Berntsen & Anor v Tait & Anor [2015] EWCA Civ 1001

Case No A2/2014/0492 + A2/2014/1625[2015] EWCA Civ 1001
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
CHANCERY DIVISION, COMPANIES COURT
Mr Justice Morgan
51292010
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 13/10/2015
Before
LADY JUSTICE ARDENLORD JUSTICE LONGMORELORD JUSTICE JACKSON
Between
(1) Innes Keochan BerntsenAppellants(2) Christopher RichardsonAppellantMatthew TaitRespondentsSarah RaymentRespondent
The Appellants appeared in person for in personMr Justin Fenwick QC and Mr Ben Smiley (instructed by Mayer Brown International LLP) for RespondentsHearing Hearing dates: 9-10 June 2015
Judgment
[1]The events in this case arise out of the development of a hotel called the Coniston Hotel in Kent. It was developed by Coniston Hotel (Kent) LLP (“the LLP”) a limited liability partnership whose members were the two appellants, Mr Richardson and Mr Berntsen. Three weeks from opening, the LLP, it is said, ran out of bank facilities. These were provided by National Westminister Bank plc (“NatWest”), a member of the Royal Bank of Scotland group (“RBS”). After discussion, the LLP (acting by the Second Appellant) NatWest appointed the respondents as administrators (“the administrators”) – it is said precipitately. The hotel was sold – it is said, at an undervalue – to another member of the RBS group (“West Register”). West Register finished the development and now runs the hotel.[2]The appellants made claims against the administrators for mismanagement and misconduct of the administration. The appellants brought these proceedings in their capacities as creditors and members under paras 74 and 75 of Schedule B1 to the Insolvency Act 1986 (“IA86”). Para 74 of Schedule B1 enables the court to grant wide-ranging relief where a member or creditor can show that administrators have acted so as unfairly to harm their interests. Para 75 empowers the court to examine into the conduct of administrators and to grant relief if there has been misconduct. The appellants had previously brought proceedings against NatWest but those proceedings have been struck out. In addition, the LLP has been wound up by the court.[3]By orders dated 31 January and 8 April 2014, Morgan J ultimately entered summary judgment on all claims made by the appellants against the administrators of the LLP. Norris J had previously considered whether the claims should be struck out, but he had decided to give the appellants a further opportunity to state their claim. The appellants appeal against the orders made by Morgan J. They were made pursuant to Civil Procedure Rule (“CPR”) 24.2. This provides: The court may give summary judgment against a claimant or defendant on the whole of a claim or on a particular issue if-(a) it considers that- (i) that claimant has no real prospect of succeeding on the claim or issue; or (ii) that defendant has no real prospect of successfully defending the claim or issue; and(b) there is no other compelling reason why the case or issue should be disposed of at a trial.[4]This court gave important guidance on this sub-Rule in a case to which Jackson LJ helpfully drew attention at the start of the hearing, namely The Royal Brompton Hospital National Health Service Trust v Hammond [2001] EWCA Civ 550. Clarke LJ, with whom Laws LJ agreed, held: …CPR24.1 provides that Part 24 sets out a procedure by which a court may decide a claim or a particular issue without a trial and CPR24.2 provides that the court may give summary judgment against a defendant on the whole of a claim or on a particular issue if it considers that the claimant “has no real prospect of succeeding on the claim or issue”. . . . 107. As I see it, in the vast majority of cases of a substantial nature the question whether an issue or claim should be disposed of summarily should be determined long in advance of the trial so that the preliminary costs of a trial are avoided and so that all parties know what issues are to be decided at the trial. I would expect cases in which it is appropriate to consider striking out a claim or giving summary judgment at the trial to be very rare, although every case depends upon its own circumstances and such cases might occur. 108. Under CPR 3.4 [which provides: “(2) The court may strike out a statement of case if it appears to the court (a) that the statement of case discloses no reasonable grounds for bringing or defending a claim….”] the focus is on the statement of case rather than on the evidence, whereas under CPR 24.2 it is on the evidence which is or is likely to be available at the trial. Under CPR 24.2 the court only has power to give summary judgment against a claimant if the claimant has no real prospect of success on a particular claim or issue. As Lord Woolf MR said in Swain v Hillman [2001] 1 All ER 91 at 92, the word ‘real’ in the expression ‘real prospect of success’ distinguishes fanciful prospects of success and directs the court to the need to see whether there is a ‘realistic’ as opposed to a ‘fanciful’ prospect of success. I cannot at present envisage a case in which it would be correct to dispose of an issue against a claimant without a trial unless the defendant persuades the court that the claim should be struck out under CPR 3.4 or that the claimant has no real prospect of success in the sense just described under CPR 24.2. Moreover, the test must be the same whenever the application is made and even if (for some good reason) it is made at the trial. The test must also be the same if the question is raised of the court's own motion. 109. As I read them, the CPR do not contemplate conducting a form of trial on the balance of probabilities at the outset without allowing a trial to take place. . . .[5]The facts underlying these applications for permission to appeal (ordered to be heard on notice to the respondents with the appeals to follow if permission is granted) raise matters of considerable concern in the light of the analogy which the appellants drew between this case and the cases considered in the report dated 25 November 2013 by Mr Lawrence Tomlinson, Entrepreneur in Residence at the Department for Business, Innovation and Skills (BIS), into the lending practices of banks. The report identified concerns regarding the strategy of some banks for improving their own financial performance. In particular, his report indicated that there were circumstances in which RBS "is engineering a business into default in order to move the business out of local management and into [its] turnaround division [Global Restructuring Group (GRG)].” RBS also could potentially generate profits by purchasing assets through its property division, West Register, at a low value. Needless to say the report was critical of such actions.[6]I accept the Tomlinson report shows that there are matters of public concern on facts such as Tomlinson describes. I bear in mind that CPR 24.2 prevents the court from giving summary judgment where there is a compelling reason for a trial even if a party has no real prospect of success. Whether there was a real prospect of success is a matter which I must consider in detail in this judgment. Despite the concerns to which the Tomlinson report gives rise, there would be no point in having a trial in this case if, in the light of the evidence available to the court or likely to be available to it at trial, the court is satisfied that there is no prospect of success. The only purpose of civil proceedings would be to consider and if thought fit grant a financial remedy against the respondents. The points of public concern are not furthered by unsuccessful and costly legal proceedings.

HOW THE APPELLANTS’ CLAIMS AROSE

[7]The LLP had of course substantial banking loans and facilities to enable it to redevelop the hotel. Norris J describes the position thus:
“6. The facilities which had been negotiated (and about which there is no dispute) were a term loan and an overdraft. There was in addition a general business loan (but there is a dispute about its availability). The facility about which there is the greatest dispute is a chattel mortgage from Lombard. 7. The term loan had been part of the original funding and was initially £3.4m. But it was increased as the Coniston Hotel project was modified. As a result of the latest extension (signed on only 24 May 2010) at the beginning of June 2010 it afforded a facility of £4.2m which was due for repayment on 30 June 2010. As at 2 June 2010 £83k (taking the highest figure contended for) remained available to be drawn. The position of Mr Berntsen and Mr Richardson is that Mr Flannery had promised them that this would be rolled over into a new facility: the Bank disputes this. 8. The overdraft had also been an original feature. Oddly, it appears not to have had any formal limit, the Bank simply drawing a line when it chose. . . .Mr Berntsen and Mr Richardson say that the Bank was not entitled to impose any limit on the overdraft because the Bank had said that there would be enough money for the development: and further that the overdraft could not be called in. 9. On 21 May 2010 the Bank granted a £350,000 facility known as the “General Purpose Business Loan”
. Mr Berntsen and Mr Richardson say that this was “intended to assist cash flow issues, caused amongst other things, by VAT payments” i.e. that it was available for any purpose. The Bank says that it was intended to fund VAT payments until they could be recovered at the end of the quarter. The facility had a repayment date of 30 June 2010. It is common ground that this had been drawn down by £199,000 at the material time. Clause 4.1 of the Loan Agreement says:- “The Customer will repay the Loan from the proceeds of the Company's VAT refund by the Repayment Date or, if earlier, the date the proceeds become available. If those proceeds do not repay the Loan, the Customer will repay the balance of the Loan by the Repayment Date”. 10. The Lombard chattel mortgage was intended to be asset finance secured on fixtures and fittings in the Coniston Hotel. Internal Bank documents show that a loan of £400k had been approved in principle by Lombard on or about 3 June 2010 (having originally been declined). The approval was subject to a Second Charge being granted over the Hotel and a joint and several personal guarantees being given by Mr Berntsen and Mr Richardson in the sum of £400k. In these proceedings the Bank's position (supported by an apparently contemporaneous attendance note and an e-mail to Mr Richardson dated 2 June 2010) is (a) that it told Mr Berntsen and Mr Richardson that the facility had not been approved (as was initially the case); but (b) that it did not tell them that a review had led to approval of the funding; and (c) that it took that course because on 3 June 2010 the Bank had discovered that the position was worse than it had expected. In these proceedings Mr Berntsen and Mr Richardson say that they thought that the Lombard chattel loan (which they put at £500k) had been granted (because Mr Flannery had “pre-agreed” it) and indeed that the £225k worth of cheques drawn (but not presented) had been so drawn on the footing that the Lombard funding would be available, and that any demand for a personal guarantee was unlawful. (In a complaint to the Financial Ombudsman Service on 4 October 2010 one of their complaints is that they were “bullied to provide personal guarantees”). They rely on some valuation instructions prepared by the Bank on 11 June 2010 (and which came into their possession during the administration) which state:- “The Bank has agreed to provide [the LLP] with a loan facility of up to £5,029,000… to assist with the development of Coniston Hotel…” It is said that this figure only makes sense if the total loan facility includes the Lombard loan. . . . 21. The Lombard loan was not offered to the LLP. The Bank did not commit to providing any further facility that would fund the completion of the Hotel and its opening for trade. . . . “The Customer will repay the Loan from the proceeds of the Company's VAT refund by the Repayment Date or, if earlier, the date the proceeds become available. If those proceeds do not repay the Loan, the Customer will repay the balance of the Loan by the Repayment Date”. “The Bank has agreed to provide [the LLP] with a loan facility of up to £5,029,000… to assist with the development of Coniston Hotel…” It is said that this figure only makes sense if the total loan facility includes the Lombard loan. . . . 21. The Lombard loan was not offered to the LLP. The Bank did not commit to providing any further facility that would fund the completion of the Hotel and its opening for trade. . . .[8]As Norris J explains, there was no agreement about any limit on the overdraft which meant that NatWest could give notice that it was not prepared to increase it. It did this on 3 June 2010 when it returned two cheques totalling some £90,000 and indicated that it would not meet cheques totalling £225,000 which had been drawn but not yet presented. That meant that the LLP had to address its cash flow position.[9]The situation was not a happy one. The overdraft facility was terminable and not an “evergreen” facility. Any VAT refund would simply repay borrowings and not create an amount of fresh lending, so all VAT had to be accounted for out of VAT received. The general business loan had to be repaid by 30 June.[10]The appellants took advice from their solicitor, who referred them to BDO Binder Hamlyn LLP (“BDO”). The appellants instructed BDO to advise them on the steps that they ought to take.[11]There is an issue as to the propriety of BDO’s communications with NatWest, which turns on BDO’s terms of engagement, which I consider next.

BDO’s terms of engagement

[12]Norris J set out the relevant terms of engagement as follows: 17. On 14 June 2010 an Engagement Letter dated 11 June 2010 was signed: Mr Berntsen and Mr Richardson say (in a letter before action from their Counsel Mr Miah dated 1 December 2010) that they relied on legal advice from Vertex Law in signing it. According to its terms it set out the basis on which BDO were to provide professional services to the members of the LLP. The professional services were an Independent Business Review to be undertaken within seven days. Phase 1 entailed:-(a) a review of the short-term cash requirement of the LLP to 30 June 2010 and of the level of support required from the Bank. The Letter recorded that this support was dependent on the findings of professional agents engaged to provide an assessment of the outstanding work required to complete the construction of the Hotel.(b) A review and commentary upon the current financial position of the LLP and the immediate options available to the LLP and the Bank. Phase 2 would involve an examination of the viability of the business itself. 18. According to Appendix A to the Engagement Letter the Bank confirmed the appointment of BDO to undertake this work, and Mr Berntsen and Mr Richardson each on behalf of the LLP confirmed the Bank's instructions and undertook to co-operate with BDO and to be responsible for the fees incurred. 19. The following terms are material to this application:- (a) Paragraph 2.4 of the Engagement Letter made plain that by accepting the instructions BDO was undertaking a duty of care to the Bank, and in the event of it owing a duty of care both to the LLP and to the Bank then the primary duty of care would be to the Bank. (b) Mr Tait would be responsible for the conduct of the engagement.(c) BDO undertook to perform the services with reasonable skill and care and acknowledged liability to the LLP for defined loss caused by negligence, breach of contract, fraud or wilful default up to a specified limit.(d) Paragraph 7.1 addressed conflicts of interest. It said that although no conflict was anticipated, in the event of such occurring “our primary and overriding duty of care will be to the Bank”. BDO reserved the right to restrict to the Bank alone the disclosure of any of the work produced by the rendering of the services, and to do so at BDO's sole discretion without any obligation to consult with the LLP. Paragraph 10.2 of the Terms of Business explained that there may be circumstances in which the LLP's position could not be safeguarded, in which event the services would be terminated.(e) Paragraph 8.2 said:- “the [LLP] expressly agrees and understands that the terms in the Engagement Letter apply to all services provided by BDO pursuant to the Engagement, whether such services were performed or provided before or after the signing of the Engagement Letter”.(f) Paragraph 1.2 of the Terms of Business, having defined the term “staff member”, went on to provide that (with the exception of liabilities arising from fraud) all liability to the LLP was the sole responsibility of BDO.(g) Paragraph 18.1 of those Terms said “It is agreed that, for our interest in limiting the personal liability and exposure to litigation of our staff members, you will not bring any claim in respect of any loss against any of our staff members personally, but this will not limit or exclude the liability of [BDO] for the acts or omissions of its staff members. This exclusion shall not apply to a fraud. You agree that our staff members may rely upon the Contracts (Rights of Third Parties) Act 1999 should they need to enforce this paragraph.” (a) a review of the short-term cash requirement of the LLP to 30 June 2010 and of the level of support required from the Bank. The Letter recorded that this support was dependent on the findings of professional agents engaged to provide an assessment of the outstanding work required to complete the construction of the Hotel. (b) A review and commentary upon the current financial position of the LLP and the immediate options available to the LLP and the Bank. Phase 2 would involve an examination of the viability of the business itself. (a) Paragraph 2.4 of the Engagement Letter made plain that by accepting the instructions BDO was undertaking a duty of care to the Bank, and in the event of it owing a duty of care both to the LLP and to the Bank then the primary duty of care would be to the Bank. (b) Mr Tait would be responsible for the conduct of the engagement. (c) BDO undertook to perform the services with reasonable skill and care and acknowledged liability to the LLP for defined loss caused by negligence, breach of contract, fraud or wilful default up to a specified limit. (d) Paragraph 7.1 addressed conflicts of interest. It said that although no conflict was anticipated, in the event of such occurring “our primary and overriding duty of care will be to the Bank”. BDO reserved the right to restrict to the Bank alone the disclosure of any of the work produced by the rendering of the services, and to do so at BDO's sole discretion without any obligation to consult with the LLP. Paragraph 10.2 of the Terms of Business explained that there may be circumstances in which the LLP's position could not be safeguarded, in which event the services would be terminated. (e) Paragraph 8.2 said:- “the [LLP] expressly agrees and understands that the terms in the Engagement Letter apply to all services provided by BDO pursuant to the Engagement, whether such services were performed or provided before or after the signing of the Engagement Letter”. (f) Paragraph 1.2 of the Terms of Business, having defined the term “staff member”, went on to provide that (with the exception of liabilities arising from fraud) all liability to the LLP was the sole responsibility of BDO. (g) Paragraph 18.1 of those Terms said “It is agreed that, for our interest in limiting the personal liability and exposure to litigation of our staff members, you will not bring any claim in respect of any loss against any of our staff members personally, but this will not limit or exclude the liability of [BDO] for the acts or omissions of its staff members. This exclusion shall not apply to a fraud. You agree that our staff members may rely upon the Contracts (Rights of Third Parties) Act 1999 should they need to enforce this paragraph.”[13]These terms are relevant because the appellants contend that they did not agree to the respondents acting in the interests also of NatWest, whereas these terms clearly permitted the respondents to do so. The appellants have not challenged these terms in any way.[14]BDO clearly had to advise on the financial situation of the LLP. As an Australian judge neatly put it: “Lack of liquidity is not conclusive of insolvency, neither is availability of assets conclusive of solvency” (Hymix Concrete Pty Ltd v Garrity (1977) 13 ALR 321 at 328).[15]NatWest insisted that the hotel should be revalued by Knight Frank Rutley LLP (“KF”), surveyors. The appellants agreed, and KF were instructed to produce a valuation within a short timescale.

Respondents instructed to advise

[16]I can take the events from the summary included by Norris J in his judgment: 12. On 3 June 2010 there was a meeting between the LLP members and the Bank (represented by Mr Burgess and Mr Wade). Mr Berntsen and Mr Richardson said that it was at this meeting that the Bank confirmed its refusal to release any further funds unless they gave additional security for loans which they said had already been agreed to fund the hotel development. There were 70 contractors on site and 65 members of staff recruited to open and run the Hotel. 13. That same evening Mr Richardson (together with someone from Zenon Tax who undertook the book-keeping for and gave tax advice to the LLP) met with Ms Rayment of BDO. Mr Berntsen and Mr Richardson submit that on behalf of the LLP they engaged her (and her colleague Mr Tait) as individual insolvency and restructuring advisers practising from the offices of BDO, and that Ms Rayment and Mr Tait thereby became the fiduciary agents of the LLP. The Respondents do not accept that analysis: they say that it was BDO that was retained as adviser. At that meeting Mr Richardson outlined the problems of the LLP. There is a full attendance note recording these instructions, and at the hearing I indicated that I would rely on this as indicating what Mr Richardson told Ms Rayment: Mr Miah did not argue that I should not. The key points were(a) that when re-assessed in April the project was underfunded by £1.1m;(b) that that shortfall was intended to be funded by an injection of £400k by Mr Berntsen and Mr Richardson (which was made), an eventual £200k VAT refund and £500k from Lombard refinancing the equipment;(c) that the Bank had refused cheques of £80k and that there were uncleared cheques of £190k;(d) that suppliers and trade creditors were owed £280k (of which about £40k was disputed);(e) that there were £180-£260k further completion costs (plus VAT);(f) that there were staff costs which over 2 months were £200k. It appears to me from her notes that she understood (or was told) that an additional £900k was needed to finish the project and begin trading: this would be consistent with what the bank records as its understanding at the meeting held earlier on 3 June 2010. 14. The following day Ms Rayment reported this meeting to the Bank. This report led to a meeting with the Bank's Restructuring Group which Ms Rayment summarised on 9 June 2010 saying:- “…we are currently not formally engaged by either the LLP or yourselves and are therefore unable to provide any formal written advice to either party. You mentioned you were happy for us to work with the management and didn't think we needed a dual letter of engagement. We are more than happy to proceed on this basis but are mindful of our relationship with the bank and would wish to retain the ability to keep you informed at all stages. We will seek to build this into our engagement letter but it is possible that we may require a dual engagement letter to achieve this.” Mr Berntsen and Mr Richardson say that this demonstrates that from the outset Ms Rayment and Mr Tait had divided loyalties. 15. Mr Berntsen and Mr Richardson were also taking legal advice from Vertex Law. Their lawyer is recorded as informing BDO on 9 June 2010 that there were no funds available from personal sources or from third parties, that there was pressure from subcontractors and a growing level of concern from employees, that the amount required to complete the work had increased significantly above £200k (a figure which did not include the working capital required to open and trade as a hotel) and that the members needed a firm commitment from the Bank. None of this seems to be in dispute. . . . “…we are currently not formally engaged by either the LLP or yourselves and are therefore unable to provide any formal written advice to either party. You mentioned you were happy for us to work with the management and didn't think we needed a dual letter of engagement. We are more than happy to proceed on this basis but are mindful of our relationship with the bank and would wish to retain the ability to keep you informed at all stages. We will seek to build this into our engagement letter but it is possible that we may require a dual engagement letter to achieve this.” Mr Berntsen and Mr Richardson say that this demonstrates that from the outset Ms Rayment and Mr Tait had divided loyalties.

Independent Business Review

[17]The appellants’ case is that the respondents were instructed to prepare an independent business review but that it was never prepared, nor did the respondents produce a cash flow for the LLP.

Lombard’s funding proposal

[18]The appellants’ case is that Lombard agreed to give a loan. Details of this funding appear in para 10 of the extract which I have set out from the judgment of Norris J. Lombard said that they would fund the chattels and that they would fund the cables. However by 3 June their position was that, while Lombard would grant a facility of up to £400,000 it would require a second charge over the hotel and guarantees from the appellants (appeal bundle 7/134). NatWest did not convey Lombard’s approval of the transaction to the LLP because its financial position was worse than they thought. The appellants’ case is accordingly that the respondents should have proceeded on the basis that this funding was available and factored it into the decision as to whether the LLP should be rescued or put into liquidation.

Appointment of administrators

[19]As Norris J relates, the LLP (acting by the Second Appellant) appointed the respondents as administrators on 22 June 2010. The appellants took the view that the administration was precipitate because: . . . sufficient funds had already been agreed to enable the Hotel to complete, open and trade, and the Bank was contractually obliged to make those sums available. . . . 24. Of the existing confirmed facilities, on the members' case when the administration began(a) there was £83k available under the term loan expiring 30 June 2010;(b) the existing overdraft was fully utilised;(c) there was £150k of the “General Business Loan” available until 30 June 2010 (and more until that date if a VAT repayment was received earlier). They would add to that £400k due from Lombard and something available on the corporate credit cards. 25. Although the contemporaneous estimate of the costs to complete and trade was £900k, Mr Berntsen and Mr Richardson have subsequently completed a cash flow forecast which shows that on the footing that construction assets (plant and equipment) could have been sold for £135k, the objective could have been achieved for £368k. On this case therefore receipt of the Lombard loan remained fundamental to rescuing the business as a going concern.

Fresh property valuation: KF instructed and produce much reduced valuation

[20]The appellants had a valuation of the hotel from Savills showing that the hotel would be worth £7.7m with vacant possession on completion of the development. The partners had placed considerable confidence in this valuation but NatWest was clearly not happy to rely on it alone for the purposes of its lending and so the respondents advised the appellants, and the appellants agreed, to obtain another valuation of the hotel.[21]KF were instructed to value the hotel on about 8 June 2010. I take the evidence about their valuation again from the judgment of Norris J: 16. As at 10 June 2010 Mr Berntsen and Mr Richardson thought the hotel was worth £7.7 million as it stood (based on their understanding of a Savills valuation made in February 2010). Mr Tait told the Bank's Restructuring Group that the valuation of the hotel was the “critical issue”: and he told the LLP to commission a valuation from Knight Frank (“KF”). . . . 20. The KF valuation as at 15 June 2010 came in (in draft) at £2.5-£3m with the Hotel in its existing state (depending on the marketing period), £3.75-£5m with the Hotel completed and sold as a “turnkey” sale (depending on the marketing period), and £5.5m with established trading. This was obviously insufficient to support any further lending (or, for that matter, a term out loan of 60% LTV by way of refinancing). The total costs to complete the building were £200,000 (on the footing that Mr Berntsen and Mr Richardson remained in control, because they had negotiated very favourable rates with their suppliers). This figure was assessed by GVA Grimley and is on this application agreed to be accurate.[22]The appellants’ case is that the respondents should not have procured a fresh valuation but taken steps to require the Bank to honour the facilities which it had granted to the LLP.[23]It appears that, on the same day as they were appointed as administrators, the respondents invited KF to make proposals for a strategy for marketing the hotel. Shortly thereafter, the first respondent invited two other firms of agents to make proposals for marketing strategy. One of those agents (Christie & Co) recommended a lower price than KF.

Disposal of the hotel

[24]Norris J explained in his judgment that the hotel was sold at a much reduced value and that there was a substantial deficiency in the administration: 26. The Hotel was in due course sold as it stood for £4.25m to West Register (a company associated with the Bank) under a sealed bid process. The proceeds (net of costs) were paid to the Bank under its fixed charge. There was a deficiency in the administration of £6.267m. Over £1m remained due to the Bank in respect of the shortfall on its security realisation. Mr Berntsen and Mr Richardson were loan creditors for £4.4m. That is why the LLP is now in liquidation.[25]Additionally, we were told in the course of the hearing that West Register still owns the hotel, which is trading – presumably profitably.

Case against the respondents as administrators

[26]Norris J helpfully summarised the appellants’ case in these terms: The liability of the Joint Administrators is straightforward. It is to be found in IA 1986. The administration complaints are capable of being focused…• The joint administrators divulged confidential information to the Bank in e-mails dated 21 and 23 June 2010.• The joint administrators failed to make proper enquiry arising out of the members' representations that adequate loan facilities had been put in place by the bank (enlarged at the hearing of this application into an allegation that the joint administrators failed to sue the bank for breach of contract). . . .• The joint administrators failed to heed warnings that the KF valuation was not a genuine independent valuation.• The joint administrators failed to heed warnings not to wrongly sell the Hotel.• The joint administrators had a close relationship with the bank and acted in the foregoing respects in breach of fiduciary duty. It is true that some of these allegations are unparticularised, and that at present the joint administrators have to trawl through discursive written statements to find the case against them: but that can be remedied (bullet points added)[27]Norris J gave more detail about the claim (mentioned in the second bullet point) that NatWest was obliged to extend banking facilities: Mr Berntsen and Mr Richardson say that Mr Tait and those working with him should have refused to agree any further valuation exercise being undertaken in relation to the Hotel (and compelled the Bank to work on the Savills valuation), and they should have “point[ed] out the obvious” that the Bank was contractually bound to advance sufficient money to complete the development, open and trade it without the provision of any additional security such as personal guarantees: and if the Bank did not acknowledge that it was so bound, then they should have advised the LLP to sue the Bank, in which event the Bank, if sued, would have advanced the money, and would have done so before any creditor took any insolvency proceedings, so enabling the project to be completed and opened. (In fact the Bank has been sued in the Queen's Bench Division and has denied any such obligation as is asserted. Summary judgment has been given in favour of the Bank, although that judgment is under appeal. . . (Judgment, [21])[28]On the third bullet point, the appellants’ case before Norris J was that Mr Tait was acting in concert with NatWest (judgment of Norris J, [16]). Judgments of Norris and Morgan JJ in these proceedings Norris J – 1 February 2013

Judgments of Norris and Morgan JJ in these proceedings

[29]The respondents applied to strike out the appellants’ claim and for summary judgment. Their application was heard by Norris J, who gave judgment on 1 February 2013.[30]Norris J decided an important point of law as to the differences between paragraphs 74 and 75 of Schedule B1 to the IA86. He held that a professional negligence claim against a person who later became an administrator was outside para 74, that para 74 which was concerned with unfair harm suffered by a member or creditor and that para 75 was concerned with claims arising out of an administrator’s misconduct. No one has sought to challenge Norris J’s ruling on that point of law on this appeal.[31]Norris J held that the claim had not been carefully analysed in the appellants’ pleading with the result that the Points of Claim do not meet the standard to be expected in insolvency proceedings. I accept the submission that it is not possible to “set an agenda” for disclosure, for evidence or for trial.[32]On the other hand, Norris J recognised that dismissing the entire claim at that stage was disproportionate: But in my judgment it would be disproportionate (or more directly, unjust) to strike out or dismiss the entire claim if by pruning and definition the members' case can be put in a form that the Joint Administrators can address: and Mr Berntsen and Mr Richardson should still be afforded that opportunity . . .([61])[33]Norris J permitted the claim to go forward but only on the basis that claims outside para 74 or para 75 of Schedule B1 to the IA86 were omitted and that further particulars of unfair harm were given.[34]Norris J warned that: “from and after 22 June 2010 the case that the LLP could have been rescued as a going concern (or at least the development built out and sold on) is not promising. The confirmed facilities had been all but exhausted. The argument depends on establishing that the Bank could have been persuaded to process the Lombard loan offer (and that the required real and personal security would for that purpose have been forthcoming) and would have permitted the application of the loan to support limited trading in administration (to complete the required £200k works). It also depends on demonstrating that the KF valuation would have been challenged by an administrator performing his statutory responsibilities and would (if subjected to sustained criticism) have come more into line with the Savills valuation (or that some other valuer would have been instructed and would have aligned its valuation with Savills) in order to support such lending. It finally depends on establishing that the completed Hotel could have been sold for more than £4.25m plus the completion costs.” (judgment, [72])[35]Norris J ordered that all complaints against the appellants in respect of acts or omissions prior to their appointment as administrators be struck out. He also held that allegations of fraud made by the appellants were insufficiently particularised and should be properly particularised. He awarded costs against the appellants and this court dismissed an appeal against this part of his order on 2 October 2013 ([2013] EWCA Civ 1520). There was no appeal against any other part of the order of Norris J.[36]Subsequently, Arnold J heard a case management conference in this case and gave directions, including directions for the service of witness statements. Those directions were important in the history of these proceedings but they are not directly in issue on these appeals.

Morgan J – 30 January 2014

[37]On 30 January 2014, the respondents had made a new application for strike out and summary judgment at a case management conference before Morgan J. He noted that in the proceedings against NatWest, Master Leslie had held that there was no real prospect of success on a claim that there was a concluded agreement for a new facility either with NatWest or with Lombard. His decision on this point was upheld on appeal by Richard Salter QC sitting as a Deputy High Court Judge.[38]Morgan J noted that there were three claims:(1) the rescue claim: that the respondents failed to take steps to obtain funding from NatWest.(2) the undervalue claim, that is, the claim that the hotel was sold at an undervalue: the appellants’ case is that the respondents were parties to a pre-determined arrangement to enable West Register to acquire the hotel at an undervalue. The judge rejected that because it was not pleaded and was an allegation of serious dishonesty and fraud. The judge found that there was no pleaded case capable of supporting this allegation.(3) the examination claim: the appellants contended that the court should make an order under para 75 so that the administrators could be examined before the court about the administration and so that they should be prevented from claiming payment of administration costs. This particular claim has not been pursued before us.[39]Morgan J gave summary judgment against the appellants on the rescue claim. This claim had been fully examined in the proceedings against NatWest. There was no new material. Morgan J did not give summary judgment on the other claims. He gave the appellants liberty to amend their pleadings in relation to the claim concerning the undervaluation of the hotel and adjourned consideration of the claim in relation to the costs of the administration.

Morgan J – 8 April 2014

[40]By 8 April 2014, the appellants had served a draft amended statement of case in accordance with the judge’s order. The respondents nonetheless made a further application for summary judgment.[41]The appellants put forward a new undervalue claim. They argued that there was a conspiracy to defraud and that the marketing of the hotel was a sham. The parties to the conspiracy were by implication: the representatives of NatWest, the valuer at KF and the respondents. The appellants’ case was that all the parties to the conspiracy knew the valuation was at an undervalue. The aim of the conspiracy was to enable West Register to buy the hotel.[42]KF were instructed to market the hotel and sent particulars to some 460 parties. There were 51 viewings of a data room which had been set up with information of the hotel, and 10 independent parties were accompanied on viewings of the hotel itself. The highest offer, which was for £4.25m, came from West Register. There was no foundation for the allegation that the sale was a sham. The judge did not consider that the fact that the valuer who gave the Savills valuation might be called as a witness at trial justified having a trial. The appellants also indicated that they might call a Mr Hossack as their expert witness but there was no report setting out his opinion.[43]The appellants further contended that the respondents had been in breach of their duties to them in their communications with NatWest between 3 and 22 June. The respondents contended that Mr Richardson had given his consent to the respondents giving NatWest confidential information about the appellants and the LLP. The judge found that there was a dispute of fact as to the extent of Mr. Richardson’s agreement. However the matter was covered by the terms of engagement and there was no basis for any allegation of fraudulent conduct which no doubt would take the respondents outside their terms of engagement. The appellants’ case was not viable. Despite the Tomlinson report, the judge’s view was that: “[t]he court exists to deal with viable claims. It does not exist to conduct a public inquiry when a judge finds that there may be a matter of public interest which might arise in other cases, but not in this case.” ([50])[44]The judge then dealt with the examination claim under para 75 of Schedule B1 to the IA86. He noted that nothing would be paid to the appellants whether as members or creditors if the claim succeeded under this head. Citing, among other authorities, Cavendish Bentinck v Fenn (1887) 7 App Cas 562, a decision of the House of Lords, at 664-5, 666-7 and 669, The judge held that to come within para 75, the appellants had to have a sufficient interest in the relief sought.[45]For these reasons, Morgan J gave summary judgment on the extant claims made by the appellants in the proceedings.[46]The appellants now appeal against Morgan J’s orders of 30 January and 8 April 2014.

DISCUSSION

[47]For the reasons contained in this judgment, I consider that the appellants have no real prospect of success at trial. As the three claims advanced by the appellants have now been considered by the courts on several occasions, I propose to focus on those points which in my judgment are sufficient in themselves to demonstrate that the appellants have no prospect of success on their claims if there were to be a trial.

The rescue claim

[48]Mr Richardson, presenting the arguments on these appeals for the appellants, put at the forefront of his argument that BDO had a conflict of interest in acting for them. He points out that the respondents passed on large amounts of the information which the appellants provided to them about the business of the LLP to NatWest. Mr Richardson argues that, if the appellants had known about this conflict of interest they would not have instructed BDO. He also submits that if the respondents had not had that conflict of interest they would not have advised the appellants to agree to the administration. Moreover the appellants would only have agreed to the respondents communicating with NatWest to see if they would release sufficient funds to enable hotel to open. The respondents had also allowed conversations to take place with NatWest in which the GRG or West Register were involved without disclosing to the appellants about West Register’s interest in this matter.[49]So far as the duties of the respondent are concerned, Mr Richardson’s argument on conflict of interest fails to take full account of the fact that the appellants had agreed to the respondents’ terms of business which stated that in accepting instructions the respondents were undertaking a primary duty of care to NatWest (see para 12 above). The appellants plainly gave authority to the respondents to disclose information about the business to NatWest.[50]The appellants’ real point here, stemming from the conflict of interest, is that the respondents did not discharge their duties to the appellants because they did not investigate the sources of funding which were available to it to complete the hotel. In fact, on the appellants’ case there were several ways in which the necessary funding could have been found. The appellants contend that only £122,000 was needed for this purpose. The respondents dispute this figure, but as this is an application for summary judgment I consider that I must proceed on the basis that the appellants would be able to establish at trial that the correct figure was £122,000.[51]Mr Richardson identified several sources of funds. He referred to the Lombard offer of funding. The difficulty about this matter is that it is clear that Lombard would have required the appellants to execute joint and several personal guarantees in support of the borrowing. The appellants’ own tax adviser, Mr Richard Price, as his witness statement shows, made it clear to NatWest that he would strongly advise the appellants not to give guarantees of this kind. The appellants do not assert that this was not said or that they would nonetheless have gone ahead and given the guarantees regardless of Mr Price’s advice. In those circumstances, there is no prospect of showing that this source of funds would have been available to the appellants.[52]The appellants have said at an earlier stage in these proceedings that they had had an oral agreement with NatWest to extend the facilities that they required. Deputy High Court Judge Richard Salter QC, in the earlier proceedings against NatWest expressed the view that it was surprising if two experienced businessmen such as the appellants were prepared to rely on an oral promise of this kind. Mr Richardson did not orally pursue this argument before us though he referred to the decision of the Supreme Court in Carlyle v Royal Bank of Scotland plc [2015] UKSC 13 for the proposition that an oral agreement by a bank for funding was a binding contract, but as Lord Hodge SCJ, with whom the other members of the Supreme Court agreed, made clear, that depends on the facts of the case (see para 26).[53]It has been suggested on earlier applications that there should be a trial so that the LLP’s relationship manager at NatWest, Mr Flannery, who had supported the development and was well disposed to the appellants, could give evidence. But Mr Flannery gave evidence in the earlier unsuccessful proceedings against NatWest and had been unable to give concrete evidence in support of the appellants’ contentions against NatWest in those proceedings. In the circumstances, the judge came to the inevitable conclusion that the prospect of Mr Flannery’s evidence at trial did not provide the appellants with a prospect of success at trial on the question of the availability of funds.[54]Next, the appellants say that NatWest had improperly charged the LLP with the sum of £238,000 being the costs of an interest hedge taken out to secure interest due on a borrowing by a company called Instant Fire Protection Ltd which the appellants had run before they commenced the development of the hotel but had since disposed of. NatWest’s case is that this interest hedge was novated so that the LLP became an obligor if the hedge was at any particular time no longer in the money. There is an email from Mr Berntsen stating that this was to happen. The appellants deny that the interest hedge was ever novated in this way. No novation document has been produced. The difficulty with this argument, however, is that the appellants did not pursue this point with the respondents at the time, and even if they had, NatWest clearly did not accept it and it remains in dispute to this day. This improper debit was not therefore capable of being a ready source of funding to the LLP.[55]The appellants contend that the respondents could have used a substantial repayment of VAT to provide the whole or major part of funding to complete the development. The difficulty with this argument, as Norris J explained, is that the LLP was contractually obliged to NatWest to use this sum in reducing facilities which NatWest had extended to the LLP. It was not a free asset of the LLP.[56]That leaves two other possibilities. The first was that a hotel chain, the MacDonald group, had agreed to take a lease of the hotel on completion on terms that they would pay a proportion of the revenue and profits of their business at the hotel by way of rental. There was no guarantee that there would be any particular level of such revenue or profits. This project would not provide a fixed income stream to match the interest due on the borrowings from NatWest and so was not a source of funding that the respondents could use as a basis for securing funding to complete the hotel.[57]The final possibility of funding was from Swale Borough Council. The appellants rely on the fact that the Chief Executive, Mr Abdool Kara, had expressed an interest in the completion of the hotel and had indicated that the Council would look at any proposition. But, although the respondents had had a long meeting with him, he had not made any offer of funding. It was a possibility but not an immediate option. Sources of funding had to be immediately available as the LLP had engaged staff and the administrators could not continue the business without knowing that they had the funds to complete the hotel because of the risks involved in taking on staff. There is no prospect therefore of showing at trial that this would be a source of funding that could have been used to complete the hotel.[58]I appreciate that there has been no cross-examination of those involved. However, as a result of the steps taken and case management directions given in these proceedings and in the earlier proceedings against NatWest the appellants have had numerous opportunities to put forward some basis for challenging the position but have been unable to do so. Disclosure has taken place.[59]The appellants contend that, even if they could not show that there were immediate sources of funding available, there was sufficient material here for the respondents to have sought to persuade NatWest to extend more funding to the LLP. They say that they expected the respondents to fight their corner. Even assuming that the respondents had agreed to perform that sort of function, this argument would take the appellants nowhere unless there were grounds for concluding that NatWest would have been so persuaded. No such grounds have been advanced.[60]In those circumstances, I conclude that the judge was right to conclude that the rescue claim had no prospect of success.

The undervalue claim

[61]The question here is in my judgment whether there is any evidential basis for the allegations which the appellants make. The fact that the decision to sell the hotel was only taken by the respondents and NatWest at the end of June 2010 after advice from KF on the property value and advice from GVA Grimley on the amounts needed to complete the hotel is inconsistent with the allegation by the appellants that the respondents had entered into a predetermined arrangement to instruct KF to sell the hotel on 1 June 2010. The respondents sought tenders for their marketing exercise from three firms, on various assumptions. On the respondents’ case, the respondents chose KF, which offered the lowest fees, and then carried out a proper marketing exercise prior to sale of the hotel.[62]Mr Richardson points to an email dated 7 July 2010 from the first respondent to Mr Sarling, an employee of BDO, in which the first respondent says: They [the appellants] are very sensitive to the asking price as they believe that KF have undervalued it, culpably so. (appeal bundle 8/556)[63]In my judgment, leaving aside the fact that the purchaser was West Register and that West Register had been involved in this matter since the appellants first instructed the respondents, the only basis for this claim is the fact that the KF valuation of the hotel was so much lower than that of Savills. But the fact was that these valuations were on different bases and even now there is no evidence that KF’s valuation was not such that the respondents could properly rely on it. Coupled with that there is evidence of extensive marketing of the hotel. That marketing exercise described by Morgan J makes it unrealistic to suppose that the appellants could succeed on their conspiracy claim. The respondents sought tenders for their marketing exercise from three firms, on various assumptions. The fact that West Register was involved from the start and was the ultimate purchaser has made me scrutinise what happened with scepticism but at the end of the day it is impossible for the appellants to get round the evidence as to the way the respondents marketed the hotel.[64]In the circumstances the judge was in my judgment right to conclude that there was no realistic possibility of this claim succeeding.

The examination claim

[65]This claim was not pursued in detail before us and so I need say very little about it. As Morgan J pointed out, any repayment or release of sums set aside to pay the administration costs (and his unchallenged finding was that such costs amounted to £130,000) would go to the secured creditors not the appellants since any such repayment or release would merely reduce the deficiency as regards secured creditors. The appellants will not therefore suffer any direct loss if this claim is not pursued at length. No secured creditor has come forward nor has any explanation been provided as to why despite the absence of an interest in the appellants this claim should be pursued. In those circumstances, I consider that the judge was right to hold that this claim should be struck out.

Conclusion

[66]For the reasons given in this judgment, I consider that permission to appeal should be granted but the appeals dismissed.[67]When the judgments were circulated in draft in accordance with the Practice Direction supplementing CPR 40, we received a substantial number of suggested amendments from the appellants. I have considered them carefully and accepted some of them, but not the bulk of them. On those, in summary, I accepted the respondents' submission that those submissions were an attempt to reopen issues which the court had considered and determined against them. Lord Justice Longmore[68]I agree. Lord Justice Jackson[69]I also agree.

Cited in 3 later judgments