Before : |
Sir William Bailhache, Commissioner, and Jurats Hughes and Ramsden |
Between |
Garry Yuri Itkin |
Representor |
And |
Andrew Wood |
|
And |
Alexander Adam |
Respondents |
|
(In their capacity as Joint Liquidators of Golden Sphinx Limited) |
|
Advocate I. C. Jones for the Representor.
Advocates M. St. J. O'Connell and S. A. Hurry for the Respondents.
judgment
the commissioner:
1. On 23 May 2023, judgment was handed down in respect of the application by the Representor for orders preventing Golden Sphinx Limited ("the Company") from instructing Advocate Jeremy Garrood and removing the Respondents from their appointment as Joint Liquidators. In its judgment, the Court expressed concern about a number of features of the liquidation. In essence there were three:
(i) There was uncertainty about whether proper notice was given to the Representor, as a creditor of the Company, of the proposed appointment of the Respondents as liquidators.
(ii) There was concern about the approach which had been taken by Advocate Garrood, who had been instructed by the Company before it resolved to go into liquidation and who was initially instructed by the Respondents thereafter. In referring to that concern, we reiterate what was said at paragraphs 9 and 10 of the Court's judgment of 23 May - Advocate Garrood did not appear before the Court at the hearing of the Representation and we accordingly did not hear directly from him. Thus, for the avoidance of doubt, we made and make no findings or criticism as to the propriety of his conduct to date, albeit we did conclude that it would be inappropriate for the Respondents to instruct him as counsel to assist them as liquidators in the liquidation of the Company.
(iii) There was concern as to whether the funding of the Respondents by Mrs Sabadash would have an impact on their ability to perform their functions as liquidators.
2. As we said at paragraph 47 of the judgment, we are satisfied that the Respondents are professionals who seek to do their job as liquidators notwithstanding the concerns which we have expressed earlier. However, in the circumstance that at its heart the litigation in the different jurisdictions seems to us to be an argument between two individuals, Mrs Sabadash on the one hand and the Representor on the other, we think it is important that the Respondents, who have a special status as liquidators which is recognised in Courts outside the island, have the legitimacy of that status endorsed in relation to the actions which they propose to take. They have asserted firmly to this Court that, notwithstanding that they are funded by Mrs Sabadash, they are able to apply an independent approach to the functions which they have as liquidators. We are satisfied that they intend to do so and, as we think we made plain in our judgment of 23 May, we do not express any personal or professional criticism of them beyond the comment that it was in our view an error of judgment in the particular circumstances of this case not to confirm until put under pressure in Court the identity of the party funding the liquidation and thus the conduct of the litigation.
3. In our judgment of 23 May, we indicated at paragraph 48 that the Respondents should return to Court with details of the progress they had made on the proposed alternative funding arrangements for the liquidation and the conduct of the litigation. We had such a hearing on the date on which the judgment was handed down.
4. Advocate O'Connell submitted that we should sit in private to hear details of the funding arrangements which the Respondents had made. He said that these were privileged and it was likely that the Court would see materials which would include a range of options from the possibility of external funding through to the continuation of funding by Mrs Sabadash. Any funding provided externally would inevitably be linked to the question of the likely success of the litigation, which was why the submission should be heard in private.
5. Advocate O'Connell went on to submit that the Respondents would have no difficulty in scrutinising the activities of Mrs Sabadash. He said that if she metaphorically turned off the funding tap, then the Respondents could come back to Court and at that stage seek alternative funding. Furthermore, the Respondents were not only comfortable with that but also with the proposition that they would update the Court from time to time, but they must be able to do so in private. In that context he relied upon Craig v Humberclyde Industrial Finance Group Limited and Others [1999] 1 WLR 129. In that case, a company was wound up by order of the Court (as opposed to going into liquidation at the instance of the shareholders, as in this case) but the official receiver was unable to pursue litigation in the interests of the company for shortage of funds. The liquidator sought directions from the Court and the judge directed him to assign the actions to the former directors. On appeal by the putative defendants of such actions, the Court of Appeal held that the liquidators' power to sell the property (which included the causes of action) was subject to the control of the Court and in exercising that control the Court's function was essentially administrative, to ensure as far as practicable the proper exercise of fiduciary powers or obligations. In the circumstances, the judge had been entitled to exclude the representatives of the putative defendants from that part of the hearing dealing with evidence and submissions as to the merits of the company's actions against those members of the group; and the judge had given counsel for those putative defendants an adequate opportunity to be heard. Accordingly, there was nothing unfair in the course of the proceedings taken.
6. The decision in Craig v Humberclyde was in our judgment one of general principle, albeit that there was reference to the particular provisions of the Insolvency Act 1986 and the Insolvency Rules made thereunder, which are missing from our legislation. In our judgment, Advocate Jones rightly agreed that Craig v Humberclyde was relevant and applied in the instant case, and accordingly we heard from Advocate O'Connell with Advocate Jones present, and briefly from Advocate Jones who then retired. We then heard from Advocate O'Connell in private and Advocate Jones returned to make some final submissions. This judgment is available to the Representor because it represents the conclusion of his application for the dismissal of the Respondents as liquidators of the Company, but we have sought to protect the confidence of what was said to us in private albeit, as is clear, we are taking that into account.
7. As to the merits of their position, Advocate O'Connell noted in open hearing that the Court had been rightly concerned with Advocate Garrood's involvement at the outset, and also that the Court was able to look at the reality of the position overall. He submitted that at one time the Company had assets of over £75 million. It is now before the Court in an insolvent state and the reason he contended for that position was that the Representor had removed the assets or a substantial part of them. Indeed, Advocate O'Connell submitted that the Representor admits that he did so, as part of an exercise to 'lock down' the assets. On his own case, it was said that the Representor had indulged in self-help security.
8. As to the position in relation to different funding possibilities, Advocate O'Connell described the process by which litigation funders might consider a proposal. At step one, a confidentiality agreement would be prepared in respect of the transmission of information about the litigation to prospective funders. With that confidentiality agreement would generally be provided an opinion from counsel on the merits, sufficient to justify interest on the part of the litigation funders.
9. Step two would represent that stage where there was active due diligence and closer discussion. A term sheet would identify the matters to be negotiated.
10. Step three would involve the investment of funds in the litigation and the execution of the deal in respect of which such funding would be provided.
11. Step four would involve ongoing monitoring of the litigation in respect of its progress and potential returns. That was an onerous stage in the proceedings because the funders would set up a credit committee or investment committee to consider the extent to which they would continue to put their own funds at risk.
12. The cost of all this was enormous. The external funder generally took a substantial uplift which could be up to 50% on all the actual outlay, depending on the extent of the risk. The result was that there was less money available to creditors at the end of the litigation, if it were successful.
13. It was furthermore said that there was no current complaint of what Mrs Sabadash had done as director (other than in her convening of the creditors' meeting) so any investigation of her conduct was theoretical rather than real at this stage.
14. That was the extent of the submissions made in Advocate Jones' presence insofar as external funding was a possibility. It was said to us that the materials which the Respondents wished to put forward would disclose their independence as liquidators, but it might be against the interests of the Company to do so in the presence of Advocate Jones.
15. Advocate Jones submitted that, as far as one could tell, we were not at the process point at the moment. He had no objection in principle to third party funding, but it is difficult for the liquidators if they are funded by Mrs Sabadash, and their conduct since August 2022 shows that to be so. As director, she refused payment of a substantial judgment debt due by the Company to his client, the Representor. The Company under her direction opposed his application to have the Company wound up and issued its own claims in respect of the substance of the judgment debt which it owed. The bottom line is that the Representor criticises Mrs Sabadash at every point, and it is entirely accurate to describe the litigation as, in effect, litigation between his client and Mrs Sabadash.
16. In response, Advocate O'Connell submitted that Advocate Hurry had written to Advocate Jones on 21 February 2023 seeking details of what the precise concerns were, and yet there had been no reply. Advocate Jones confirmed that was correct. He said he had set out the problems already.
17. At that point, Advocate Jones left Court and Advocate O'Connell addressed us in confidence. However, it is not necessary or relevant to our decision to refer to anything said to us in private for the purposes of this judgment.
18. We were presented with a draft affidavit called the second affidavit of Andrew Wood. It was unsworn, but as Mr Wood was present in Court, he swore it before us as being true to the best of his knowledge, information and belief. In his affidavit, Mr Wood explains how the Respondents' consistent view has been that before they cause the Company to continue or commence Court proceedings to recover the Company's assets, they need to have clarity on the funding arrangements for any such proceedings, including any adverse costs award.
19. Apart from being registered as an approved liquidator in Jersey, Mr Wood is managing director of Teneo Financial Advisory Limited and, as mentioned, joint liquidator of the Company. He put before us a copy of an agreement (the "Teneo Agreement") entered into with Mrs Sabadash on 4 July 2022. In that agreement, Mrs Sabadash undertook to pay the Respondents in respect of their remuneration and all the liquidation costs, expenses and disbursements. There was no uplift or other high percentage recovery for Mrs Sabadash in the event of recoveries being made by the Company. That distinguished the Teneo Agreement from what was common in funding agreements with commercial funders. As a result, the Teneo Agreement was advantageous to the Company's stakeholders.
20. However, that agreement did not provide a sophisticated framework for handling the litigation which might be necessary. A draft of a litigation funding agreement (the "DFA") was first provided to Mrs Sabadash for comment on 14 December 2022. It remained unsigned by both parties at the date of the hearing, albeit that both the Respondents and Mrs Sabadash appear to have acted so far as if it had been signed. Mrs Sabadash has approved the costs budget and the additional commitment (as defined by the DFA) thereby paving the way for the Respondents to attempt to recover assets of the Company with potentially considerable value. The DFA has in fact been amended from time to time, albeit still remaining unsigned, given the lapse of time since it was first drafted, and the developments which have taken place. The Court was shown the amendments.
21. What is particularly important, according to Mr Wood, is that one notices from the revised version of the DFA, that Clause 9, which relates to the control and conduct of each action, has not changed. It provides as follows:
"9.1 The joint liquidators [the Respondents] (on behalf of the Company) shall have overall and day to day control and conduct of, and responsibility for, each Agreed Action.
9.2. The funder shall have no control or conduct of any Agreed Action."
22. "Agreed Action" is defined in the DFA as action or additional action as agreed between the funder and the Company in accordance with Clause 4.3. Although it may subsequently have changed, at the date of the hearing, that clause was in these terms:
"Upon receipt of the Initial Advice the Company will procure that a copy of the Initial Advice is delivered to the funder. The funder and the Company will negotiate in good faith to agree to investigate, commence and / or pursue one or more agreed actions."
23. Mrs Sabadash is the funder. The Initial Advice is defined as a written advice on the merits of the actions comprising the litigation between the Company and, among others, the Representor, and any other additional action provided by legal counsel.
24. Advocate O'Connell emphasised that nothing in the Teneo Agreement or in the DFA gave Mrs Sabadash any right to require the Respondents to take particular steps. As a result it could fairly be said that the Respondents were entirely independent of the funder and it was proper for them to proceed on that basis.
25. As to external funding, the Respondents had made some enquiries. Their enquiries with Harbour Litigation Funding were more advanced than enquiries with others - counsel's advice had been provided and Harbour had indicated a potential interest. Detailed negotiations had not however taken place, although it was indicated by Harbour that they would want a return of between 1.35 and 3 times their investment. The discussions with two other funders had barely started.
26. In Advocate O'Connell's submission, if the Court were satisfied that the Respondents could properly fulfil their functions, funded as they were by Mrs Sabadash, then there was no reason to spend additional monies through an external funding agreement of the kind described. He said that we should be so satisfied - if the Respondents found themselves in difficulties, then they could make a Beddoe application and seek approval for external funding. He agreed that Advocate Jones could be informed of this. He also agreed that Advocate Jones could be informed that Mrs Sabadash has promised only to pay for the agreed actions. When Advocate Jones was informed of this on his return, he submitted that the possibility of a Beddoe application did not address the difficulties which have been identified, other than that the Court will be able to supervise the performance of the Respondents' functions.
27. We make the following observations about the DFA as it was shown to us at the hearing:
(i) It remained unsigned. In our judgment it should be executed as soon as convenient. It may be that Mrs Sabadash has so far acted in accordance with its terms, but this is not the type of contract in our judgment which could successfully lead to a conclusion that its part performance revealed its binding nature.
(ii) The funding obligation on Mrs Sabadash was to pay the amount of a funding request within five business days of receipt. Amounts paid are then treated as an expense of the liquidation of the Company. The funding request must be accompanied by such information as Mrs Sabadash may at any time reasonably require. It follows that if the Respondents were to come across circumstances which they considered should be investigated but which were potentially adverse to the interests of Mrs Sabadash, they would, on the face of it, be obliged to inform her that this is what the funding was required for.
(iii) The DFA only provides for Mrs Sabadash and the Company to negotiate on the basis of the initial advice for the investigation, commencement or pursuit of one of more Agreed Actions - that is to say, actions agreed between Mrs Sabadash and the Company. There is indeed an additional provision headed 'Additional Commitment' - this refers to the need for agreement between Mrs Sabadash and the Company of a costs budget for any agreed actions.
(iv) When we said in our earlier judgment that in litigation he who pays the piper calls the tune, it seems to us that this was entirely apposite to the present case, not in Mrs Sabadash having the ability to tell the Respondents what they must do, but rather as a mechanism for curtailing what they were able to do simply by reason of her control of the purse strings.
(v) The DFA provides that Mrs Sabadash may at any time discontinue the making of advances in respect of a commitment at her absolute discretion save that she would remain liable for discontinuation costs and any adverse costs order.
28. It was said to us by Advocate O'Connell that, if the Respondents found themselves in difficulties with the performance of their obligations, then they would be able to return to Court and apply for directions, seeking approval for external funding. That submission was made in Advocate Jones' presence and arose in the context of an acceptance that Mrs Sabadash had promised only to pay for the Agreed Actions. In his submission in response, Advocate Jones said that the possibility of a Beddoe application did not address the difficulties which previously had been identified, other than to show that the Court could supervise the performance of the Respondents' functions.
29. Nothing that we have seen has caused us to change our view that Mrs Sabadash in essence retains practical control over what the Respondents are able to do because, if she does not approve of their intended actions, she is not obliged to provide the funds for them. For as long as the Respondents take steps in the liquidation which are acceptable to her, she will continue to pay for them. Nothing that we have seen or heard suggests that any of the preliminary concerns which we expressed in our judgment of 23 May have dissipated, although we do accept, as we indicated at the hearing, that the Respondents have every intention of acting professionally as liquidators of the Company and taking steps which are in the best interests of its stakeholders.
30. The far more difficult question has been the next steps from here. The Company has resolved to go into liquidation. It is not a resolution to go into voluntary liquidation, so far as one can tell, because the Company does not seem to be able to procure that a statement of solvency is provided: Mrs Sabadash would have to accept an obligation to come up with payment of the substantial judgment debt in favour of the Representor for that to take place.
31. Accordingly, if we were make to an order relieving the Respondents of their functions, the question we must address would be what further order would be right or proper.
32. Under Article 175 of the Companies (Jersey) Law 1991, as amended (the "Law"):
"175. Appointment or removal of liquidator by the court
(1) The court may appoint a liquidator if for any reason there is no liquidator acting in a creditors' winding up.
(2) The court may, on reason being given, remove a liquidator in a creditors' winding up and may appoint another.
(3) The appointment or removal of a liquidator under this Article may be made on request by the company, a director of the company, a creditor, the Viscount, the Commission, the Minister or any other person."
33. Although it is slightly unclear, we think that this is a creditors' winding up and therefore the Court has the power under Article 175(2) to remove the Respondents. However, the liquidation would continue. Article 185A of the Law allows for a termination of the creditors' winding up, but by paragraph (2) of that Article, any application, whether by the liquidator of the Company or, by the members sanctioned by special resolution by the Company, is to be refused unless the Court is satisfied that the Company is then able to discharge its liabilities as they fall due. There is no basis at present for thinking that the Company would be able to do so.
34. Replacing the present Respondents with any other professional liquidators funded by Mrs Sabadash would essentially raise the same concerns as have been raised in connection with the Respondents.
35. It would seem to follow that if we were to adopt this course, it would be to drive the appointment of external funders, a much more expensive solution which these Respondents have indicated they will follow in any event if it becomes necessary for them to do so to fulfil their obligations as liquidators.
36. None of these options appears necessarily attractive. In our judgment, the least worst option is that the Respondents should continue in their appointment and accordingly we have reached the conclusion that the Representation, insofar as it seeks the removal of the Respondents, should be dismissed. Having received from the Respondents their undertaking that Advocate Garrood will not be reinstructed by them in the course of this liquidation, it is unnecessary to make the further orders in that connection which the Representor had sought.
37. It will clearly be necessary, if Mrs Sabadash gets to the point she does not wish to fund the liquidation any further, for the Respondents to make a Beddoe style application to the Court for approval to seek third party funding. On the basis, however, that the liquidation will continue to be funded by Mrs Sabadash, we think it right to add to our decision just given that it would be appropriate for the Respondents to apply at this stage for a direction pursuant to Article 186A of the Law, to seek approval of the steps which the Respondents intend to take in litigation in Jersey or in other jurisdictions. In our view, it would be inappropriate to convene the Representor to any such application insofar as the application concerns litigation hostile to his position. Inevitably, it would be necessary for the Respondents to set out in any such application the merits and demerits of the proposed action, as they are advised at that time. The purpose of the application, as we currently see it, is not to advise the Respondents as to what action they should or should not take; but rather to ensure that, given the special status which liquidators have in most other advanced jurisdictions, this Court can be satisfied that, in the circumstances of this case, which as we have said we regard as essentially litigation between two warring creditors of the Company, no unfair advantage is obtained by one of those creditors through her appointment and payment of these liquidators. It goes without saying that approval of any such action, whether in Jersey or other jurisdictions, would not amount to an endorsement of the merits of the action in question of itself - and given the possibility that much of the litigation may yet occur in Jersey, it is also necessary that a different Court be constituted to deal with that litigation than with any application under Article 186A.
38. Finally, we are available to be addressed on costs of the Representation if either party wishes to make an application in that connection, and they should apply to the Bailiff's Judicial Secretary to fix a date in the usual way in that event. It may, however, be helpful to give a preliminary indication of our current views. It will be apparent that, although the Representation has been dismissed, it has been partially successful in the sense that an undertaking has been given not to reinstruct Advocate Garrood, and because the Court has been satisfied that there are circumstances unconnected with the integrity or professionalism of the Respondents which cause concern in relation to their appointment; and yet on the other side, the Representation has been dismissed and that prayer for relief has not been granted. Our preliminary view is that the equity in these circumstances is that each side should bear their own costs - that has the effect of neutrality as between the two warring creditors on this particular issue, which, provisionally, as indicated, if not heard by the parties, might seem at this stage to be the equitable result.
Authorities
Companies (Jersey) Law 1991.
Insolvency Act 1986.
Craig v Humberclyde Industrial Finance Group Limited and Others [1999] 1 WLR 129.