England and Wales High Court (Patents Court) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
INTELLECTUAL PROPERTY

		Royal Courts of Justice Strand. London. WC2A 2LL
		07/07/2008

MR. JUSTICE NORRIS :

1. This application is made at commencement of the trial. Nothing I say by way of summarising the nature of the case or the nature of the defence for the purposes of addressing the application now made should be taken as any preliminary view as to the outcome of the trial itself.
2. The trial is of the claimants' claim arising out of what are alleged to be breaches of fiduciary duty by Mr. Sean Holly, a former director of the claimant Magical Marking Limited. What is said is that on a date in February 2003, in breach of his duties to Magical Marking, Mr. Holly acquired a complete electronic copy of the designs, business documentation and customer list of Magical Marking which he then used to establish a rival business, Education & Special Projects Limited (ESP).
3. Amongst the claims advanced in the action is a claim that ESP knew, or ought reasonably to have known, that Mr. Holly was acting in breach of his fiduciary duties to Magical Marking and that any information, documentation or property which was passed to ESP was information, documentation, or property which belonged to Magical Marking which Mr. Holly ought not to have passed on and that, accordingly, ESP received the whole and held it on constructive trust for Magical Marking.
4. In support of the claims for infringement of copyright, breach of fiduciary duty, misuse of confidential information, and so forth, the prayer for relief includes injunctive relief restraining the use of the property so acquired by ESP and an account of the profits obtained by reason of the acquisition and use of that property.
5. Amongst the defences which were advanced by ESP to that claim was a defence that, in truth, Magical Marking did not own the copyright in the material which ESP acquired. The positive case put forward by ESP was that the underlying fundamental designs were derived or copied from antecedent work created by a third party and Magical Marking had no proprietary claim to it.
6. The trial of these claims which I have summarised was set for June 2008. On 25th March 2008, Mr. Holly, as director of ESP, placed ESP in administration. Notice of appointment was given on 31st March 2008.
7. The effect of the notice of appointment was immediately to impose a moratorium on all legal proceedings then current. Pursuant to paragraph 43 of schedule B1 to the 1986 Act, Magical Marking had the right to apply to the court for permission to continue its claim and the right to apply to the administrators for consent to continue to pursue its claim.
8. The principles on which such requests are to be approached were authoritatively set out by Nicholls LJ, as he then, was in Re Atlantic Computer Systems [1992] Ch 505 in a familiar passage at page 542 following.
9. In essence, the following principles emerge. (1) It is for Magical Marking to make out its case for leave to be given for the moratorium to be lifted. (2) The purpose of the moratorium is to enable the administrators to achieve the purpose for which the administration was put in place. There will be cases in which permission to continue or commence proceedings can be given without jeopardizing that purpose in any way, but in most cases it will be necessary for the court to conduct a balancing exercise. (3) The court has to balance the legitimate interests of a person having proprietary claims against those of the other creditors of the company. In carrying out that balancing exercise, the court is not embarking upon a mechanical exercise but embarking upon an exercise of judicial judgment which seeks to take account of the parties' respective interests and all the circumstances of the case. As Nicholls LJ put it, "The purpose of the power to give leave is to enable the court to relax the prohibition where it would be inequitable for the prohibition to apply". (4) In carrying out the balancing exercise, great weight is normally given to the property interests of an applicant because an administration for the benefit of unsecured creditors should not be conducted at the expense of those who have proprietary rights which they seek to exercise.
10. In the instant case Magical Marking's claims have about them something of a proprietary colour, even though monetary relief is amongst the relief sought. Where claims relate purely to monetary relief, guidance is afforded by the judgment of Patten J in Barry v TXU , [2005] 2 BCLC 22 At page 28 Patten J said this: "It seems to me that it will only be in exceptional cases that the court gives a creditor whose claim is simply a monetary one a right by the taking of proceedings to override and pre-empt the statutory machinery." It is to be observed that that remark was made in the course of an application where the purpose of the administration was to bring about a CVA or, alternatively, a scheme under section 425 of the Act in which the contested claims of all creditors would be put to a meeting and each creditor would then be able to vote in accordance with what he regarded as his own interests.
11. The purpose of the present administration is made clear from the administrator's report, with a copy of which I have been provided with. In the instant case the administrators have decided that the purpose of the administration is to achieve a better outcome for creditors than if the company were immediately placed into liquidation. What they have done is to sell the undertaking and assets of ESP to an associated company carried on by the ESP personnel for £100,000 payable by deferred installments.
12. The assets in the administration are accordingly the proceeds of sale of property which Magical Marking says is held on constructive trust for it and, in addition, the collection of book debts (expected to realise some £70,000-100,000) in respect of transactions which Magical Marking says ESP is bound to account for to it because of the circumstances in which ESP acquired the means of trade.
13. The attitude of the administrators for the request for leave is fairly summarised in a letter which the administrators wrote on 7th May 2008 in these terms: "The administrators will not grant consent to a monetary claim being continued through the courts in circumstances where there is no benefit to the company in doing so and/or no exceptional circumstances that would justify proceeding. If and/or when there is to be any distribution to the unsecured creditors, then your client's claim will be considered at that time and in the manner set out in the insolvency legislation without the proceedings being run to trial."
14. What the administrators accordingly consider is that when the time comes to distribute the funds in their hands (being the balance of the proceeds of sale and the balance of the book debts collected) then the company will be placed into creditors voluntary liquidation and at that point Magical Marking can seek to prove in the liquidation for what it claims to be its debt and the liquidator can then rule on the claim.
15. In my judgment, that is not a satisfactory disposition of Magical Marking's claim and I propose to give leave for it to continue the proceedings which it has instituted and which were continuing so close to trial when ESP entered into administration and immediately sold its entire undertaking and assets.
16. Conducting the balancing exercise, it seems to me that the following are the key factors. First, in essence the claim that is being advanced by Magical Marking is one that has a proprietary foundation, a claim to ownership of information, copyright, documentation and confidential customer information. In respect of that it seeks both monetary and non-monetary relief. It seeks an injunction restraining the use of that property. It seeks an account of all profits realised by the use of that property. The outstanding condition cannot benefit until the property issue is settled.
17. There are, in my judgment, sound commercial reasons why the claimant should seek that non-monetary relief. It is said that it is necessary to quash the rumours circulating in the business following the terms of ESP's defence as to the ownership of the underlying rights, a situation of uncertainty in which competitors are beginning to take advantage. It is said to be necessary in order to promote the development of Magical Marking, in particular in relation to franchising or the raising of further capital, that its rights in relation to the underlying material should be declared upon by the court. As it was put on Magical Marking's behalf in one of the letters, if the action goes to sleep, that does not vindicate Magical Marking's rights. The idea that the action should go to sleep as against ESP, although continuing against the other defendants only to be revived at a later stage against ESP's liquidators, does not in my judgment provide an effective or economical way of disposing of the dispute which undoubtedly exists.
18. Thirdly, I consider that to postpone the trial of the action against ESP will lead to a serious duplication of costs. Not only will the trial be proceeding against the other defendants, but also summary judgment has been obtained against the first defendant in respect of his joint liability (along with that of ESP) for the breaches of fiduciary duty and in consequence of that summary judgment, an inquiry has already been ordered. There is thus no doubt that Magical Marking will be put to expense in establishing its claim in pursuit of that summary judgment. There is no sound ground for saying that it must do the same all over again at a later stage against ESP.
19. Fourthly, merely to allow the moratorium to take effect and to postpone the resolution of the undoubted dispute that exists to some later liquidation of ESP will not address the question of what is to become of the costs incurred by Magical Marking against ESP in litigating the claim until such time as the director of ESP chose to put it into administration. As the statement of affairs in the administration has disclosed, ESP has been litigating its defence substantially on credit and the solicitors' firm which extended it credit in respect of its legal costs is now one of the principal creditors in the administration.
20. It seems to me that Magical Marking's costs to date should be capable of being addressed and that can only occur if the action is allowed to proceed to a resolution. As I emphasized at the outset of this judgment, what that resolution is remains to be determined, but I see no advantage in postponing the resolution of the question.
21. On the other hand I do not consider that lifting the moratorium and allowing Magical Marking to pursue its claim will significantly impede the objective of the administration. So far as I can see, the administration achieved its objective on day one by selling the entire undertaking and assets to an associated company which will collect the back debts and as the administrators point out, what they now have to do is essentially distribute a fund which they have in their hands. No serious harm can come by resolving the issue at the trial which is now before me, thus enabling the administrators to know where they stand in relation to that fund in their hands.
22. I accordingly give leave for the action to proceed.

(See separate transcript for proceedings after judgment)