did not exist when it was presented.  I do not believe that they exist today.  In those circumstances, I believe that it is right for the petition to be struck out now.  If future circumstances arise when a petition of this nature would be appropriate, then it is always possible for the petitioners to issue a new petition.  The present petition, however, I believe ought not to be allowed to remain in existence on some sort of 'just in case' basis."

15. Mr Oliver, on behalf of the appellants, submits that this is wrong, that the business purpose cannot be achieved and that it was premature of the judge to decide on the striking out application that it could. 
16. To the contrary, Miss Leahy, for the respondents, says that the test is whether it is impossible or, as Lord Justice Bagallay said in Re German Date Coffee Company (1882) 20 ChD 169, "utterly impossible to carry on the business".  She submits that it may be possible to do so because the acquisition of the software may be reinstated.  The LLP may be in a position to exploit that software as a result either of negotiations or, if necessary, litigation.
17. The issues before us, as they were before the judge, are  first of all, whether Mr Oliver is right as to the narrow construction that he urged as to the scope of the business purpose and, either way, whether on the evidence before the judge he was right to conclude that the petitioners cannot show that it is, in practical terms, impossible to carry on the business.  As a matter of construction, Mr Oliver submits, as he did to the judge, that the business purpose requires that the ICT Software Purchase Agreement as defined (that is, the original agreement) must be in place for the business purpose to be carried on.  He says that his clients will not agree to a variation of that agreement. 
18. The judge decided against him on this point and held that so long as the ICT Software as defined, necessarily by  reference to the agreement, was acquired it matters not that other provisions of the agreement may have been varied.  For such a variation what is needed, according to Clause 2.2, is a 75% vote or the joint approval of the Board of the LLP and Cabvision.  In effect, that means that the Board could authorise such a variation since necessarily Cabvision, as the other party to the negotiation, would have to agree anyway.
19. Mr Oliver submits that in the context of a structure which he says - it is not in dispute - was devised as a tax shelter to take advantage of capital allowances for wealthy  individuals, precision is needed and there is no scope for flexibility of interpretation such as might arise in a different type of commercial context. 
20. I accept that given the constraints of the agreement, such as the requirements for unanimous consent to some things and 75% to others, and the importance of the business purpose at the heart of the agreement and venture, the relevant provisions must be properly and carefully construed.  But even so, I disagree with Mr Oliver's submissions.  The business purpose could have been defined as being "to acquire the ICT software under the ICT Software Agreement" in which case he might have been right.  But I agree with the judge that on the ordinary language of the agreement what is critical is that the exact rights and technology defined in the original agreement are those to be acquired, and that so long as those are acquired it matters not whether there are other variations to the ICT Software Agreement. 
21. Mr Oliver's second point on this aspect is that the judge did not have enough evidence before him to show that the negotiation with Cabvision would, or even might, lead to the LLP acquiring or being able to exploit the ICT software.  The judge knew there were negotiations at an early stage.  He did not know their content because of commercial confidentiality. Is Mr Oliver right to say that without knowing something about the content or the state of those negotiations he could not conclude that they might, at their lowest, enable the LLP to acquire and exploit the ICT software?  It seems to me that the negotiating parties were entirely reasonable in maintaining a cloak of confidentiality over their negotiations, especially at an early stage and just after the change of management of the LLP.  It also seems to me that while, no doubt, there would be amendments to the contractual relationship between the parties, it is by no means an unreasonable inference that the parties would aim to enable the LLP to acquire and exploit the ICT software as originally defined, not least because the Board and the advisers of the LLP would be aware, as would of course Cabvision, that this is indeed critical to the LLP's existence and business. 
22. For both of those reasons, either of which might suffice, I conclude that the judge was entitled to hold that the existence of the negotiations was inconsistent with the petitioners' proposition that the substratum of the LLP had already gone for good. 
23. There was some debate before us as to the possibility of litigation against Cabvision if negotiations failed.  This is a secondary point, if, as the judge held, the negotiations themselves showed that the substratum had not yet gone.  I therefore propose to say almost nothing more than that.  All I will observe is that as matters stood on the evidence before the judge, it was not clear whether unanimous consent would or would not be given for litigation against Cabvision if that became necessary.  It is unnecessary to consider the  facts on that or the terms and effect of the relevant provisions in the agreement. 
24. In the light of Miss Leahy's contentions and the judge's judgment, and despite Mr Oliver's clear and succinct submissions, it seems to me that the judge was right, accepting that on an application such as he heard, as on any striking out application, the applicant has to show that the proceedings have no realistic prospect of success. 
25. I agree with the judge on that matter.  As he said, if it later becomes clear that the negotiations have failed and that litigation either is not or cannot be taken or it, in turn, fails, a fresh petition may, no doubt, follow.  This petition was, as the judge held, premature.
26. SIR CHRISTOPHER STAUGHTON:  I agree.
27. LORD JUSTICE LONGMORE:  I also agree.  Miss Leahy has demonstrated to my satisfaction that this petition could not succeed.  The petitioners have to show that the substratum business has gone or, in the words of Lord Justice Baggallay in the Re German Date Coffee Company (1882) 20 ChD 169 at  188 that there is an impossibility in carrying on the business of the company as at the date of the petition.  It is, in my view, impossible to see how it can be said that at the date of the petition it was then impossible for the business to continue since negotiations could result in Cabvision agreeing to supply the identical software it had agreed to supply in the original agreement, even if perhaps on different terms. 
28. I agree with my Lords, and this appeal will be dismissed.

Order: Appeal dismissed with the costs summarily assessed in the sum of £8,500.