England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY

		Priory Courts, 33, Bull Street, Birmingham B4 6DS
		27th November 2009

Judge Purle QC:

1. The. Applicants are the Joint Liquidators of Equilift Limited ("the Company"), which was a supplier and installer of stair-lifts. They were formerly appointed Joint Administrators on 12^th December 2008.
2. The Liquidators have identified possible proprietary claims relating to bank accounts under their control. If those potential claims are valid, the result will be that the relevant bank balances are not, strictly speaking, held by them as Liquidators, but as trustees for the persons beneficially entitled.
3. The matter originally came before me for directions with a view to the joinder of representative parties.
4. In very broad outline, what happened was that the Company for some time operated 4 accounts, known as Main Account Detail, Main Account Pooling, Deposit (Advances) and Deposit Account Pooling. The first 2 and the last 2 were linked, in that payments were made from the one to the other for the purpose of earning interest. Main Account Detail and Deposit (Advances) were current accounts, the other 2 were interest bearing.
5. The idea was that customer deposits and other payments would be held in reserve until work for the customer was complete, though this information was not (unless anyone asked) in general communicated to the customer.
6. Before 1^st October 2008, only consumer deposits were treated in this way, and there were other differences in the way the accounts were operated before and after that date. After 1^st October 2008, other deposits, stage payments and prepayments in respect of service contracts were included in the arrangements. However, the arrangements were operated rather loosely. Some deposits and prepayments were paid into one account, some into another (including the main current account). A balance was struck on a monthly (later weekly) basis by reference to work done in relation to sums previously paid, and deposits, stage payments and prepayments which had by then been earned. The balance on reconciliation was transferred from one account to another, though there was no attempt to differentiate between customers' monies and the Company's monies, e.g., by paying sums both ways. There was payment one way only, according to the balance struck. In addition, the Company drew down from the deposits, stage payments and prepayments sums sufficient to enable it to carry on business. In short, the monies were there to be treated as the Company's own, though a degree of self-discipline was introduced to comply with what the Company understood was "best practice", with the apparent aim of protecting customers from the risk of insolvency.
7. These facts, which are developed more fully in evidence, give rise to potential arguments of some complexity with different interested classes of potential beneficiaries (if there ever was a trust). As there were 4 accounts which received the payments in question, and 3 classes of customer (relating to consumer sales, trade sales and service contracts) there are a number of classes of potential beneficiaries. Additionally, individual customers may be able to point to features peculiar to themselves. Difficult question of tracing may also arise to the extent that trust monies (if that is what they were) moved from one account to another, or were absorbed in the regular reconciliation process.
8. Ordinarily, where there is real doubt over whether a liquidator is holding monies as liquidator or as trustee, the Court will join the necessary parties (and, where there are a large number of them, representatives of recognised classes of potential beneficiaries) so that the matter may be resolved conclusively. Either way, the liquidator will usually be entitled to his costs out of the property (whatever its character). Often, but not always, the representative parties will be likewise entitled in respect of their costs, and a pre-emptive costs order will sometimes be made so as to ensure their effective participation. Nevertheless, it has to be borne in mind that any claim to treat what is ostensibly the Company's property as someone else's is, from the Company's perspective, hostile litigation, as to which the normal costs order is that the losing party pays.
9. The proper approach of the Court to costs was considered by Sir Nicholas Browne-Wilkinson VC (as he then was) in Re Westdock Realisations Ltd and Another [1988] BCLC 354 at 359-360. He said this:-

"If a trustee, liquidator of receiver, or any other person in a neutral capacity is holding moneys which belong to others but it is not known who is beneficially entitled, the court frequently makes orders that the costs of determining who is beneficially entitled to those moneys are to be paid out of the moneys held. The ordinary order for costs in the case of an express trust fund is one example. In addition, orders are frequently made in the Companies Court where there are issues as to beneficial ownership that the costs come out of the fund: see for example Re Exchange Securities & Commodities Ltd (No 2) [1985] BCLC 392 and the remarks of Nourse J in Re First Guarantee Trust Co Ltd (unreported) 14 February 1985 . It is in my judgment much too late to put forward a contention that there is no jurisdiction to make such order. However, of course, in considering whether such an order should be made the fact that in one event the fund will be held not to belong to the liquidators is a most relevant matter to take into account…

… After hearing the argument I am satisfied that there is no fixed practice relating to all cases. I am also satisfied that there cannot be any practice applicable as a rule of thumb to all types of cases. The range of summonses which can be issued and are heard raise such a wide range of issues that there can be no fixed rule. However, in my judgment the proper approach is as follows. In general, claims arising for determination in such cases are, as counsel for ECGD submits, hostile claims in which one or more parties are in dispute as to the ownership of property. It is litigation between rival claimants. In those circumstances one would expect that the costs would normally follow the event, the unsuccessful claimant paying not only his own costs but also the other side's. However, there are many cases in which it is essential for the due administration of the liquidator's or receiver's duties to obtain a decision from the court. In such cases there are often large classes of creditors, contributories or other claimants, the exact membership of which class is often not easily established or even known, who will be affected by such decision. In such a case the liquidator or receiver joins a representative respondent to argue the point on behalf of the class. Frequently the sum at stake for the individual respondent joined does not justify him incurring the costs involved in litigating the matter. As a result, in order to ensure that the matter is properly determined the costs of the representative respondents are frequently paid out of the fund. An agreement to that effect is often made before the proceedings are heard; indeed on occasion the court orders it before trial. But in my judgment those are special cases in which it is necessary for the proper execution of the duties of the receiver or liquidator to have the matter determined and a pre-emptive order as to costs is a necessary prerequisite to that determination being obtained. This is not a rule applicable in all cases; it is simply in my judgment the right general approach to costs in these cases."

10. In the subsequent case of Re Joshua Shaw & Sons Ltd [1989] BCLC 362, Hoffmann J declined to make a pre-emptive costs order in favour of a representative party where he was able to conclude that to do so would be a waste of money, as the claim which it was sought to determine was not even arguable. That must clearly be right, but leaves open the question of what is to happen where there are potential trust claims, some of which are clearly arguable, in cases where it is unreasonable to expect a representative party to shoulder the costs of the whole class, but where to join the requisite range of representative parties would run the risk, in view of the likely costs order, of exhausting the whole or a substantial part of the property in dispute. That also would be a waste of money.
11. The problem is made more acute by one further consideration. If the Liquidators are holding any part of the Company's assets as trustees for some or all of its customers, their distribution of those assets otherwise than in accordance with what may turn out to be the rights of the beneficiaries would be a breach of trust, even though the Liquidators may make that distribution in good faith in accordance with the best legal advice available. The Liquidators, as neutral parties, are not bound to put themselves at personal risk in that respect, when their only wish is to distribute the assets they control to the persons properly entitled.
12. This point is of significance in the present case. When the matter initially came before me for directions, I was alarmed at the prospect of creating litigation on a scale which would have the potential to exhaust a substantial part if not the whole of the amounts involved. The funds in the relevant accounts totalled £171,784.35 on 12^th December 2008, and a total of 484 customers are affected, falling into 3 categories: consumer customers, trade customers and those who have paid for service contracts. Many of the consumer customers are disabled and can ill afford the loss of their deposits or prepayments, let alone the costs of litigation, and there is understandably a degree of righteous indignation from some customers whose payments were taken late in the day. No-one has, however, yet articulated a proprietary claim. Individual amounts are, of course, relatively small, some very much so.
13. In those circumstances, I required the Liquidators to obtain a written Opinion of Mr Zaman QC (who then appeared before me) to enable me to consider, on a non-adversarial basis in the first instance, the competing arguments. Mr Zaman QC has prepared such an Opinion. He has concluded that the arrangements put in place by the Company from 1^st October 2008 were probably ineffective to create a trust in favour of any of its customers. A small point remains as regards the position before 1^st October 2008 which I consider at the end of this judgment.
14. I do not propose to debate the merits of Mr Zaman QC's Opinion, as that would require adversarial argument, and the question I am deciding is whether I should give directions to enable that argument to take place. It is sufficient to say that Mr Zaman QC's Opinion is fair, balanced and well reasoned, recognising that there are arguments both ways. Ordinarily, that would justify a full hearing where the respective arguments could be advanced by representatives of all interested parties. In this case, however, that would be expensive, and it would not be fair to expect a representative party or parties to shoulder the costs of satisfying the Liquidators' understandable desire for certainty. That would point therefore to the desirability of a pre-emptive costs order for payment of their costs out of the funds in issue. It would, however, be disproportionate for the matter to be litigated further at the risk of the relatively modest fund. The reasonable and proportionate course is that the Liquidators should act on Mr Zaman QC's Opinion, and treat the funds in question as falling within the assets of the Company available for distribution among creditors generally.
15. This leaves the Liquidators theoretically at risk of a breach of trust claim following distribution of the funds in the liquidation. However, the Court has a broad discretion to relieve trustees under section 61 of the Trustee Act 1925 (if that is what the Liquidators turn out to be). It seems to me that Liquidators acting upon the Opinion of experienced Counsel in cases where the funds in dispute are relatively modest would undoubtedly be acting honestly and reasonably. Given also that the Liquidators are now seeking the directions of the Court as to whether or not to act upon the Opinion (a sensible safeguard that in cases such as the present should only be dispensed with if the amounts affected are so small as to make that course disproportionate) it is inconceivable that they would not be relieved from the consequences of any breach of trust which distribution in accordance with Mr Zaman QC's Opinion would inadvertently involve. This is in line with established Court of Appeal authority: see, generally, Re Allsop [1914] 1 Ch 1 at 12-13.
16. It seems to me also that it is reasonable to expect the Company's customers to accept the Opinion obtained by the Liquidators, and that it is unreasonable and a disproportionate waste of money to expect any further debate to be funded out of the relatively modest cash sums in dispute. Implicit in that, though, is the recognition that customers should be told of the Opinion, and have the opportunity, at their own expense and risk as to costs, to contend for a different result.
17. What I am minded to do therefore, is direct the Liquidators to waive privilege in respect of Mr Zaman QC's Opinion (I have ascertained that they are agreeable to this course) and write to all affected customers informing them of this judgment, and of the course they propose to adopt of acting in accordance with Mr Zaman QC's Opinion. The customers will be told of their right to request sight of copies of the application now before the Court, the evidence in support, Mr Zaman QC's Opinion and this judgment. Each customer will also be given permission to apply, within a period of 2 months of the Liquidators' letter, for an order that the cash sums held by the Liquidators should be distributed in some other way. Failing any such application, the Liquidators will be authorised (subject to the point raised at the end of this judgment) to treat the cash reserves as part of the assets of the Company available for distribution in the liquidation.
18. I do not think it would be appropriate to appoint representative parties in the particular circumstances of this case. I would only be content with that course if a pre-emptive costs order was appropriate, or the customers were acting collectively as a self-funded group. For the reasons I have given, I consider a pre-emptive costs order to be a waste of money, and collective group action by the customers can probably be discounted as a practical reality given the small amounts involved.
19. A draft letter has been provided to me which I approve subject to correction of the spelling of my name (Purle, not Pearl) and of the date of handing down (which is 27^th November and not, as originally envisaged, 26^th November). The judgment once handed down will also be available on BAILII, and the Liquidators should provide the link in their letter.
20. I did have one query relating to Mr Zaman QC's Opinion, which it has been possible to clarify prior to handing down this judgment. He expressed the view in para 57(1) that the Company certainly had a trust in operation prior to 1^st October 2008, but not (on balance) thereafter. This is consistent with the Opinion I required the Liquidators to obtain, as the Order I made related solely to the position after that date. However, Mr Zaman QC's Opinion raised the prospect that there might be consumer deposits from before 1^st October which, on ordinary tracing principles, had not subsequently been expended, and should therefore be paid to the relevant depositor. The point has now been clarified. There is only one consumer deposit pre-dating 1^st October 2008 which remains unexpended, in the relatively modest sum of £516.09. The Liquidators propose to repay that deposit to the customer in question without admission of liability. This is sensible and proportionate and I shall sanction that course.
21. The Liquidators solicitors should provide a draft order as a Word document for my approval (annexing the corrected version of the letter). The costs of the application will be in the liquidation.