England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		31 March 2000

Mr. Justice Laddie:

1. This is an application ('the Respondents' Application') by the Respondents, Mr. Malcolm Cohen and Mr. Raymond Hocking, both of BDO Stoy Hayward, to strike out or stay certain parts of an application to the Companies Registrar brought by the applicant, Holdenhurst Securities Plc ('the Holdenhurst Application').
2. Holdenhurst is a wholly-owned subsidiary of a company called Wimbledon & Southwest Finance Plc ("Wimbledon"), which carried on business as a bank. Wimbledon was placed into Administration by Order of Warner J on 16 February 1994, for three of the four statutory purposes, namely approval of a company voluntary arrangement ("CVA"), approval of a Scheme of Arrangement, or more advantageous realisation of assts. The Respondents were appointed administrators. The Administration Order remains in force and the Respondents continue to be the administrators. Wimbledon entered into a CVA with its creditors on 19 April 1996. Dividends of just over 50 pence in the pound have been paid out to the creditors. Subject to the claims made by Holdenhurst in these proceedings, the Respondents estimate that the total dividend payment will be in the region of 70 pence in the pound. The Respondents are also the supervisors of the CVA.
3. Holdenhurst was itself a trading bank although it has not traded for several years. It has two directors, namely David Peterman and his father, Wolfe Peterman, who are or were at material times also directors and shareholders in Wimbledon. Holdenhurst became a wholly-owned subsidiary of Wimbledon as a result of a Share Sale and Collaboration Agreement dated 11 February 1993. Apparently a few months later another agreement was entered into between Holdenhurst and Wimbledon. It is dated 7 July 1993 and by it Wimbledon purchased from Holdenhurst its assets and assumed its liabilities. This has been referred to as "the Transfer Agreement".
4. In December 1979, Holdenhurst set up an occupational pension scheme ("the Pension Scheme"). Its trustees are David and Wolfe Peterman, Wolfe's wife Gwendoline Peterman and a professional trustee, Buckingham Trustees. The sole beneficiaries are the three Petermans.
5. After the appointment of the Respondents as administrators, the Petermans made various claims for sums which they said were due to them and to the Pension Scheme. In early 1996 the Respondents compromised the Petermans' then claims. That compromise involved the payment by the Respondents of cheques totalling £390,000 on 24 May 1996 which was the day after the CVA became effective. That sum included £249,150 paid to the Pension Scheme.
6. Some seven months later, on 10 December 1996, Mr David Peterman, as trustee of the Pension Scheme, wrote to the Respondents. He asserted that (i) Holdenhurst owed the Pension Scheme £863,538 ("the Pension Scheme Debt") and (ii) Wimbledon owed Holdenhurst some £885,583 by way of intercompany debt under Clause 4.2 of the Transfer Agreement ("the InterCompany Debt"). Notwithstanding the fact that they had been in negotiations with the Respondents in relation to alleged debts due to themselves and the Pension Scheme up to the payment of £390,000 in May of that year, this was the first time that the Petermans had mentioned the existence of either of these alleged debts. Whether or not these alleged debts fall within the voluntary arrangement is, as yet, unresolved.
7. The Respondents did not and do not accept that either of these debts exist either at all or in the sums claimed. Correspondence failed to resolve the dispute between the parties and, on 9 April 1999, Messrs Zatman & Co, solicitors for Holdenhurst, wrote to BDO Stoy Hayward as follows:

"We write this letter to advise that we intend commencing proceedings for recovery of the inter-Company debt. Before such proceedings are issued, however, we must either have your consent alternatively leave of the Court pursuant to Section 11(3)(d) of the Insolvency Act 1986. Please advise whether you are prepared to consent to such proceedings being issued."

8. The Respondents did not give their consent. The result was that on 15 October 1999 the Holdenhurst Application was made to the Registrar. However it is not restricted to a request for leave under s. 11(3)(d) of the Act. Rather it is in the following terms:

"For an Order in the following terms:

1. That it be declared that the debt of £885,553.00 owing from [Wimbledon] to [Holdenhurst] has not been extinguished; and

2. That the Respondents be directed to admit the said debt under the voluntary arrangement made in respect of the Company on the 19th April 1996; or

3. That leave be granted pursuant to section 11(3)(d) of the Insolvency Act 1986 for the [Holdenhurst] to bring proceedings against [Wimbledon] for a declaration as to the debt owing by [Wimbledon] to [Holdenhurst]..."

The Respondents' Application is to strike out or stay paragraphs 1 and 2. No attempt is made to prevent Holdenhurst continuing with paragraph 3 although the Respondents do and will contend that leave should not be granted.

9. It will be appreciated that the claims to the declaration and the direction to admit the debt covered by paragraphs 1 and 2 are put forward as independent of, and alternatives to, the request for leave under s. 11(3)(d). The former are directed against the Respondents in their capacity as supervisors of the voluntary arrangement. The latter involves them only in their capacity as administrators. Mr. Tamlin, who appears for the Respondents, says that the first two paragraphs of the Holdenhurst Application are only an attempt by the Petermans to side step the need to obtain leave of the Court under s. 11(3)(d). He says that this is illicit.

The application to strike out

10. S.11(3) of the Act provides as follows:

"During the period for which an administration order is in force -

(a) no resolution may be passed or order made for the winding up of the company;

(b) no administrative receiver of the company may be appointed;

(c) no other steps may be taken to enforce any security over the company's property, or to repossess goods in the company's possession under a hire-purchase agreement, except with the consent of the administrator or leave of the court and subject (where the court gives leave) to such terms as the court may impose; and

(d) no other proceedings and no execution or other legal process may be commenced or continued, and no distress may be levied, against the company or its property except with the consent of the administrator or the leave of the court and subject (where the court gives leave) to such terms as aforesaid."

11. As Lord Nicholls said in Re Atlantic Computers plc [1992] Ch 505 at 528, the function of an administration is to provide the company with a moratorium during which the administrators try to achieve one or more of the statutory purposes set out in section 8(3) of the Act. Consistent with this, one of the objectives of s. 11(3)(c) and (d), and their equivalents in s. 10, must be to prevent the company's assets being squandered on unnecessary or pointless litigation. When a company falls on hard times creditors will naturally wish to improve their own position vis a vis others. Pursuing litigation against the company is one way of doing that. By imposing a pre-condition of consent, s. 11(3)(c) and (d) stand in the way of a litigation free for all in which the administrators may feel obliged to compromise on weak claims because the cost of defending against them to a successful conclusion is difficult to justify in the interests of the company or the creditors as a whole. The less viable a claim is, the less likely it will be that the administrator or the court will give consent.
12. Here the Respondents sought information from Holdenhurst and the Petermans to allow them to consider whether consent should be granted. Having considered the information supplied and, in particular, the lacunae in it, consent was refused. Mr. Tamlin says that there are a number of grounds for disputing both the existence of the InterCompany Debt and the Pension Scheme Debt and he has explained to me some of the grounds upon which his clients will object to consent being granted by the court when the issue is fully ventilated at the trial. However, as Mr. Brettler, who appears for Holdenhurst, has reminded me on a number of occasions, the Respondents do not assert, at least on this strike out application, that any of those grounds are so strong that Holdenhurst's claims are bound to fail. I must proceed on the basis that it may be that the InterCompany Debt and the Pension Scheme Debt both exist in the sums asserted. It is for this reason that the Respondents do not seek to strike out or stay Holdenhurst's application for consent under s. 11(3)(d).
13. Mr. Brettler says that the first two forms of relief have nothing to do with s. 11(3)(d). Because here there is a CVA, Holdenhurst can apply under s. 7(3) of the Act which provides:

"If any of the company's creditors or any other person is dissatisfied by any act, omission or decision of the supervisor, he may apply to court; and on the application the court may -

(a) confirm, reverse or modify any act or decision of the supervisor,

(b) give him directors, or

(c) make such other order as it thinks fit."

Mr. Brettler says that this section is of very great width. The Respondents, in their capacities as supervisors, have failed to allow Holdenhurst to advance it claim in the CVA and that amounts either to a decision of theirs or an omission by them of which Holdenhurst can complain.

14. Mr. Tamlin's core submission is that only s.11(3)(d) applies here. Holdenhurst has no entitlement to seek declaratory or any other relief save with leave under that section and paragraphs 1 and 2 of the Holdenhurst Application, which do not request leave, should be stuck out accordingly. He says that if these issues are not struck out at this stage the trial of the InterCompany Debt will be prolonged and expensive. In support of this he relies on the fact that the solicitors acting for Holdenhurst have suggested directions for the trial of the Holdenhurst Application which include full standard disclosure and a time estimate for the hearing of three days. He says that by contrast the determination of the issue of whether leave should be given under s. 11(3) will be much shorter. He says that the grant of leave is a necessary precondition to Holdenhurst litigating the InterCompany Debt and the Pension Scheme Debt.
15. Mere convenience or even strong suspicions that a claim will fail do not justify a strike out. The primary question raised here is whether, as Mr. Tamlin says, the application for relief under s. 7 is really no more than a method of avoiding the restrictions to be found in s. 11. If it is not, then a strike out is inappropriate. It seems to me that in deciding that question it is necessary to consider whether there is any difference in substance between these two sections. In my mind there is. S.7 is concerned with whether a supervisor has failed in some material respect to carry out his duties as a supervisor. S.11(3) is concerned with whether proceedings should be allowed to be conducted against the company in administration. It is not concerned with whether the administrator has behaved property or not, but only with whether permission to take proceedings against the company should be given. Although here the Respondents are both the administrators in the administration and the supervisors in the CVA, those functions are distinct. It is possible, though no doubt unusual, for a CVA to exist where there is no administration at all. Furthermore even in the usual case where the CVA is put in place within the context of the administration of a company it is quite possible for the supervisors and the administrators to be different people. If they are, it is not apparent to me how an objection under s. 7(3) to an act, omission or decision of the supervisors could be struck out because an alternative way of achieving a similar result, assuming that it is similar, could have been achieved by obtaining leave under s. 11(3)(d) to bring proceedings against the company and then pursuing such proceedings to a successful conclusion if leave is given. An interested party is given a right under s. 7(3) to complain of an act, omission or decision of a supervisor. If his complaint is arguable, as it is to be treated as being for the purpose of the application before me, I cannot see how I can strike it out because some other, perhaps less easy, route to the same ultimate objective is available. If this is so when the supervisors and administrators are different, it must be just as true when they are the same. The complaint against the Respondents in paragraphs 1 and 2 of the application to the Registrar are brought against them in their capacities as supervisors. The application in paragraph 3 is brought against Wimbledon. The Respondent's involvement with that arises only because they, in their capacities as administrators, have refused to give permission to Holdenhurst to sue. The applications are quite distinct and should be determined at a full hearing on their respective merits.
16. Mr. Tamlin has drawn my attention to Port v Auger [1994] 1 W.L.R. 862 in which Harman J was considering an application against a trustee in bankruptcy under s. 303 of the Act, a provision which is in its operative parts identical to s. 11(3)(d). The judge said:

"The width of the words of section 303 require the court to be cautious in allowing applications to be made against trustees in bankruptcy, remembering that the trustee in bankruptcy is, by definition, the trustee of an insolvent estate. It is the court's duty at all times to protect an insolvent estate against unnecessary expense. In my view, a wide discretion such as that conferred by section 303 should not be invoked lightly or without any proper and substantial cause. It follows that when a person comes before the court asserting, but offering no evidence beyond assertion, and without means of proving that he is a beneficiary with an interest, the court is entitled to question the substance of the alleged interest, which here may very probably be no more than a hope of being considered. When the applicant does not seek to have any act of the trustee set aside but to have declarations of right which substantially affect persons other than the trustee, notably, of course, the trustee of the settlement, as opposed to the trustee in bankruptcy, the court should be careful not to allow these wide words to be invoked so as to cause expense to the estate on a claim which the court can see is likely to be fruitless."

17. Mr. Tamlin says that the same care should be adopted to applications under s. 7(3) of the Act for equivalent reasons. No doubt it is true that the courts should be careful not to allow the wide words of s. 7(3) to be used as a means for allowing the expensive and time consuming ventilation of claims which are likely to be fruitless. But here, as I have noted already, it is not suggested that the claims made under the section are bound to fail or, if they succeed, are bound to be valueless. I have not been invited to consider whether, in the particular circumstances of this case, the Respondent's failure, in their capacities as supervisors, to accept Holdenhurst's claims is the sort of decision or omission covered by the broad wording of s.7(3). I have assumed, without deciding, that it is. I do not think that Port v Auger helps Mr. Hamlin on the Respondents' Application.
18. It follows that on the basis of the arguments advanced before me, I do not see how it could be appropriate to strike out paragraphs 1 and 2 of the Holdenhurst Application.

The application for a stay

19. In the alternative, Mr. Tamlin asks to stay paragraphs 1 and 2 of the Holdenhurst Application. I have been supplied with no separate reasons which would justify such a course and I have come to the conclusion that it would not be appropriate.

Other matters

20. That, however, is not an end of the matter. To some extent this strike out application has been caused by the Respondents' inability to get full information from Holdenhurst or the Petermans as to the nature of their claim and the material to support it. For example as long ago as July 1997 the Respondents asked for copies of the Pension Scheme accounts for the previous 5 years. They repeated that request on a number of occasions over the following two years. It was never properly answered. On 12 October 1999 the matter was raised by the Respondent's solicitors with the professional trustee of the scheme. His response was that in the light of Holdenhurst's application to the Registrar "it would not be appropriate to comment". The result of this has been that the Respondents have been compelled to issue proceedings under s. 236 of the Act seeking the necessary documentation from the pension trustees with, if necessary, oral examination of three of those trustees. It was only during the course of his submissions to me that Mr. Brettler, on instructions, disclosed that there were no annual audited accounts of the Pension Scheme. Mr. Brettler also disclosed, to the Respondents obvious surprise, that many of the other documents which they are seeking are claimed not to exist. This resulted in Mr. Tamlin suggesting ever more forcefully that there must be serious questions as to the existence or size of the InterCompany Debt and the Pension Scheme Debt. To the extent that this application has forced Holdenhurst and the Petermans to make disclosures which they have been more reluctant to do up to now, it has served a useful purpose.
21. Furthermore during his submissions, Mr. Brettler disclosed that, although Holdenhurst has no assets, this litigation was being funded by a third party. This must give the Respondents a legitimate cause for concern. I am not sure whether Mr. Brettler confirmed the identities of the third party or parties although the impression he gave me was that it was one or more of the Petermans. That raises an important issue. It is apparent that if Holdenhurst eventually loses the application to the Registrar, it will not be in a position to pay any part of the costs of the Respondents. As noted already, Holdenhurst is anticipating a trial lasting three days with full disclosure. The costs may be substantial. It is also apparent that these proceedings are not being brought for the eventual benefit of Holdenhurst. There is a real prospect that if Holdenhurst loses this application, the court will order the funder to pay the costs of the Respondents. To facilitate any such order, and subject to any observations to be made by counsel, I am minded to order Holdenhurst to disclose the identities of the persons who are funding this litigation. It will be for Mr. Tamlin and his clients to decide whether, in view of the fact that Holdenhurst has no assets, it would be appropriate to make an application for security.