Case law update

Other articles (Insolvency Practitioner, April 2021):

• Michelle Thorp, CEO
• Kevin Hellard, President
• Important reminder: Annual General Meeting
• IPA events update
• Consultative Committee of Accountancy Bodies AML guidance
• Future IPA AML regulation: What members can expect
• Richard Long becomes an Honorary IPA member
• How IPs can save history
• Updated Statements of Insolvency Practice
• Guest article: IPs of FCA authorised companies in voluntary liquidation face more new and difficult challenges

The Secretary of State for Business, Energy And Industrial Strategy v Geoghegan & Ors [2021] EWHC 672 (Ch) (23 March 2021) (bailii.org)

Hearing dates: 3 and 4 March 2021

Brief background

Bell Pottinger LLP (LLP) was incorporated on 23^rd November 2012. It operated as a high profile British multinational PR, reputation management and marketing company headquartered in London.  

Bell Pottinger’s failure was (in part) caused by an exodus of clients due to being accused of driving a divisive social media strategy which used network of fake bloggers, commentators, and Twitter users to influence public opinion and exacerbate racism by tarnishing the reputation of a family-owned investment company called Oakbay Investments (which had connections to former President Zuma). The accusations led to a major South African political controversy.

The LLP entered liquidation on 6 September 2019 following the presentation of a compulsory winding up petition.

The case concerned an application by the Secretary of State for orders that the Respondents be disqualified from acting as directors under CDDA 1986. The case is noteworthy because the Respondents attempted to evade liability, stating that they were not members of the management board of Bell Pottinger LLP, and they were not involved in or responsible for the management and control of the business and affairs of Bell Pottinger LLP.

The single allegation of unfitness made against them related to their conduct of a specific account/campaign and they argued that, as this was a trading activity below management board level or the equivalent board level for a company, it cannot lead to the conclusion that they are unfit to be concerned in the management of a company or LLP which is the test that the Court had to apply.

By substituting “member” of an LLP for “director” in the CDDA, did Parliament really intend to include junior members/partners of a large LLP who have no involvement whatsoever in the management of the LLP within the purview of disqualification? This has ramifications for many industries where LLP structures are the norm, such as professional services where junior partners rarely (if at all) get their hands on issues relating to the management of the firm and are undertaking day to day operational roles predominantly relating to their own area of expertise.

Mr Justice Michael Green held at paragraph 79 of the judgment as follows:

“(1) All members of an LLP are potentially liable to face disqualification proceedings;

(2) There is no qualification to the jurisdiction over all members under s.6 CDDA that the member has to be on the management board or at a level equivalent to a director in a company;

(3) The conduct that can be relied on is anything that is done in the capacity of a member of the LLP;

(4) The test for unfitness is the same as in relation to companies, namely the (pejoratively) so called “jury question” – see Dillon LJ in Re Sevenoaks Stationers Ltd [1991] Ch 164, 176F – whether such conduct makes them unfit to be concerned in the management of a company or an LLP;

(5) There is no line drawn in the legislation, and there is no justification for implying such a line, as to the relevant conduct that can be relied upon by the SofS”

In view of this, the Respondents’ applications to strike out and for summary judgment were dismissed. There was no distinction to be made between a junior LLP member and a senior LLP member running the firm – all are within the ambit of CDDA 1986. It was for the trial judge to review the conduct relied upon by the secretary of state, whether it is proved and whether it renders the Respondents unfit to act.

The message for Insolvency Practitioners advising LLP members is that there is no legal distinction between different categories of members of LLPs and certainly no expectation that they must serve on any management board or similar to be within the ambit of CDDA 1986 legislation, though their conduct will be reviewed and determined by a trial judge to see if it gives rise to unfitness to act.

PGH Investments Limited -v- Sean Ewing [2021] EWHC 533 (Ch)

Brief background

This case shows the continued jurisprudence of the courts in ascertaining the impact of Covid-19 conditions on the pursuit of winding up proceedings. PGH Investments Limited (“the Company”) applied for the dismissal of the winding up petition (“the Petition”) presented against it by Sean Ewing (“the Petitioner”) on 8 September 2020. In the alternative, the Company sought an order restraining the Petitioner from advertising the Petition.

The Company disputed the debt comprised within the petition. However the Judge summarised that if the conclusion was reached that the Company was in fact liable to pay the alleged debt, the court must go to consider whether it is likely that the court will be able to make a winding up order against the Company under s.122(1)(f) of the Insolvency Act 1986 (“the 1986 Act”), having regard to the coronavirus test (Covid Test) in para.5(3) of Schedule 10 to the Corporate Insolvency and Governance Act 2020 (“the 2020 Act”).

In this instance, the court had determined that the Company was not liable to pay the debt comprised within the petition. Strictly speaking, it was not necessary to go on and consider the application of the Covid Test, however the court considered the following matters:

• the evidential burden is on the Company to establish a prima facie case that coronavirus had a “financial effect” on the Company before the presentation of the Petition, that is to say the Company’s financial position has worsened in consequence of, or for reasons relating to, coronavirus;
• In the particular case, witness evidence had been filed which contained a number of bare and unsubstantiated assertions as to why Covid 19 had impacted the financial position of the Company;
• In the circumstances (and in particular the lack of documentary evidence), it did not appear to the court that coronavirus had a financial effect on the Company before the presentation of the Petition and therefore the restriction on making a winding up order in para.5(3) of Schedule 10 to the 2020 Act does not apply.

The message for Insolvency Practitioners advising companies is that the court will likely require witness evidence (and in particular, supporting documentary evidence) to demonstrate that coronavirus had a financial effect on the Company before the presentation of a winding up petition and therefore invoke the restriction on making a winding up order. 

Security Trustee Services Ltd & Ors v Seabrook Road Ltd (Re Seabrook Road Ltd) (Rev 1) [2021] EWHC 436 (Ch) (25 January 2021) (bailii.org)

Brief background

The High Court considered whether to validate the appointments of fixed charge receivers appointed over property owned by a company. The company had issued (but not given notice of) notices of intention to appoint an administrator to the receivers’ appointor (i.e. the QFCH). The court considered the procedural defects behind the notices of intention and the apparent lack of any intention by the company to appoint an administrator.

The company had issued four notices of intention to appoint an administrator during November and December 2020. This included a period prior to, during and after the appointment of fixed charge receivers over its property. Accordingly, the company had committed clear abuses of process.

The company had made no attempt whatsoever to give the QFCH notice of the NOIs. The court determined that this was a serious and inexcusable breach of the Insolvency Rules.

The NOIs had each stated on their face that notice was being given to the QFCH, which was simply not correct.

The court also determined that the NOIs were all invalid since they had not been done with a settled intention to appoint an administrator.

The court therefore allowed the receivers’ applications to remove the notices of intention from the court file and to validate the receivers’ appointment and their subsequent steps post appointment.

The message for Insolvency Practitioners from this rather extreme example of abuse of the interim moratorium process is that the courts will simply not tolerate it.

The NOIs had been issued to obtain leverage in negotiations with the QFCH, rather than with the required settled intention to appoint an administrator. Whilst the judgment does not show that any apparent sanctions were imposed on the company (or its advisers), the cautionary tale should be that it is open to any judge to report matters of apparent professional misconduct to an IP or solicitors’ regulatory body. The use of the interim moratorium process is to be treated with all due caution, and if in any doubt, legal advice should be taken. 

Content courtesy of IPA corporate partner Manolete Partners PLC.