England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

IN THE MATTER OF XL COMMUNICATIONS GROUP PLC (IN LIQUIDATION)
AND
IN THE MATTER OF THE INSOLVENCY ACT 1986

		Royal Courts of Justice Strand, London, WC2A 2LL
		02/11/2005

The Hon. Mr. Justice Kitchin :

Introduction

1. This is an appeal against the decision of District Judge Sethi of 16 June 2005 whereby he dismissed the application of the appellant, the liquidator ("the Liquidator") of XL Communications Group Plc ("the Company") under s.236 of the Insolvency Act 1986 ("the Act") for the production of documents by the respondent ("BDO"), the former auditors of the Company.
2. The appeal is brought under Insolvency Rule 7.47(2) and is by way of review of the decision by the District Judge. Accordingly, I should not interfere with his decision unless it is based upon an error of law or a wrongful exercise of discretion. As to the latter, it is not appropriate for me to set aside the decision simply on the basis that I might have exercised my discretion differently.
3. Before dealing with the substantive appeal I must deal with an application to extend time for service of the appeal notice. The Liquidator's notice of appeal was filed with the court on 30 June 2005. Under Practice Direction: Insolvency Proceedings, Part 4, paragraph 17.11 (3) an appeal notice must be served by the appellant on each respondent as soon as practicable and in any event not later than seven days after it was filed. In the event, sealed copies of the appeal notice were not received from the court until 12 July 2005. The notice was then served on BDO on 15 July 2005. The reason for the delay was that the Liquidator could not serve the notice until he had a copy from the court. On 20 July 2005, the position was explained by the Liquidator to BDO and he sought the agreement of BDO that the request for an extension of time be dealt with at the hearing of this appeal. On 20 October 2005, BDO informed the Liquidator that they would seek the dismissal of the appeal on the basis of the Liquidator's failure to serve BDO on time. Following that letter the Liquidator issued a formal application for an extension of time for service of the appeal notice.
4. I dealt with this matter at the outset of the hearing. I reached the conclusion that it was right to grant an extension of time because the notice was served as soon as practicable after receipt of the sealed copy from the court, only some seven days out of time and three months before the hearing of the appeal. Further, there is no suggestion BDO have suffered prejudice as a result of the late service. I left over the issue of costs to be determined at the end of the appeal.

Background

5. The Company was incorporated in December 1985 under the name Deckloan Plc and, on 18 March 1996, changed its name to Life Numbers Plc. At the beginning of July 1996, the Company floated on the Alternative Investment Market ("AIM"). The business of the company was said to be the selling of personal telephone numbers. BDO prepared the audit report for the flotation.
6. On 4 July 1997, the shares of the Company were suspended on the AIM. On 24 July 1997, BDO resigned as auditors of the Company but confirmed there were no circumstances to bring to the attention of members or creditors.
7. On 19 December 1997, and apparently following a reverse takeover, the Company changed its name to XL Communications Group Plc. On 30 January 1998, the shares of the Company were again suspended and on 1 April 1998, the Company entered into compulsory liquidation. Mr. Donald Gendall was appointed as liquidator with effect from 6 August 1998.
8. At some point in 2004, responsibility for the administration of the Company passed from Mr Gendall to the Liquidator. On 6 August 2004, the Liquidator was formally appointed. He is (or was) in the same practice as Mr Gendall.
9. On 17 August 2004, the Liquidator contacted BDO seeking access to the complete files created by BDO as auditors of the Company. No response was received. After two chasing e-mails BDO responded on 24 September 2004 indicating that they would look into the matter and revert. The first substantive response came by letter dated 30 September 2004. By that letter BDO declined to release the documents requested but confirmed that they undertook the audit of the pre-trading dormant accounts of the Company, then called Life Numbers Plc, made up to June 1996, and gave assistance and advice in respect of the prospectus issued for the purpose of the AIM listing. They pointed out that both were filed with the Registrar of Companies.
10. By a letter dated 5 October 2004, the Liquidator drew BDO's attention to s.235 of the Act. On 14 October 2004, BDO again declined to produce the documents, pointing out that in over six years the liquidator of the company had not contacted BDO and indicating that it was not the firm's policy to allow access to working papers except when required to do so by a court order or the like. They also pointed out that no explanation had been volunteered as to why access to the records was now sought.
11. By a letter dated 21^st October 2004, the Liquidator responded, inter alia, that he had only recently taken over the administration and been appointed as liquidator. He requested the files as part of his review of the financial affairs and dealings of the Company.
12. By a letter dated 29 October 2004, BDO explained that they had no client papers and merely their own working papers, that no attempt had been made to explain the six year delay in requesting the documents and that the Liquidator had not explained why the records were essential to the review being undertaken. Finally, they confirmed that their policy had not changed unless either the company records or the records of the previous liquidator were not available or there were specific issues that the Liquidator was reviewing in depth.
13. By further letters dated the 1 and 5 November 2004, the Liquidator offered to minimise inconvenience by having the papers picked up by courier and offered to use his best endeavours to return the files on completion of the administration. He also indicated that unless the files were offered for inspection, it was proposed to proceed by way of application to the court.
14. The files were not forthcoming and the application was duly issued on 6 December 2004. Before setting out the details of the application and the evidence sworn in support of it, I must refer to two other letters which passed between the parties after the issue of proceedings.
15. On 27 January 2005 the solicitors for the liquidator wrote to BDO in the following terms:

" You have asked for specific issues which our client needs to address. We can confirm these as follows:-

(1) Details of all instructions issued to you by the Company, divided between:-

auditing

accounts preparation

management accounts

taxation work

special work

flotation work.

(2) Copies of letters of engagement.

(3) Details of all payments made to you for work carried out.

(4) A schedule of work undertaken by you.

(5) Details of all directors who issued instructions to you.

(6) Copies of all documents on your files that constitute copy Company records.

(7) Copies of all letters or attendance notes regarding advice on solvency. If there are no such letters or attendance notes, confirmation that no such advice has been provided.

(8) Details of the Company's assets and liabilities (fixed, current, cash, liabilities, contingent liabilities and any leases relating to the Company).

(9) Copies of all papers and documentation in which you acted as 'agent' of the Company under the ICAEW Rules.

(10) Company monies ledger print outs.

(11) AIM listing documents.

(12) Copy correspondence from directors and advice given in response to the first suspension of the shares on 4 July 1997.

(13) Correspondence from the directors and advice given in response to the second suspension of shares on 30 January 1998.

(14) Details of the Company's account with NatWest, together with any guarantee or cross guarantee together with copies of any bank statements on the files.

(15) Copies of correspondence with Shipley's.

(16) Copies of correspondence with North & Co.

(17) An explanation of the need for police involvement in the Company.

(18) Full details/schedule of the inter company position with Telecomms UK Ltd.

(19) Full details/schedule of the inter company position with Personal Number Company Plc.

(20) Breakdown of director's loan accounts.

Please note that further requests may follow receipt of your response and the documentation provided."

16. By letter dated 8 February 2005, BDO responded to that letter indicating that the Liquidator had still failed to provide any reason for the need to review their papers almost seven years after the liquidation and continued:

"Your letter of 27 January 2005 requests a large number of documents (both working papers and company records), schedules of information, and information without providing an explanation as to your client's purpose. We remain at a loss as to why your client requires us to go to the considerable time, cost and effort in complying with your request given that:

i) XL Communications Plc was wound up on 1 April 1998;

ii) we resigned as auditors for Life Numbers Plc on 24 July 1997;

iii) our last material involvement was the audit report for Life Numbers Plc and the AIM listing for the same in July 1996;

iv) after almost 7 years of liquidation investigations your client will be clearly in possession of the company records.

Although your client may only have been appointed as liquidator on 6^th August 2004, his former colleague was the previous liquidator. You have provided no details as to what the previous liquidator had already carried out by way of investigations and what particular part of his investigations lead your client, the current liquidator to seek documents from us. If it is the case that the previous liquidator failed to carry out his duties, then this is a matter which should be brought to the attention of the Court. We find it extraordinary that the previous liquidator did not make such a request to us bearing in mind that the relevant limitation periods for bringing proceedings as against third parties all expired whilst he was the office holder.

What is apparent from your letter is that many of the requested documents relate to periods after we ceased to act. Referring to your list of specified documents and requests for information:

(13) We had resigned on 24 July 1997

(14)(15) Without retrieving and carrying out a review of our files we understand that the only correspondence with Shipley's was in connection with our resignation

(16) We are not familiar with the company mentioned

(17) We had no knowledge of any police involvement with Life Numbers Plc, or with XL Communications Plc (a company that we did not act for)

(18) We are not familiar with Telecoms UK Limited

The nature of your client's enquiries would suggest that XL's auditors and advisors are better able to assist.

If your client is able to specify a legitimate purpose for which access is required and indicating the Company records that are missing this respect, we will reconsider your request. At present, the failure to particularise the purpose and properly specify the documents which we could have in relation to the particular events that your client wants to investigate (despite repeated requests), leads to our view that the application is both unreasonable and oppressive and thus unlikely to succeed."

The application

17. As I have indicated, on 6 December 2004 the Liquidator issued an application under s.236 of the Act that BDO "do produce to the [Liquidator] its file of papers for having acted on behalf of the Company".
18. The application was supported by a witness statement of the Liquidator dated 25 November 2004. Having set out some of the background of the matter and exhibited the correspondence, he concluded:

"In order for me to investigate the affairs of the Company it is necessary for me to review the respondent's file of papers."

19. BDO responded to that statement with a statement of a Mr. Henbrey, an auditor partner in BDO, dated 8 February 2005. He pointed out the following matters, many of which had previously been set out in correspondence.
20. First, BDO had a number of files in storage in connection with the Company and that they acted as auditor from 1996 until the date of BDO's resignation in July 1997. During that period BDO assisted with the preparation of the prospectus of the Company prior to its AIM listing on 1 July 1996. He explained that while the files remained in storage, he had seen some of the key documents obtained via a company search and had also been able to refer to a computer schedule of the files in storage which, together with his recollection, enabled him to make the statement.
21. Secondly, although BDO resigned as auditors on 24 July 1997, the last work carried out for the Company was in connection with the audit report dated 27 June 1996 and the AIM listing on 1 July 1996. He explained that the prospectus for the AIM listing was available via a company search and included the audit report. As was evident from the directors' report and company history, at that time the Company had never traded and the audit report recorded a balance sheet of £50,000 in share capital and £50,000 in cash.
22. Thirdly, BDO were replaced by a firm called Shipley's who thereafter acted in connection with the audit and corporate finance aspects of the business.
23. Fourthly, the list of 20 items identified in the letter dated 27 January 2005 detailed almost every possible document that could be in existence, including mattes that could not possibly be on BDO's files because they related to the time after BDO had ceased to act.
24. Fifthly, that considerable time, effort and costs would be involved in retrieving the files, reviewing them and answering the Liquidator's request for information and preparing the schedules requested.
25. In response to the evidence of Mr. Henbrey, the Liquidator produced a second witness statement dated 18 February 2005. He explained that having reviewed the documentation held by him it became apparent that further information was required in order fully to investigate the history of the Company's affairs, that he needed the information regarding the dealings of the company in order to carry out his investigative duties as Liquidator and that he was trying to establish the true financial position of the Company both pre and post the AIM flotation.

Decision of the District Judge

26. The District Judge refused to make the order requested essentially because he considered that the Liquidator had failed to establish a reasonable requirement for the information and documents sought. First, he explained the nature of the power under s.236 of the Act and the requirements for its exercise as follows:

"4…This is an extraordinary power which needs to be exercised carefully and in which the court has an unfettered discretion. The liquidator has to establish a reasonable requirement for the information he seeks. The onus falls upon him but his views are normally entitled to a great deal of weight. It is then for the court to carry out the balancing exercise, weighing the potential importance of the information sought to the liquidator against the potential oppressiveness to the respondent.

5. So what are the requirements? As is clear from case law the documents required are those that are necessary to reconstitute the state of the company's knowledge to fill the gaps. It also extends to all documents which the liquidator may reasonably require in order to carry out his functions. His function is to realise assets and thereafter distribute the funds. He may need to investigate certain transactions, matters which may involve transactions by directors, preferential treatment of certain creditors, or a transaction at undervalue."

The District Judge then related the substance of the evidence relied upon by the Liquidator and summarised the contents of the letter from BDO dated 8 February 2005. He continued:

"7. …However, they did offer to revisit the matter upon the purpose being identified in respect of the documents in possession of the respondents. No such purpose has been identified.

8. I have considered the case law referred to me and it appears to me that in all those cases the administrators and/or liquidators have made clear what they are investigating. There is no need to set out in detail the nature of the investigations but a general but identified nature of the investigation should at least be made out; more so given the extraordinary nature of the relief sought.

9. Further in a case such as this where considerable time has elapsed since the respondent's involvement, it falls upon the liquidator to set out what enquiries/ investigations have been made and the result of those which has therefore resulted in the application in order for him to complete the enquiries and fill in the gaps in the information about the company's affairs, dealings and property. There is no need for the liquidator to make out the requirements in detail.

10. In this case, I am not satisfied that the applicant has discharged the onus of showing a reasonable requirement for the information and documents and, accordingly, I dismiss the application."

Relevant legal principles

27. I did not understand there to be any real dispute between the parties as to the relevant legal principles. It is well established that the powers conferred by s.236 are powers directed to enabling the court to help a liquidator discover the truth of the circumstances connected with the affairs of the company in order that the liquidator may be able, as effectively and cheaply as possible, to complete his function and put the affairs of the company in order, including the getting in of any assets of the company available in the liquidation. When the liquidator thinks he may be under a duty to recover something from some person concerned with the affairs of the company then it is appropriate for the liquidator to be able to discover, with as little expense as possible and with as much ease as possible, the facts surrounding any such possible claim. Normally the court should seek to assist the liquidator to carry out his duties in this way.
28. The scope of s.236 has always been understood to extend to reconstituting the state of the company's knowledge, however it is now well recognised that the scope of the jurisdiction also extends to all documents which the liquidator may reasonably require to see to carry out his functions: British and Commonwealth Holdings (No. 2) [1992] AC 426.
29. Nevertheless, it is for the liquidator to establish his case under s.236. He must show that he reasonably requires the documents sought. In this connection the view of the liquidator is normally entitled to a good deal of weight: Sasea Finance Ltd (Joint Liquidators) v KPMG [1998] BCC 216 at 220. It is also recognised that the liquidator is required to establish only a "reasonable requirement" for information, not an absolute need and that he is under no duty to make out the requirement in detail. The court ultimately has an unfettered discretion which it will seek to exercise in the interests of the winding up without being oppressive to the party the subject of the application. As Lord Slynn explained in British and Commonwealth Holdings at 439, the proper case is one where the liquidator reasonably requires to see the documents to carry out his functions and the production does not impose an unnecessary and unreasonable burden on the person required to produce them in the light of the liquidator's requirements.
30. Counsel for the Liquidator also advanced the following propositions, which I accept. First, the court will, in exercising its discretion, generally view a case against an officer or former officer of a company as stronger than that against a third party and for this purpose the auditors of a company are recognised to be officers. Moreover, an application is not to be considered unreasonable simply because it is inconvenient to the respondent or may cause him considerable work. Finally, it is to be noted the application in issue is for documents and information and that such an application is much less likely to be oppressive than an order for oral examination.

Grounds of appeal

31. With these legal principles in mind I must now consider the submission that the District Judge fell into error in exercising his discretion to refuse the application. Before dealing with the particular submissions advanced on behalf of the Liquidator, I would, however, make the following preliminary observations.
32. First, I am satisfied that the District Judge had well in mind the principles which I have outlined. Although he does not refer to any specific authority, he recognised the scope and purpose of the jurisdiction under s.236 and that he had an unfettered discretion but that the views of the liquidator were entitled to a great deal of weight. Importantly, he recognised and was guided by the need for a liquidator to show a reasonable requirement for the information and documents sought in order to carry out his functions. It was this requirement which he considered, in the light of all the circumstances, the Liquidator had failed to satisfy.
33. Secondly, it seems to me that it is important that the application in issue be considered against the whole of the background to which I have referred and that is what, in my judgment, the District Judge did. In particular, I have in mind the following. The application relates to a liquidation which happened over seven years ago and yet the Liquidator has provided no details of what investigations have been carried out over that period, what those investigations have revealed and what, if any gaps remain. Further, the evidence of BDO shows that their involvement was relatively limited and came to an end at the latest in July 1997. Further, their last material involvement in the affairs of the Company was in July 1996, that is to say a year before the shares were first suspended and nearly two years before the Company entered compulsory liquidation. Despite this limited involvement, the application is made on an extremely broad front and seems to extend to all documents which BDO might conceivably have. Further, the letter sent on behalf of the Liquidator on 27 January of this year reveals that the Liquidator is seeking documents which are in the public domain or which relate to activities that took place after BDO resigned as auditors. It was in the light of all of these circumstances that the District Judge came to the conclusion that the evidence submitted on behalf of the liquidator did not establish a reasonable need for the documents requested.
34. I turn then to consider the particular submissions advanced. First, it was contended that the District Judge wrongly made and relied upon a finding of fact that the Liquidator did not identify "the purpose" of the application.
35. I am unable to accept this criticism. It is no doubt true to say that the purpose of the application was to establish the true financial position of the Company, to investigate fully the affairs of the Company and to reconstitute the state of knowledge of the Company. But this is to do no more than state a liquidator's function and is a matter which the District Judge had well in mind, as appears from paragraph 5 of the decision. What the Liquidator has failed to do in the evidence in support of the application is to explain why the documents sought are required in order to carry out those functions. The Liquidator must establish a reasonable requirement for the documents he seeks and that is what the District Judge looked for but failed to find in the evidence in support of the application. He considered that, in the light of the circumstances to which I have referred, it was not good enough simply to state that the documents were required without any further explanation. That, in my judgment, was a view he was entitled to come to, particularly bearing in mind the scope of the request and the inevitable cost and burden of complying with it.
36. Secondly, it was contended that the District Judge failed to take account of or give proper weight to the view of the Liquidator that the documents he sought were reasonably required or necessary in the interests of the winding up of the company, to reconstitute the knowledge that the company should possess and generally to enable the liquidator to carry out his functions. In my judgment this criticism is also misplaced. In paragraph 4 of his decision, the District Judge expressly recognised that the views of a liquidator are normally entitled to a great deal of weight. In paragraph 6 of his decision, the District Judge recorded the fact that the Liquidator was asking for the documents as part of his review of the financial affairs of the Company and its dealings and property.
37. Thirdly, it was submitted that the District Judge required a degree of detail in the evidence of the liquidator regarding the purpose of the application that was not necessary or required for an order under s.236. In this connection it was also submitted that the District Judge wrongly required that the application be accompanied by evidence of enquiries made by the Liquidator. To my mind these submissions are something of a re-statement of the first criticism of the conclusion reached by the District Judge. I consider that, bearing in mind the long period of the liquidation, the wide-ranging nature of the request made and the limited involvement of BDO in the affairs of the Company, the District Judge was entitled to come to the conclusion that the Liquidator needed to give some explanation of what he had done and why the information was required.
38. Fourthly, it was submitted that the District Judge wrongly increased the weight of the burden on the Liquidator under s.236 in view of the time that had elapsed since the winding up order and the appointment of Mr. Gendall as first liquidator of the Company. It is of course true to say that the court must consider the position of a company as it finds it and that if the documents are shown to be necessary then the fact that they are sought many years after the liquidation commenced should not in any way be a bar to the application. Nevertheless, I do not accept that the District Judge wrongly increased the burden on the Liquidator. Rather, it was one of the factors that he took into account as part of the factual matrix against which he was invited to make the orders sought.
39. Finally, it was submitted that the District Judge failed to apply s.236 for its proper purpose, failed to balance any potential prejudice to BDO as against the interests of the creditors, failed to take into account that BDO was at all times an officer of the Company and that many of the documents sought by the liquidator were and are owned by the Company and failed to take into account that the application was only for inspection of documents. I am unable to accept these submissions. These are all matters which the District Judge had in mind. He knew the status of BDO, he appreciated the role of a liquidator and the general purpose of an application under s.236, he was aware of the nature of the documents sought, he knew that the application was for inspection of documents, not for examination of BDO, and he was aware of and referred specifically to the history of the matter. It is also to be noted that the application was not brought on the basis that the documents sought by the Liquidator were and are owned by the Company.
40. Overall, I have reached the conclusion that the District Judge did not err in principle or in the approach he adopted and that he exercised his discretion in a reasonable way in the rather unusual circumstances of the present case. He was entitled to come to the conclusion that he did. In all the circumstances this appeal must be dismissed.