Sefton (As Liquidator of Online Corporate Services Ltd) v Gallucci [2008] EWHC 738 (Ch)

Claim Nos. 1045 and 1508 of 2002

[2008] EWHC 738 (Ch)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Venue BIRMINGHAM DISTRICT REGISTRY

Date 14 April 2008

Before

His Honour Judge Purle QC

sitting as an Additional Judge

Between

COLIN ANTHONY SEFTONClaimant

(As Liquidator of Online Corporate Services Limited)Claimant

B E T W E E N:-

-and –

Between

AMORINO PETER NINO GALLUCCIDefendant

Mr Paul Burton instructed by Cobbetts LLP acted for Claimant

The Defendant acted in person for in person

Hearing Hearing date: 31 March 2008

Judgment handed down: 14 April 2008

JUDGMENT

[1]Online Corporate Services Ltd (“the Company”) was wound up by the Court on 4th November 2002, having previously been in administration. The Claimant was its Administrator and became its Liquidator.

[2]The Liquidator has brought proceedings against the Defendant, who was a director of the Company, in respect of his removal of monies and assets from the Company, including a share portfolio. A Freezing Order has been in place since 17th September 2002, with a specified financial limit of £1,500,000.

[3]A number of claims are made against the Defendant, based upon allegations of misfeasance, transactions at an undervalue and/or defrauding creditors and as constructive trustee (“the misappropriation claims”). There was additionally a preference claim. This arose out of the Defendant’s assertion that he was a substantial creditor and anything that was removed went to reduce what he was owed.

[4]The matter came before HH Judge Norris QC who decided on 28th March 2003 that the Defendant’s answer to the misappropriation claims, even if correct, provided no answer to the preference claim. He accordingly vested the share portfolio (the principal asset removed) in the Liquidator and adjourned the misappropriation claims generally with permission to restore. He also ordered the Defendant to pay the costs down to that date including the Freezing Order costs to be assessed if not agreed. Subsequently, a payment on account of those costs of £40,000 was ordered. The £40,000 was duly paid.

[5]HH Judge Norris QC also continued the Freezing Order until trial of the misappropriation claims. This however was done upon the Liquidator’s undertaking immediately to apply to the Court to reduce the specified sum by crediting to it the net proceeds of any sale of the share portfolio. That undertaking was not carried out. By a later order (made on 26th January 2004) the Freezing Order was amended and is now expressed to be made by consent, though its continuation was hardly necessary as it had already been continued the previous March. What happened on 26th January 2004 was that the Freezing Order was varied so as to enable the Defendant to pay a specific sum in respect of legal costs. Another variation referred to the need to pay £40,000 as costs to the Liquidator. However, that had already been provided for in an earlier Order of 15th December 2003. I imagine that the “consent” related to the variations only. However, I shall treat it as a Consent Order in the full sense. The Order itself contained permission to apply to discharge or vary the Order.

[6]Since 28th March 2003, the Liquidator has done nothing to progress the trial of the misappropriation claims. The Defendant now asks me to discharge or vary the Freezing Order.

[7]In support of his arguments, the Defendant has sought to explore the merits of the misappropriation claims which, he says, are really quite hopeless. I do not think it is right for me to approach the matter in that way. The Freezing Order was confirmed by HH Judge Norris QC on 28th March 2003 when only the misappropriation claims were left, and was reconfirmed (apparently by consent) the following February. In those circumstances, I should only consider a discharge or variation in the light of matters which did not pertain at the date of those earlier Orders. Thus, I proceed on the basis that the misappropriation claims are properly brought and that there is a real risk of dissipation if the Freezing Order is discharged or materially varied. On the latter point, the matter is said by the Liquidator to be critical as the Defendant (who has recently served a term of imprisonment following a conviction for falsifying documents in these proceedings) is seeking to use frozen assets (a property and shares) as security in place of another property over which a judgment creditor (Prudential Assurance) has obtained a charging order. The Defendant tells me that he is taking steps to obtain permission to appeal the Prudential Assurance judgment. I am not, however, prepared to assume that he will necessarily succeed in that endeavour, or on any appeal that may ensue. In my judgment, the risk of dissipation is real and present if the Freezing Order is not maintained. It is said on behalf of the Liquidator that the misappropriation claims, which are said to be of significant merit, could be rendered economically unjustifiable without the Freezing Order.

[8]I should also mention that there are a number of unsatisfied costs orders against the Defendant. Apart from the costs Order made on March 28th 2003 (as to which £40,000 has been paid on account) I have been referred to a number of other occasions upon which the Defendant was ordered to pay costs. The Orders I have been referred to are those dated 22nd September 2003, 11th March 2004, 18th April 2005, 27th June 2005 and 5th July 2005. With (I am told) one exception, a detailed assessment has been ordered if the costs can not be agreed. They have not been agreed and the Liquidator has not taken any formal steps to have them assessed. As regards the occasion when no order was made for assessment of costs which the Defendant was ordered to pay, the Liquidator has not until the hearing before me asked for one.

[9]A number of these costs orders arose as a result of attempts by the Defendant to get rid of or vary the Freezing Order. They were unsuccessful, though ultimately they seem to have founded on the rock of procedural ineptitude. The matter was described thus in a letter dated 6th July 2005 from the Liquidator’s solicitors to a firm of solicitors who appeared at that stage to be about to act for the Defendant:- “With regard to Mr Gallucci’s substantive applications yesterday, these were dismissed by the Judge in their entirety with an order for costs to be assessed in default of agreement. The manner in which the applications were dismissed was in order to ‘clear the decks’ ensuring that there are no outstanding applications by Mr Gallucci but without consideration of the merits of the applications that he has previously attempted to pursue, such that should you feel that there is substantial merit in any of the matters that he is trying to pursue you are not precluded from issuing an application on his behalf with appropriate evidence filed in support.”

[10]Other costs liabilities of the Defendant towards the Liquidator arose in respect of securing the Defendant’s and 2 of his associates’ attendance at an examination under sections 236-7 of the Insolvency Act 1986 in (eventually) September 2004. The Defendant proved obstructive and was arrested and imprisoned for a short while.

[11]I have not been given any indication as to the level of costs which may be due under the various Orders. Concern has, however, been expressed on behalf of the Liquidator that the likelihood of recovery of his costs would be prejudiced should the Freezing Order cease. In the absence of any idea as to the level of costs, I do not think it would be right, given the delay in pursuing the costs liabilities, to keep the Freezing Order in place for the purpose of protecting the Liquidator in respect of those costs orders if the circumstances otherwise justify its discharge. Moreover, upon the only occasion when a specific amount has been identified (the £40,000 payment on account) the costs have been paid.

[12]The Liquidator may well be right that his prospects of recovery (both in respect of the misappropriation claims and the costs) will or may be prejudiced without the protection of a Freezing Order. No Freezing Order would have been made in the first place unless the risk of the Defendant taking steps to defeat the fruits of a judgment had been present. Against that, however, there has been considerable delay in prosecuting the misappropriation claims and this is a significant point against allowing the Freezing Order to continue. It is also a matter which by definition had not occurred and therefore was not considered by the Court when the Order of 28th March 2003 was made. For the same reason, a minimum of a further 4 years of delay cannot have been in anyone’s mind at the time of the Consent Order of 26th January 2004. On the same date, an Order was made directing a Case Management Conference to consider (if sought) amendments to the Liquidator’s application which to this day have not been formulated.

[13]It is well established that a claimant who obtains a Freezing Order is under a duty to get on with the action as rapidly as he can, and not simply “rest content with the injunction”: see, generally, Lloyd’s Bowmakers Ltd v Britannia Arrow Ltd [1988} 1 W.L.R. 1337 at 1347 and 1349-50; Comdel Commodities Ltd. V Siporex Trade SA [1997] 1 Lloyd’s Rep. 424. A claimant who does not act speedily runs the risk that the injunction will be discharged on the grounds of his delay. In Town and Country Building Society v Daisystar, The Times, October 16th 1989, Farquaharson L.J. said that it was the duty of the claimant to press on with the claim so that the defendant was subjected to the Freezing Order for as little time as possible, and that if the claimant wished not to proceed with the claim expeditiously, even temporarily, then it was his duty to apply to the court to discharge the injunction.

[14]Despite the peremptory terms with which Farquharson L.J. made his point, I undoubtedly have a discretion whether or not to discharge the injunction. As the Privy Council explained in Walsh and Others v Deloitte & Touche Inc

[2002] 4 LRC 454

at para [26]:

“Their Lordships have no doubt that failure to progress the action, wherever it is taking place, is a ground upon which a court may discharge an injunction previously granted.”

[15]This discretion must be exercised in the light of all the circumstances, including the reasons for any delay and the Defendant’s own behaviour in the proceedings. The principles are set out in the 5th edition of Gee on Commercial Injunctions at pp. 724-727.

[16]I turn then to consider the delay in this case. It is substantial. The Liquidator has done nothing to progress the misappropriation claims for 5 years. There have been a number of applications made by the Defendant, but these related one way or another to the Freezing Order and the various costs orders, and not to advancing the misappropriation claims. The last of those to be heard was in July 2005. The Liquidator has not satisfactorily explained why he did not progress the misappropriation claims at all by that date, or why he has not done so since. The Liquidator did secure (despite the Defendant’s obstructiveness) the section 236-7 examinations I have mentioned in September 2004 but did nothing after that. These were not of course steps in the action and I have not seen or been told anything which justified him in putting the action on hold pending the examinations. On the contrary, one of the Orders of 26th January 2004 made provision for a Case Management Conference at which any re-amendment of the Ordinary Application could be made, but so far as I am aware no case management directions have been sought. Even if, however, it was proper to put the action on hold pending the examinations, there remains 3 and a half years delay since then, and 2 years and 9 months of delay since the last hearing before the court in July 2005. This to my mind is plainly unacceptable.

[17]The continuation of the Freezing Order today can not, incidentally, be justified by reference to the need to secure compliance with the Order vesting the share portfolio in the Liquidator, as that has occurred. There may be a balance of costs due under the Order of 28th March 2003, but the Liquidator has done nothing to have them assessed. The same applies to subsequent costs orders. As mentioned, in all cases bar one, an Order for assessment has been made but not acted upon. I have no doubt that an Order for assessment would have been made in respect of the excepted Order, had it been sought timeously, but no such application was made.

[18]As already mentioned, the Liquidator’s solicitors wrote to a firm of solicitors they understood would be acting for the Defendant on 6th July 2005. This did not elicit any meaningful response and on 30th September 2005 the Liquidator’s solicitors wrote to the Defendant, saying:

“You therefore leave us with no alternative but to prosecute not only the outstanding costs orders in favour of our client but also the substantive applications against you.”

This statement was not followed by action.

[20]Mr Davison of the Liquidator’s solicitors has made a witness statement explaining that at the time of the correspondence I have just referred to, his firm was particularly keen to bring matters to a conclusion because, in April 2005, his firm had received correspondence from West Midlands Police Force indicating that the Defendant was to be subject to criminal prosecution. Notably, it is not said that the action was put on hold because it was thought to be inappropriate to proceed in the light of the pending criminal proceedings. That is not surprising, as the court commonly does manage civil actions, sometimes to trial, notwithstanding the existence of criminal proceedings, exercising where appropriate control over the publicity afforded to the civil proceedings. As the criminal proceedings are not said to have had any impact on the civil proceedings, the precise course of those proceedings is not explored in the evidence. I am however told that the Defendant was sentenced to 30 months imprisonment in October 2006. He did not of course serve the whole sentence. I am not told exactly when he came out. Mr Davison’s firm did however correspond with him both during and after his period of imprisonment, and could have got on with the action had they been instructed to do so throughout that period.

[21]Mr Davison refers expressly to a letter dated 31st July 2007 from the Defendant to his firm in which the Defendant denies all liability and claims that he is owed £22,000 by the Company. This was challenged by Mr Davison’s firm and “further proceedings” against the Defendant were threatened. The Defendant’s letter is cited by Mr Davison as an example of the tone of correspondence received from the Defendant since commencement of the proceedings. I am not referred to any other example. I do not see any of that as justifying the delay that has occurred.

[22]A general complaint is made to the effect that the combination of frivolous applications and obstructive correspondence emanating from the Defendant has put the Liquidator to expense and impeded the progress of the action. Were it the case that the Defendant caused the Liquidator such expense that he needed to raise a fighting fund from the creditors in order to continue, that may have justified such delay as was attributable to the assembly of that fund. However, no evidence has been put forward other than in very general terms explaining in any meaningful way the financial constraints the Liquidator has been under, and what steps he has taken to deal with those constraints. Mr Burton for the Liquidator recognised that the action could have been more actively pursued, and candidly told me that he suspected that the reason the action went to sleep was because of the need to put together a fighting fund. Much as I am grateful to Mr Burton for his candour, what he suspects is no substitute for evidence.

[23]Complaint is also made that the Defendant has never provided an appropriate statement of means, as required by the Freezing Order. Mr Davison points out that the Defendant’s witness statement in purported compliance with the Freezing Order extends to 4 brief paragraphs only. He does not say, however, in what respects it fails to comply with the Freezing Order. Brevity is not a breach. The statement in question is stamped 31st October 2002. It discloses 4 assets, namely 2 properties, some shares and an amount of cash. The precise details of the shares are not disclosed, but, if the liquidator needs or formerly needed to know more (and it is not part of his case that he did) he has had ample time (over 5 and a half years) to ask questions, or to raise a complaint before the Court. He has not brought any such complaint before the Court and cannot in my judgment pray the deficiencies he now perceives in the disclosure as an answer to his own delay.

[24]Mr Burton on behalf of the Liquidator accepted that for the action to proceed, the Liquidator would need to put in more evidence. He was not able to offer a firm timetable for that purpose as the Liquidator may need to carry out further investigations. The reasons for more evidence are (as I understand the matter) 2-fold:-(i) the Liquidator has a claim for loss of value of the share portfolio formerly vested in the Defendant;

(ii) the Liquidator also has a claim for a transfer of the Company’s business to Rockstone Services Ltd.

[25]The Liquidator got the share portfolio back 5 years ago. He undertook to apply to the Court to reduce the maximum sum by giving credit for the proceeds of the share portfolio but never did so. It may be that he has not realized the portfolio yet, though this would be surprising. The Rockstone transfer was referred to in a witness statement of his solicitors as long ago as January 2004. I am unimpressed therefore that the Liquidator is not in a position to progress his claims forthwith. A further amendment to his Application was, as I have noted, contemplated as long ago as January 2004, and I imagine that this related to or included the 2 elements of the claim now identified by Mr Burton. I accordingly treat the case as one where there has been substantial and unjustified delay which is continuing.

[26]Mr Burton did advance the following suggestion:-(i) I should make an Order for assessment of the outstanding costs forthwith;

(ii) I should allow a short period of time for the Liquidator to consider his position and to elect whether to proceed or not. If he elected to proceed, further directions would be sought. If he took the view that the action was not worth pursuing, he would say so;

(iii) The Defendant should in any event serve a witness statement or affidavit showing his current means. This reflects Mr Davison’s witness statement, where he states that the Liquidator cannot be certain what assets (if any) the Defendant still holds nor what value should be attached to those assets, and asks for an Order for a “full and detailed affidavit of means”, apparently so as to help the Liquidator make the commercial decision of whether or not to proceed.

[27]It was not fair, Mr Burton submitted, for the Liquidator to be forced into taking a position before those steps had been undertaken. Mr Burton also emphasised that the Liquidator owed duties to creditors and had to act with appropriate circumspection. That was also a factor I should have in mind when considering the delay that has occurred in this case.

[28]I do not consider the approach urged on me by Mr Burton to be acceptable. On 12th February 2008 I made an Order on paper requiring both an explanation of the extended period of inactivity, and proposals as to the way forward (if any) or whether the proceedings and any freezing orders should now be terminated. It was obvious from the terms of that Order that I was troubled by the delays that have occurred. Despite that, I have no firm proposals for the way forward, only an outline of what the Liquidator needs to do to make up his mind.

[29]As already mentioned, the Liquidator already has, with what I was told was one exception, orders for a detailed assessment under various Orders. It is for the District Judge who is being asked to assess the costs to decide whether and to what extent the delay in proceeding under those Orders (assuming they stand) precludes recovery. As regards the remaining Order (where no detailed assessment was ordered) I shall (on the same assumption) direct that the question of whether those costs should be assessed be referred to the District Judge asked to deal with the other outstanding assessments. Nothing I say should be taken to prejudge the exercise of the District Judge’s discretion.

[30]I have already explained why I am unpersuaded that the concerns the Liquidator has concerning the Defendant’s statement of assets can be used as justification for or as counterbalancing the delays for which the Liquidator is responsible. Moreover, I do not think it is in general right for a claimant to ask for a Freezing Order and accompanying assets disclosure before deciding whether to proceed. A Freezing Order is granted to protect claims which the claimant has decided to bring and the assets disclosure has as its purpose the policing of that Freezing Order. A claimant who seeks a Freezing Order and associated disclosure in order to ascertain whether it is worth making a claim in the first place is guilty of abuse, though I can well see that parties who start proceedings intending to take them to trial may properly change their mind if and when it becomes evident that the party pursued is not worth anything.

[31]The same principle applies to the present application for an up-to-date assets disclosure. This is required primarily to enable the Liquidator to decide whether or not to proceed. Mr Burton says the Liquidator should not be put to his election until he has received that updated assets disclosure. I do not agree. The Liquidator is only entitled to maintain the Freezing Order, and the associated assets disclosure, on the basis that he does indeed intend to proceed. He is not entitled to disclosure in order to make up his mind.

[32]In the present case I am prepared to accept that, when the Freezing Order was granted in 2002, the Liquidator (he was then acting as Administrator) genuinely intended to proceed. The fact that he brought the matter relatively speedily before the Court and recovered the share portfolio in March 2003 demonstrates that. Since then, the position has changed. The Liquidator as at today is undecided whether to proceed or not, but wishes to have the Freezing Order in place and associated up-to-date disclosure to inform the decision-making process. That is in my judgment an improper use of the Freezing Order procedure.

[33]I do not overlook the fact that insolvency office-holders of necessity adopt a commercial approach to litigation and that their duties are to creditors first and foremost. This does not however give insolvency practitioners a privileged position in litigation. They are just as much bound as any other claimant to progress proceedings under which they have the benefit of a Freezing Order speedily. They are in that respect in no better or worse position than other litigants. I am mindful too that litigation costs have a measure of priority in an insolvency and that this can have an oppressive effect on a Defendant in some cases. I am not saying that the present case is an example of that sort of oppression. Nevertheless, I do consider, having weighed all the circumstances of the case, that the prolonged delay in progressing the misappropriation claims is a serious irregularity and that the points made on behalf of the Liquidator do not counterbalance or excuse that irregularity. The Freezing Order necessarily causes the Defendant continuing difficulties, as is reflected in the problems he has had in offering alternative security to Prudential Assurance. Moreover, the existence of the Freezing Order persuaded Master Moncaster in November 2006 to direct that, when the property over which Prudential Association’s charging order extends is sold, the surplus proceeds of sale should be paid into Court and not to the Defendant. I do not overlook the fact that the Defendant’s conduct has been far from blameless. He evaded his examination and advanced false evidence to this Court. For each of those transgressions he has been arrested and imprisoned. The position remains that he is entitled to ask for his assets to be frozen for as short a period as is reasonably possible. Making due allowance for the Defendant’s obstructive and (at times) dishonest behaviour, that period is comfortably exceeded many times over. The Liquidator is not entitled to tie the Defendant’s assets up indefinitely without good reason. None has been shown for the prolonged period that has already expired. I do not think that it is right that the assets should be tied up any longer.

[34]I shall therefore discharge the Freezing Order. It will however remain in place until this judgment is handed down. Until that occurs, it must be complied with and any breach would be a contempt of Court with potentially serious consequences.

[35]As I am discharging the Freezing Order, the question of variation does not arise.

[36]As to the future progress of the action, I shall give the Liquidator an opportunity to put forward appropriate directions (if he wants to) when judgment is handed down. Failing that, I shall dismiss the remaining claims. I would not regard giving the Liquidator further time to make up his mind as an appropriate direction.