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Cite as: [2005] EWCA Civ 1601, [2006] 3 WLR 427, [2006] Ch 585

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		Neutral Citation Number: [2005] EWCA Civ 1601
		Case No: A2/2005/0100

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE CHANCERY DIVISION
THE HON MR JUSTICE LEWISON
HC04 C03931

Royal Courts of Justice
Strand, London, WC2A 2LL

20th December 2005

B e f o r e :

LORD JUSTICE WARD
LORD JUSTICE JONATHAN PARKER
and
SIR PETER GIBSON
____________________

Between:

	CABVISION LIMITED	Appellant
	- and -
	(1). LEONARD PAUL FEETUM (2). STEPHEN RICHARD MARSDEN (3). SIMON ALAN SMITH	Respondents

____________________

(Transcript of the Handed Down Judgment of
Smith Bernal WordWave Limited
190 Fleet Street, London EC4A 2AG
Tel No: 020 7421 4040 Fax No: 020 7831 8838
Official Shorthand Writers to the Court)

____________________

John McDonnell QC and Mark Watson-Gandy (instructed by Messrs Jens Hills & Co) for the Appellant
Paul Girolami QC and Siward Atkins (instructed by Messrs Salans) for the Respondents
____________________

HTML VERSION OF JUDGMENT
____________________

Lord Justice Jonathan Parker :

INTRODUCTION

This is an appeal by Cabvision Ltd ("CV"), the third defendant in the action, against an order made by Lewison J on 5 January 2005. The respondents to the appeal are the first three claimants in the action, Mr Leonard Feetum, Mr Stephen Marsden and Mr Simon Smith. They are among the five founder members of a limited liability partnership known as Tower Taxi Technology LLP ("the LLP"). The LLP is the fourth defendant in the action.

On or about 3 December 2004 CV purported to appoint the first two defendants in the action, Mr Mark Levy and Mr Jeremy Berman, as administrative receivers of the LLP pursuant to a power in that behalf contained in a Debenture dated 5 April 2004 granted by the LLP to CV ("the Debenture").

In the action, the respondents and the two remaining founder members of the LLP, Mr Sharp and Mr Church (the fourth and fifth claimants in the action), challenge the validity of that appointment. They contend firstly that as at the date when the appointment was purportedly made no 'Insolvency Event' (as defined in the Debenture) had occurred, and accordingly that the power to appoint administrative receivers had not arisen; and secondly that in any event the Insolvency Act 1986 ("the 1986 Act"), as amended by the Enterprise Act 2002 ("the 2002 Act"), prohibits any exercise of the power. CV joins issue on these contentions. It further contends that the respondents do not have the requisite status (locus standi) to bring the action, and that only the LLP can do so.

Mr Sharp and Mr Church have taken no part in this appeal. Mr Sharp provided us with a witness statement on behalf of himself and Mr Church, in which he explained their position and made a number of factual observations. We have read that witness statement, but in the event neither Mr John McDonnell QC (for CV) nor Mr Paul Girolami QC (for the respondents) found it necessary to refer to it in the course of argument. In the circumstances, there is no need for me to consider it further.

Before the judge Mr Levy and Mr Berman adopted a neutral stance as to the validity of their appointment, and they too have taken no part in this appeal.

Hence the dispute on this appeal is between CV on the one hand and the respondents on the other.

The action was commenced on 17 December 2004. Due to the perceived urgency of the matter, application was made to Lindsay J on 23 December 2004 for directions. He directed that the issue as to status (which I shall call "the status issue") and the issue as to whether the 1986 Act, as amended by the 2002 Act, prohibited the exercise of the power to appoint administrative receivers (which I shall call "the 1986 Act issue") be listed to be heard by 6 January 2005 as an application for summary judgment under CPR Part 24. In the event, the application was listed before Lewison J on 5 January 2005. The hearing lasted a full court day. At the conclusion of the hearing the judge adjourned for a few minutes and then delivered judgment. His judgment, delivered under conditions of great pressure and effectively extempore, is, if I may respectfully say so, of a very high quality: higher, certainly, than I could have achieved in similar circumstances. For those who wish to refer to it, it is now reported at [2005] 1 WLR 2576.

In his judgment, the judge resolved both the status issue and the 1986 Act issue in favour of the respondents. Accordingly he granted substantive relief on the claim, declaring by his order that CV's appointment of Mr Levy and Mr Berman as administrative receivers of the LLP was prohibited by the 1986 Act and thus invalid.

The judge refused permission to appeal, but permission was granted by Jacob LJ on the papers on 11 February 2005.

THE FACTS IN SUMMARY

CV is a UK resident company which carries on the business of generating revenue from advertising in taxicabs. It has developed a computer software system known as 'ICT Software' for the display of information, entertainment and advertising on a screen installed in the passenger compartment of the cab. The screen is activated when the passenger enters the cab. The sound volume can be controlled by the passenger, but the visual display on the screen can only be turned off by the cab driver.

By December 2003 the development of the system had reached the stage where CV was seeking third party investors, with a view to the commercial exploitation of the system by generating revenues from the advertising displayed on the screens. The LLP was designed by the claimants (who are tax advisers) as the vehicle for raising the desired investment in the project. The attraction of the investment lay in the opportunity for higher rate taxpayers to claim tax relief in the form of capital allowances in an amount greater than the amount of their investment. This opportunity was created by 'gearing up' the amount of capital invested by individual subscribers to the project by the addition of a bank loan of an amount equal to three times the capital so subscribed. Thus 25 per cent of the total capital available to the project would represent capital subscribed by investors and the remaining 75 per cent would represent bank borrowing. In consequence, for every £25 invested a higher rate taxpayer could expect to obtain tax relief in a sum of £40.

The LLP was incorporated on 21 March 2003 under the Limited Liability Partnerships Act 2000 with the name 'Tower Taxi Technology One LLP'. Its name was subsequently changed to its present name. The claimants (that is to say, the respondents together with Mr Sharp and Mr Church) were its founder members.

Following discussions between the claimants and the management of CV, it was decided that the aim of the project should be to install the system in up to 10,000 cabs. The claimants and CV further concluded that in order to fund the project up to that level the LLP would need to raise £90M, £75M of which would cover the maximum cost of acquiring the necessary licences from CV, and the remaining £15M of which would be required to meet associated costs (including installation costs). This in turn meant that a maximum of £22.5M would need to be raised by way of capital subscribed to the LLP, and a maximum of £67.5M by way of bank loan.

By an Agreement ("the LLP Agreement") dated 4 December 2003 and made between the claimants and the LLP, it was agreed that the LLP would enter into a number of specified agreements ('the Approved Contracts'). These included an agreement with CV for the purchase by the LLP of the necessary licences to exploit the ICT Software ('the ICT Software Agreement'), and an agreement with a bank (in the event, Lloyds TSB Bank plc) for a facility of up to £67.5M ('the Facility Agreement').

The LLP Agreement recited that the LLP would seek to raise capital to finance the project (i.e. up to £22.5M) by the issue of shares in the LLP ('Participating Shares'). It provided (in clause 2.2) that the LLP was incorporated solely to acquire and exploit the ICT Software, and (in clause 2.7) that the Approved Contracts should be entered into and completed as soon as practicable. Clause 6 of the LLP Agreement provided that the claimants (referred to as 'Designated Members') should constitute the first members of the board of the LLP and that the business and affairs of the LLP should be managed and controlled by the board.

The ICT Software Agreement was dated the following day, 5 December 2003. By clause 2.1 of that agreement CV granted to the LLP an exclusive licence to use the ICT Software in up to 10,000 cabs on payment of 'the Price'. 'The Price' was defined as meaning "£75,000,000 … or such other sum as may be calculated after taking into account any reductions in the Price arising pursuant to clause 3 …". Clause 3.1 provided that the Price would be unconditionally due on the date of the agreement and would be paid by 31 March 2004. Clause 3.2 provided a mechanism for reducing the price proportionately in the event that less than the maximum amount of £22.5M should have been subscribed by that date. Clause 3.3 enabled the LLP to pay additional amounts on account of the price (i.e. up to the maximum of £75M) should further capital be subscribed thereafter. The ICT Software Agreement contained no provision for a minimum price. By clause 3.7 CV undertook to procure a bank loan to assist the LLP in paying 'the Price', together with guarantee from another bank as security for the loan.

On the same day, 5 December 2003, the LLP issued an Information Memorandum under the title 'An opportunity to participate in an innovative new business'. The Information Memorandum described in some detail the nature of the project and the expected tax advantages for investors who were higher rate taxpayers. It also introduced the requirement of a minimum level of subscriptions of £6.25M, failing which the project (and hence the purchase of the ICT Software from CV) would not proceed. Under the heading 'Bank Funding' the Information Memorandum stated that the LLP had received an offer in principle from a major UK clearing bank (i.e. Lloyds) to lend to the LLP, "(although for tax purposes the loan would be deemed to have been made to the individual members of the LLP)", an amount equal to three times the aggregate amount of capital subscribed by the members – an amount which was capped at £22.5M. The final closing date for subscriptions was stated to be 31 March 2004.

On 10 February 2004 the Inland Revenue issued a Press Release announcing an imminent change in the tax relief available to members of the LLP, in that in order to qualify for tax relief, borrowing would have to be made by the members of the LLP individually rather than by the LLP itself. This led to applications for subscriptions to the LLP being closed as from 25 March 2004.

On 16 March 2004 the LLP entered into the Facility Agreement with Lloyds, whereby Lloyds agreed to make available to the LLP a loan of up to £67.5M. Clause 4 of the Facility Agreement provided as follows (so far as material):

"Notwithstanding any other provision of this Agreement the aggregate principal amount of the Loan shall not exceed £67.5M or, if lower, three times the aggregate of members' capital contributions …."

Clause 6 of the Facility Agreement provided that the loan was to be drawn down in a single tranche on or before 31 March 2004 and that any unused balance of the facility would be cancelled.

As to the level of subscriptions, Mr Feetum says this in paragraphs 55 and 56 of his first witness statement:

"55. Although at the time of the issuing of the Information Memorandum in early December 2003 there were strong hopes that a significant level of subscriptions could be obtained for the LLP, and consequently a large sum of money raised for it, it became apparent by the end of February 2004 that only a greatly reduced number of subscriptions would be likely. This followed in particular the withdrawal of interest by a large prospective group of investors in February [2004].

56. By the time of the entry into the Facility Agreement on 16 March 2004, the level of valid acceptances received was low. I believe that by that date there was approximately £8,000,000 of acceptances and even if there were to be an upsurge in acceptances it appeared unlikely that the amounts subscribed would exceed £10,000,000 by the time the period for accepting was due to end, namely 31 March 2004 …."

In the event, subscriptions as at the closing date totalled £6,780,894 (i.e. only some £530,000 more than the minimum level of subscriptions specified in the Information Memorandum), and the LLP accordingly drew down three times that amount (i.e. £20,342,682) under the Facility Agreement. On 2 April 2004 completion took place under the ICT Software Agreement.

On 5 April 2004 the Bank of Scotland guaranteed the Lloyds loan, in consideration of an indemnity by CV secured by a cash deposit representing part of the price paid under the ICT Software Agreement. The LLP in turn indemnified CV in respect of CV's liability under its own indemnity to the Bank of Scotland, the LLP's indemnity to CV being secured by the Debenture.

Clause 10 of the Debenture contains a power for CV to appoint an administrative receiver over the LLP's property and undertaking on the occurrence of an 'Insolvency Event', as defined in clause 1.9 of the Debenture. For present purposes, nothing turns on the precise terms of the power.

On 3 December 2004 CV purported to appoint Mr Levy and Mr Berman as administrative receivers of the property and undertaking of the LLP, contending that an 'Insolvency Event' had occurred (a contention which, as I noted earlier, is disputed by the LLP). On the following day, 4 December 2004, Mr Levy and Mr Berman purported to accept that appointment.

By letters dated 7 December 2004 Mr Levy and Mr Berman, purportedly acting under their appointment as administrative receivers, required the claimants, as Designated Members of the LLP, to submit a statement of affairs within 21 days in accordance with section 47 of the 1986 Act (subsection (1) of which provides that where an administrative receiver has been appointed he shall forthwith require some or all of various specified classes of person including the officers of the company – or, in the instant case, the LLP – to submit a statement of affairs), and to carry out or observe a number of further requirements.

THE RELEVANT LEGISLATIVE PROVISIONS

Limited liability partnerships

The Limited Liability Partnerships Act 2000 ("the 2000 Act") provides (by section 1(2)) that a limited liability partnership is a body corporate, "with legal personality separate from its members". Section 14(1) of the 2000 Act provides for the making of regulations about the insolvency or winding up of limited liability partnerships by reference to the 1986 Act.

Regulation 5 of the Limited Liability Partnerships Regulations 2001 (made pursuant to section 14(1) of the 2000 Act) applies Parts I – IV of the 1986 Act to limited liability partnerships. It is common ground that the effect of Regulation is to apply those Parts of the 1986 Act as amended from time to time.

The 2002 Act

Parliamentary debate on the Enterprise Bill (which eventually became the 2002 Act) was preceded by the publication in July 2001 of a White Paper (Cm. 5234) entitled "Productivity and Enterprise: Insolvency – A Second Chance".

The White Paper included the following:

"EXECUTIVE SUMMARY

…

Corporate Insolvency Reforms

The package of reforms in the corporate sector is designed to create a fairer system in which there is a duty of care to all creditors and all creditors are able to participate. It should also help to maximise economic value by aligning incentives properly and will ensure that companies in financial difficulty do not go to the wall unnecessarily. The proposals will:

restrict the right to appoint an administrative receiver to the holders of floating charges granted in connection with certain transactions in the capital markets (paragraphs 2.2 – 2.6 and 2.18); and

seek to streamline the administration procedure so that it becomes a fully effective procedure in all circumstances. …

…

2. CORPORATE INSOLVENCY PROPOSALS

…

The Position of Unsecured Creditors

2.2 Throughout this period [sc. of the last twenty-five years or so] there has also been widespread concern as to the extent to which administrative receivership as a procedure provides adequate incentives to maximise economic value. There has, equally importantly, been concern about whether it provides an acceptable level of transparency and accountability to the range of stakeholders with an interest in a company's affairs, particularly creditors. For secured lenders, administrative receivership is an important mechanism, not least given that it is one over the inception of which they have complete control. Since 1986, a person acting as an administrative receiver of a company has had to be an authorised insolvency practitioner. There is little doubt that the existence of professional obligations on insolvency practitioners has had a beneficial effect on the way in which they discharge their duties. But the fact remains that, notwithstanding recent case law, an administrative receiver's principal obligation is towards his appointor. At law, they remain substantially unaccountable to any other creditor for the way in which a company's assets are dealt with. There is no equivalent of the duty owed by an administrator in an administration procedure to act in the interests of the creditors as a whole.

2.3 The maximisation of recoveries and the minimisation of costs are areas where the lack of a wider and more general accountability, and with it the absence of properly aligned incentives, can impact very substantially on the interests of unsecured creditors in an administrative receivership. For example, an administrative receiver is entitled to solely consider the interests of his or her appointor when determining the timing of a sale of a business. Where an offer is made which is sufficient to satisfy the secured creditor's claim and the administrative receiver's costs, there would appear to be little incentive for the receiver to delay the sale with a view to obtaining a better offer which might provide some return for unsecured creditors. Furthermore, it should be borne in mind that unsecured creditors have no right to challenge the level of costs in a receivership, even though they have an identifiable financial interest where there are sufficient funds to pay the secured creditor in full. The Insolvency Act 1986 (Sections 46, 48 and 49) did introduce requirements on administrative receivers to notify and report to creditors and provides for the possibility of a committee of creditors being established. But, in practice, very few such committees are appointed. Finally, it seems clear that the increasing importance of the international dimension in insolvency is likely to highlight the poor fit between international law, based on collective procedures, and administrative receivership. Taking all these factors into account, we do not believe that the present framework for administrative receivership provides an adequate basis for accountability or properly aligned incentives in relation to the bulk of cases giving rise to administrative receivership.

The Way Forward

…

2.4 The Government's view is that, on the grounds of both equity and efficiency, the time has come to make changes which will tip the balance firmly in favour of collective insolvency proceedings, proceedings in which all creditors participate, under which a duty is owed to all creditors and in which all creditors may look to an office holder for an account of his dealings with a company's assets. It follows that we believe that administrative receivership should cease to be a major insolvency procedure. We therefore propose to restrict the right to appoint an administrative receiver to the holders of floating charges granted in connection with transactions in the capital markets as described in paragraph 2.18.

…

Restricting Administrative Receivership

2.18 The Government recognises that the floating charge and the right to appoint an administrative receiver plays an important role in certain transactions in the capital markets. We will allow the right to appoint an administrative receiver to continue where floating charges are granted in relation to such transactions. Situations identified in Part VII of the Companies Act 1989 will fall outside the scope of our proposals.

…"

In the course of its passage through the House of Commons the Enterprise Bill underwent a large number of amendments, and the 2002 Act, when finally enacted, contained a number of provisions which were not foreshadowed in the White Paper.

Section 250 of the 2002 Act introduced into the 1986 Act sections 72A to 72H (headed 'Prohibition of Appointment of Administrative Receiver') and Schedule 2A thereto. It is also to be noted that section 258 of the 2002 Act introduced into the 1986 Act (by Schedule B1 thereto) a revised regime for administration.

Section 72A of the 1986 Act provides that "the holder of a qualifying floating charge in respect of a company's property may not appoint an administrative receiver of the company". (For 'company' read 'limited liability partnership': see regulation 5 quoted earlier.) It is common ground that the Debenture is a "qualifying floating charge" for this purpose. There then follow, in sections 72B to 72G, six exceptions to that general prohibition.

The first exception, which is contained in section 72B, relates to capital markets. It would appear that this was the exception referred to in the White Paper. Initially, CV relied on section 72B in the instant case, but such reliance was abandoned shortly before the hearing below. The second and third exceptions (contained in sections 72C and 72D) relate respectively to public-private partnerships and utilities. They have no application in the instant case. It is on the fourth exception (contained in section 72E) that the argument both before the judge and in this court has focused.

Section 72E is in the following terms:

"72E Fourth exception: project finance

(1) Section 72A does not prevent the appointment of an administrative receiver of a project company of a project which –

(a) is a financed project, and

(b) includes step-in rights.

(2) In this section –

(a) a project is 'financed' if under an agreement relating to the project a project company incurs, or when the agreement is entered into is expected to incur, a debt of at least £50 million for the purposes of carrying out the project,

(b) 'project company' has the meaning given by paragraph 7 of Schedule 2A, and

(c) 'step-in rights' has the meaning given by paragraph 6 of that Schedule."

Before the judge the issues arising under section 72E were (i) whether the LLP is a 'project company'; (ii) whether the project on which it is engaged is a 'financed project'; and (iii) whether it includes 'step-in rights'. The judge answered the first question in the affirmative, and there is no cross-appeal by the respondents in relation to that. He answered the remaining questions in the negative, and those are the live questions on CV's appeal so far as the 1986 Act issue is concerned. However, in the course of argument Mr McDonnell relied on the meaning of the expression 'project company' as set out in paragraph 7 of Schedule 2A, and I accordingly refer to that paragraph below.

The fifth and sixth exceptions (contained in sections 72F and 72G) relate respectively to financial markets and registered social landlords, and are not material for present purposes.

As to the meaning of the expression 'step-in rights', paragraph 6 of Schedule 2A provides as follows:

"6 (1) For the purposes of sections 72C to 72E a project has 'step-in rights' if a person who provides finance in connection with the project has a conditional entitlement under an agreement to –

(a) assume sole or principal responsibility under an agreement for carrying out all or part of the project, or

(b) make arrangements for carrying out all or part of the project.

(2) In subparagraph (1) a reference to the provision of finance includes a reference to the provision of an indemnity."

As noted earlier, paragraph 7 of the Schedule deals with the meaning of the expression 'project company' as follows:

"7 (1) For the purposes of sections 72C to 72E a company is a 'project company' of a project if –

(a) it holds property for the purpose of the project,

(b) it has sole or principal responsibility under an agreement for carrying out all or part of the project,

(c) it is one of a number of companies which together carry out the project,

(d) it has the purpose of supplying finance to enable the project to be carried out,

or

(e) it is the holding company of a company within any of paragraphs (a) to (d).

(2) But a company is not a 'project company' of a project if –

(a) it performs a function within subparagraph (1)(a) to (d) or is within subparagraph (1)(e), but

(b) it also performs a function which is not –

(i) within subparagraph (1)(a) to (d),

(ii) related to a function within subparagraph (1)(a) to (d), or

(iii) related to the project.

(3) For the purposes of this paragraph a company carries out all or part of a project whether or not it acts wholly or partly through agents."

THE JUDGE'S JUDGMENT

In paragraphs 6 to 9 of his judgment the judge addressed the status issue. Before him, Mr McDonnell had submitted that if any wrong had been done, it had been done not to the claimants but to the LLP; and accordingly that the only proper claimant was the LLP itself. For the claimants, Mr David Mabb QC had submitted that the claimants had interests in the issues raised in the action in their own right, in that if they refused to comply with the requirements of Mr Levy and Mr Berman as set out in their letters dated 7 December 2003 they could find themselves exposed to civil, or even criminal, liability.

In paragraph 9 of his judgment the judge said this:

"9. Although it seems to me that Mr Mabb's argument would apply to many, if not all, cases where the appointment of a receiver is challenged, it seems to me that it is right. In my view, the Claimants do have the requisite standing to bring this application for declarations that the appointment was invalid. In so deciding, I bear in mind that the forms of declarations and injunctions sought do not claim remedies which are exclusively available to [the LLP]."

The judge accordingly turned to the questions raised by section 72E. After setting out the factual and legislative background, the judge (in paragraphs 31 to 34 of his judgment) addressed the question whether the LLP was a 'project company' for the purposes of section 72E. In the result he found that it was (and as already noted, there is no cross-appeal by the respondents against that finding).

In paragraphs 35 to 45 of his judgment, the judge addressed the question whether the project on which the LLP was engaged was a 'financed project' for the purposes of section 72E. Before him, Mr McDonnell had argued (as he has argued once again before us) that the relevant 'agreement' for the purposes of the expression 'under an agreement' in section 72E(2)(a) was the ICT Software Agreement; and that under that agreement the LLP was, as at the date of the agreement (5 December 2003), 'expected to incur' a debt of at least £50M for the purposes of carrying out the project. For the respondents, Mr Mabb had argued that the relevant agreement was the Facility Agreement; that the relevant date for assessing whether the expectation existed was accordingly 16 March 2003; and that the evidence before the court did not establish that the requisite expectation existed as at that date.

Addressing the question whether the relevant agreement for the purposes of section 72E(2)(a) was the ICT Software Agreement or the Facility Agreement, the judge said this (in paragraphs 38 to 40 of his judgment):

"38. .... At one stage in his argument, Mr McDonnell argued that the paragraph [i.e. section 72E(2)(a)] contained two mutually inconsistent limbs. Limb 1 refers to an agreement relating to the project under which a project company incurs a debt of at least £50m. Limb 2 referred to an agreement relating to a project under which an expectation arises that the project company will incur a debt of at least £50m under a different agreement. He has subsequently modified this submission to some extent, and submitted that the words of paragraph (a) divided itself into two so that a project was financed if under an agreement relating to a project, a project company 1) incurs or 2) when the agreement is entered into, is expected to incur a debt of at least £50m for the purposes of carrying out the project. The word "under", according to Mr McDonnell, means either "pursuant to" or "for the purposes and in accordance with the terms of" an agreement.

39. The real question, as it seems to me, is whether the agreement to which paragraph (a) refers is the agreement which itself creates the obligation to repay the debt. As Mr Mabb put it, the question is whether the word "incurs" is that which is linked to the agreement or whether it is the expectation that is linked to the agreement. In my view, Mr McDonnell's way of reading paragraph (a) is a very strained way of reading it, and it seems to me that it ignores the use of the definite article in Limb 2 which presupposes that the agreement which is entered into has already been identified earlier in the paragraph. The only previous identification of an agreement is in Limb 1, and that is an agreement under which the liability is actually incurred.

40. Second, accepting that "under an agreement" means "in accordance with the terms of the agreement", as Mr McDonnell says is so – it is in my view an odd concept that an expectation arises in accordance with the terms of an agreement. Rather, in my view, the natural meaning of the phrase is that the debt will be incurred under the agreement. Consequently, I accept Mr Mabb's submission that it is the incurring of the debt, rather than the expectation, which is linked to the agreement. That being so, it seems to me that the relevant agreement for the purpose of deciding whether the project is a financed project is the facility agreement with Lloyds TSB Bank."

The judge then turned to the question whether the requisite expectation existed as at the date of the Facility Agreement (16 March 2004). After referring to the witness statements of Mr Feetum and of Mr Jens Hills of Messrs Jens Hills & Co, CV's solicitors, the judge concluded (in paragraph 45 of his judgment) that:

"[t]he highest that it can be put is that [the LLP] expected to borrow 'up to' £67.5M; but 'up to' is not the same as 'at least'. In my view, therefore, this was not a project which was a financed project, and consequently the exemption [sic] in section 72E does not apply."

In paragraphs 46 to 49 of his judgment the judge turned to the question whether the project included 'step-in rights', saying this:

"46. The third condition which needs to be satisfied is that the project was one with step-in rights. Mr McDonnell relies on [CV's] right to appoint an administrative receiver as amounting to a conditional entitlement to make arrangements for carrying out all or part of the project. The relevant part of the definition in Section 72E is amplified by paragraph 6 of Schedule 2A ….

47. In the light of paragraph 6(2), there is no difficulty in concluding that [CV] is providing finance within the extended statutory definition. However, does it have an entitlement to make arrangements for the carrying out of all or part of the project? It has a contractual entitlement to appoint a receiver but, if that is enough, then this condition for the application of the exemption from the statutory provisions would appear to be superfluous. It appears to me to be unlikely that this is what Parliament intended.

48. In common with all debentures, the debenture in the present case provides that the receiver is the agent of the borrower. Whatever he does is attributable in law to the borrower and not the lender. Thus, on the face of it, if the receiver decides to carry out the project, it will be the borrower who is treated in law as carrying it out or as making the necessary arrangement to do so. Moreover, although the receiver has the power to act in the name of [CV], it is his – the receiver's – option whether to do so or not. [CV] does not, in my view, have an entitlement to make the arrangements to carry out the project. It is dependent on the discretionary decision by the receiver.

49. Mr McDonnell also relies on the ability to appoint an administrator. The right to appoint an administrator is a statutory right, although the availability of that right is dependant on the provisions of the security documentation. Bearing in mind that the avowed purpose of the legislation was to encourage the appointment of administrators in place of administrative receivers, it would be odd if the power to appoint an administrator opened the way to the appointment of an administrative receiver. Moreover, as in the case of a receiver, a decision by an administrator to carry on the project would not in law be the decision of [CV]. In my judgment, therefore, the project is not one in which there are step-in rights."

The judge accordingly held that the project did not fall within section 72E(1) since it was not a 'financed project' and it did not include 'step-in rights'.

THE RESPONDENTS' CONCESSION

Shortly before the hearing of the appeal, Mr Girolami conceded that the factual issue as to the existence at the relevant date (whether that date be 5 December 2003 or 16 March 2004) of the expectation described in section 72E(2)(a) was not apt to be decided on an application for summary judgment, so that if the success or failure of the appeal turned on that issue, there would have to be a trial on that issue. In the light of that concession, Mr McDonnell did not find it necessary to proceed with a proposed application to adduce additional evidence.

THE GROUNDS OF APPEAL

By ground 1 of its grounds of appeal, CV raises the status issue once again, contending that the rule in Foss v. Harbottle (1843) 2 Hare 461 applies to a limited liability partnership, and that none of the recognised exceptions to that rule is applicable in the instant case. Reliance is also placed on the fact that the claimants have neither applied for nor been granted permission to proceed under CPR Part 19.

By ground 2 of its grounds of appeal CV contends that the judge wrongly construed section 72E(2)(a), and that, having regard to the purpose of the various statutory exceptions to the general prohibition on the appointment of administrative receivers by the holder of a qualifying floating charge, the words 'expected to incur' must have been intended to be applied objectively at an early stage of the project so that the parties would know whether the exception applied. It is contended that the test should be satisfied when under the terms of the project (1) a loan in excess of the amount of the threshold is or will be available and (2) the parties intend that an amount in excess of the threshold will be drawn down if the project succeeds; and that although the ICT Software Agreement was the relevant agreement, the test was satisfied both at the date of that agreement (5 December 2003) and at the date of the Facility Agreement (16 March 2004).

By ground 3 of its grounds of appeal CV contends that in relation to 'step-in rights' the judge ought to have found that a power to appoint an administrative receiver might amount to 'step-in rights' depending on whether the powers granted were sufficient to fulfil the requirements of paragraph 7 of Schedule 2A; and that in the instant case the power granted by clause 10 of the Debenture did amount to 'step-in rights' since it enabled the receiver to make 'arrangements for carrying out all or part of the project', within the meaning of paragraph 6(1)(b).

THE RESPONDENTS' NOTICE

By a Respondent's Notice, the respondents invite us to uphold the judge's finding on the status issue on the additional ground that the claimants have the requisite status to bring the claim not merely in their capacity as Designated Members of the LLP but also in their capacity as ordinary members of it. It is contended that their rights and/or interests as ordinary members of the LLP were vitally affected by the validity or otherwise of the appointment of administrative receivers, since the LLP is effectively 'transparent' for tax purposes and the tax advantages to which they would otherwise have been personally entitled would be put at risk if the appointment were found to be valid.

THE ARGUMENTS

The status issue

Mr McDonnell repeats the submission made below (and rejected by the judge) that the rule in Foss v. Harbottle applies in the instant case, and that the respondents cannot bring themselves within any of the exceptions to that rule. In particular, he submits that if (which is denied) the appointment of administrative receivers was invalid, any loss caused by that wrongful appointment can have been suffered only by the LLP, and hence that only the LLP can sue in respect of it. He further submits that it is not open to the claimants to commence a derivative action in the name of the LLP, under the exception to the rule in Foss v. Harbottle explained by this court in Prudential Assurance v. Newman Industries (No 2) [1982] Ch 204 ("Newman") at 210D-211A, since if CV's factual allegations as to the conduct of the claimants are made out the position will be that the wrongdoers in control of the LLP are none other than the claimants themselves. He submits that one of CV's purposes in appointing administrative receivers was to safeguard the interests of ordinary members.

Mr McDonnell further submits that a claimant should not be permitted to, in effect, circumvent the rule in Foss v. Harbottle by claiming a declaration instead of damages. As to the court's jurisdiction to make a declaration, he relies on Meadows Indemnity Co Ltd v. The Insurance Corporation of Ireland & Anor. [1989] 2 Lloyds Rep 298 CA ("Meadows"). In Meadows this court considered the well-known passage in Lord Diplock's speech in Gouriet v. Union of Post Office Workers [1978] AC 435 ("Gouriet") dealing with the court's jurisdiction to grant declaratory relief.

In Gouriet (at p.501) Lord Diplock said this:

"Authorities about the jurisdiction of the courts to grant declaratory relief are legion. The power to grant a declaration is discretionary; it is a useful power and over the course of the last hundred years it has become more and more extensively used …. Nothing that I have to say is intended to discourage the exercise of judicial discretion in favour of making declarations of right in cases where the jurisdiction to do so exists. But that there are limits to the jurisdiction is inherent in the nature of the relief: a declaration of rights. The only kind of rights with which courts of justice are concerned are legal rights; and a court of civil jurisdiction is concerned with legal rights only when the aid of the court is invoked by one party claiming a right against another party, to protect or enforce the right or to provide a remedy against that other party for infringement of it, or is invoked by either party to settle a dispute between them as to the existence or nature of the right claimed. So for the court to have jurisdiction to declare any legal right it must be one which is claimed by one of the parties as enforceable against an adverse party to the litigation, either as a subsisting right or as one which may come into existence in the future conditionally on the happening of an event…. But the jurisdiction of the court is not to declare the law generally or to give advisory opinions; it is confined to declaring contested legal rights, subsisting or future, of the parties represented in the litigation before it and not of anyone else."

In Meadows this court endorsed Lord Diplock's statement that the court's jurisdiction to grant declaratory relief is limited to cases where legal rights are contested. In Meadows itself there was no issue directly between the claimant and the defendant, and declaratory relief was accordingly refused. In the course of his judgment, Neill LJ referred (at p.305) to "the general policy of the law to resolve disputes between all parties in one set of proceedings". May and Nourse LJJ agreed with Neill LJ. In the course of his judgment, May LJ said this (at p.309):

"Meadows' interests are not 'vitally affected' within the meaning one must give to that phrase on the authorities. I accept the general submission that was made to us that a person who is not a party to a contract has no locus, save perhaps in exceptional circumstances, to obtain a declaration in respect of the rights of other parties to that particular contract."

Mr McDonnell relies on Meadows as authority for the proposition that, based on the above passage from Lord Diplock's speech in Gouriet, the jurisdiction to make a declaration is limited to cases in which there is a contested issue as to the legal rights of the parties represented in the litigation before the court, and that the fact that a party has a direct interest in the outcome of the litigation will not suffice to confer jurisdiction in the absence of a direct issue between the parties. In the alternative, he submits that if and to the extent that the court has a discretion in the matter of granting a declaration, that discretion should not be exercised in the circumstances of this case, given that the claimants are a minority of the members of the LLP. Otherwise (as he submits) any individual director or employee who for some reason objects to a purported appointment of receivers could challenge the appointment, even if the company (or, as the case may be, the limited liability partnership) is content with the appointment and has no wish to challenge its validity.

Mr McDonnell also relies on the decision of this court in Secretary of State for Trade and Industry v. Jabble & Ors [1998] 1 BCLC 598 ("Jabble"). In Jabble the claimant Secretary of State had issued proceedings under section 6 of the Directors' Disqualification Act 1986 against the defendant directors of a company (McIvor Spirits Ltd) which had some time previously been placed in administrative receivership. The defendants contended that the appointment of the administrative receiver was invalid, and hence that the conditions of section 6 were not satisfied and the Secretary of State was not entitled to rely on the section as the basis for the disqualification proceedings. Mr Registrar Buckley ordered the trial of a preliminary issue as to whether the appointment of the administrative receiver was a valid appointment. At first instance, Sir John Knox held that it was. The defendants appealed. In this court Millett LJ, in the course of argument, took the point that neither the company nor the appointor was party to the proceedings. In the result, this court (Millett and Judge LJJ and Sir Christopher Staughton) allowed the defendants' appeal but only to the extent of setting aside the judge's order and the order for the trial of the preliminary issue. In the course of his judgment Millett LJ said this (at pp.600g-601b):

"So it comes about that we are asked to pronounce upon the conditional or unconditional nature of a debenture and guarantee and the validity of an appointment of an administrative receiver in proceedings to which neither the company which granted the debenture, nor the bank to which it was granted, nor even the administrative receiver whose appointment is challenged, are made parties. In my judgment the proceedings are completely misconceived. If the debenture and guarantee were indeed conditional and the condition was not satisfied, or if the appointment of the administrative receiver was invalid, then McIvor could have brought proceedings against the bank to have the appointment declared void. Despite the passage of more than five years since the administrative receiver was appointed, McIvor has never challenged the appointment. The administrative receivership is long since spent. The assets of McIvor have been distributed, no doubt to the prejudice of the unsecured creditors and to the advantage of the bank. The appellants, who remained directors of McIvor … never took any steps either to replace themselves as directors of McIvor or to procure McIvor to bring proceedings to challenge the appointment of the administrative receiver. They themselves never had any standing to challenge the appointment even in proceedings properly constituted against the bank. But they seek to do so now in their own right as directors or former directors of McIvor and not as creditors, in the absence of McIvor and in proceedings brought by the Secretary of State to which the bank is not a party. In my judgment they have no standing to do so." (My italics)

Judge LJ agreed with Millett LJ. Sir Christopher Staughton's judgment includes the following (at p.602a-d):

"The point taken by the court, and adopted by Mr Newey for the Secretary of State, is that the validity of an appointment of an administrative receiver cannot be challenged in these proceedings. That can only be done, it is said, in proceedings to which the company and the receiver and the debenture holder are parties. ….

For the reasons given by Millett LJ I am satisfied that that argument is well-founded ….

I too would allow the appeal to this extent, that is to say by deleting the declaration in the order of Sir John Knox …. that the appointment of an administrative receiver to [McIvor] … was not invalid or void. I would substitute a declaration that its validity is not material to these proceedings and cannot be challenged here. I would also, if necessary, set aside the order of Mr Registrar Buckley … that there be a trial of a preliminary issue."

Mr McDonnell submits that the sentence which I have placed in italics in the passage from the judgment of Millett LJ quoted above forms part of the ratio of the decision. As such, it is, he submits, authority for the proposition that in the instant case the claimants have no status to challenge the validity of the appointment of Mr Levy and Mr Berman, notwithstanding that CV and the LLP are joined as parties to the action.

Mr McDonnell accordingly submits that a member of the LLP (including a Designated Member) should only be allowed to challenge the validity of the appointment in the context of a derivative action (a course which, he submits, is in any event not available in the instant case).

Mr Girolami submits that the claim advanced by the claimants does not fall within the rule in Foss v. Harbottle, since the claimants are not purporting to advance a cause of action vested in the LLP. He submits, relying in particular on the letters from Mr Levy and Mr Berman dated 7 December 2003, that in their capacity as Designated Members the claimants are directly affected by the validity or otherwise of the appointment in that they have been called upon to comply with statutory requirements and they need to know whether they are obliged to do so.

As to Mr McDonnell's reliance on Meadows, Mr Girolami submits that the instant case is one in which legal rights are contested, the central issue in the instant case being whether the Designated Members retain the legal right to manage the affairs of the LLP or whether that right is now vested in Mr Levy and Mr Berman. In any event, he submits, the law has moved on since Meadows was decided. In support of this submission he referred us to Zamir & Woolf's The Declaratory Judgment 3^rd edn. at paras. 3.017-3.023 where the later authorities are summarised.

Mr Girolami relies in particular on the decision of this court In re S (Hospital patient: Court's jurisdiction) [1996] Fam 1 ("Re S") (in which Meadows does not appear to have been cited). In Re S a carer of S sought a declaration that S's wife and son were not entitled to remove him to Norway. In the course of his judgment in Re S Millett LJ, after quoting the passage from Lord Diplock's speech in Gouriet which this court considered in Meadows, continued (at p.21H):

"Since that decision [i.e. Gouriet] the courts have developed the jurisdiction to grant declaratory relief in a number of cases which, though distinguishable from the present, are nevertheless not altogether dissimilar to it. We have now reached a position where the court is prepared in an appropriate case to fill much of the lacuna left by the disappearance of the parens patriae jurisdiction by granting something approaching an advisory declaration. In my judgment, the passage which I have cited from Lord Diplock's speech in [Gouriet] can no longer be taken to be an exhaustive description of the circumstances in which declaratory relief can be granted today. It is to be regarded rather as a reminder that the jurisdiction is limited to the resolution of justiciable issues; that the only kind of rights with which the court is concerned are legal rights; and that accordingly there must be a real and present dispute between the parties as to the existence or extent of a legal right. Provided that the legal right in question is contested by the parties, however, and that each of them would be affected by the determination of the issue, I do not consider that the court should be astute to impose the further requirement that the legal right in question should be claimed by either of the parties to be a right which is vested in itself."

Later in his judgment, Millett LJ said this (at p.22):

"The dispute raises a justiciable issue; it concerns the legal rights of the patient; all proper parties, including the patient, are before the court; and the determination of the issue affects the rival claimants and their rights and obligations to the patient. In my judgment the court is entitled and bound to decide it."

Mr Girolami submits that the instant case is on all fours in these respects with Re S.

As to Jabble, Mr Girolami submits that the sentence in Millett LJ's judgment which I placed in italics when quoting from his judgment (in paragraph 58 above) was strictly obiter, and in any event cannot be reconciled with his reasoning in Re S (which does not appear to have been cited in Jabble). He submits that in Jabble the court plainly dealt with the question of declaratory relief on the basis that it was a matter for the discretion of the court. He submits that in the instant case there is every reason for exercising the court's discretion by granting the declaratory relief sought.

He also referred us to a passage in the judgment of Rimer J in Re Kaytech International plc [1999] 2 BCLC 351 ("Kaytech"). In Kaytech, the court was faced with a situation similar to that which arose in Jabble, in that a respondent to disqualification proceedings sought to challenge the validity of the liquidator's appointment. Rimer J held that the proper course for the respondent would have been to apply for a stay of the disqualification proceedings to enable him to start separate proceedings challenging the liquidator's status, in which all parties affected (including the liquidator and the company) were joined as parties. After referring to Jabble, Rimer J said this (at p.396a-d):

"In my judgment, the principle reflected in that case [i.e. Jabble] is applicable here. If, following the service of these proceedings on [the respondent], he wanted to challenge [the Secretary of State's] assertion that [the company] went into liquidation in 1993, then his correct course was to apply promptly for a stay or adjournment of these proceedings so that he could in the meantime start separate proceedings challenging Mr Alexander's status as liquidator, being proceedings in which all parties affected by the challenge would be joined as defendants. That would include Mr Alexander and presumably also [the company] itself. [Counsel for the respondent] submitted that such a course would not have been open to the [respondent], since he would have no locus standi to commence such proceedings. I am not convinced of that, since I consider it probable that his status as a respondent to the disqualification proceedings would have given him a sufficient interest, but whether that is right or not, he has anyway not sought to put it to the test, but simply expects the court to decide the point in proceedings to which neither Mr Alexander nor [the company] are parties." (My italics)