Case law update

IPA Insolvency Practitioner newsletter, December 2023

An insolvency case law update prepared by Kelly Jordan, Associate Director at Manolete Partners PLC.

Kelly is an Associate Director based in the North East and joined Manolete in September 2022. She works predominantly within our business development function. She is an experienced lawyer specialising in all aspects of restructuring and insolvency matters. Previously Kelly was a Partner at a prominent regional law firm in the North East as well as at a top 20 firm. She has been recognised by Legal 500 as a leading individual and was ranked in Chambers and Partners. In 2012, Kelly completed a secondment to The Royal Bank of Scotland’s Global Restructuring Group. Kelly is a member of R3 and sits on the North East Regional Committee and is currently the vice chair for the region.

Severance of proceedings

Wright and others v Chappell and others [2023] EWHC 2873 (Ch)

In this case arising from the insolvency of the BHS group of companies, the court had to consider whether to grant an adjournment upon the application of the first respondent (Mr Chappell). Applying the Court’s powers of management under CPR 3.1, the application was granted and the claims against him were severed from the proceedings against the other directors.

When proceedings for wrongful trading and misfeasance were commenced against Mr Chappell and the other former directors of the BHS group by the liquidators, Mr Chappell was serving a six year sentence of imprisonment for HMRC offences. He was released from prison on licence only a few days before the trial commenced and sought an adjournment on various grounds including, amongst others, that his imprisonment had impeded his ability to prepare for trial, mandatory probation appointments prevented him from attending court, he was undergoing medical treatment for prostate cancer which also impacted his ability to participate in the proceedings and had been denied access to trial bundles.

Prior to the trial, there had been various attempts by Mr Chappell whilst he was still in prison to adjourn the trial, albeit on an informal footing by way of correspondence. He was largely unrepresented throughout, had no access to electronic devices and had struggled and/or failed to participate in the action being taken against him for one reason or another. Consequently, there was also a question as to whether he had complied with the court’s directions and filed points of defence and, if not, whether he was debarred from defending himself in any event.

Applying the law on the Court’s power to adjourn, particularly on applications made at the ‘eleventh hour’, the judge felt there were two delays to consider: (i) Mr Chappell’s delay in applying for the adjournment; and (ii) his delay in preparing for trial. The reasons for the delay in applying for the adjournment were obvious given Mr Chappell’s imprisonment but the judge did not fully agree that the liquidators’ conduct was responsible for Mr Chappell’s delay in preparing for trial.

The judge was not satisfied that Mr Chappell was being deliberately tactical with the aim of derailing the trial as contended by the liquidators but took the view that it was practically impossible to defend proceedings whilst in prison.

Nonetheless, the judge accepted that there is no legal principle that a party in prison is entitled to an adjournment of civil proceedings because of the practical constraints which a prison sentence imposes on them. For that reason and in the interests of striking a fair balance between the parties, the judge was minded to only grant a short adjournment of one or two weeks for Mr Chappell to get up to speed with the proceedings. However, granting a short adjournment was problematic for two reasons. Firstly, Mr Chappell’s medical condition and ongoing treatment and secondly, the other parties lack of availability.

The judge therefore considered that the only sensible course left was to sever the claims. The power to sever is provided by CPR 3.1(2)(e) and CPR 3.1(2)(i) allows the court to divide the proceedings and order a separate trial.

Whilst the judge initially was opposed to the idea of severance because of the time and cost of a separate trial and the risk of inconsistent findings, he concluded that it was ultimately more convenient to sever the proceedings and was the “least worst” option for all parties for the following reasons:

1. The prejudice caused to the other parties if the trial against the other defendants was adjourned would be very significant from a cost and insurance perspective.
2. There is a possibility that the liquidators would not pursue the claims against Mr Chappell if the claims against the other defendants failed. Even if they did not fail, it may not be worthwhile pursuing Mr Chappell because of his impecuniosity.
3. Even if the liquidators do pursue Mr Chappell, they may apply for summary judgement to strike out his defence.
4. If Mr Chappell had not applied for an adjournment and simply not participated in the trial, it would have been open for him to apply to set aside any judgement (although he would no doubt have a heavy burden in persuading the Court to do so).
5. Although it may be difficult to assess the level of contribution which each of the other defendants should make if the claims against them were successful, for example, if they both blame Mr Chappell to a greater or lesser extent, it would not be impossible for the court and that element could be adjourned until the claims against Mr Chappell were resolved.

The judge therefore ordered that the trial of the claims against Mr Chappell be adjourned for further directions until after he has handed down judgment following the trial against the other defendants. The judge further directed that those claims should be dealt with as separate proceedings pursuant to CPR Part 3.1(2)(e) and that the claims against the other defendants should continue to be heard at the present trial.

This is an unusual but interesting case highlighting the court’s power to sever proceedings.

Content courtesy of IPA corporate partner Manolete Partners PLC.

Please note that guest content does not necessarily represent the views of the IPA.