Clydesdale Financial Services Ltd & Ors v Smailes & Ors [2009] EWHC 1745 (Ch)

[2009] EWHC 1745 (Ch)

Case No B7625176

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Venue Royal Courts of Justice

Date Thursday, 18 th June 2009

Strand

London

WC2A 2LL

Before

MR JUSTICE RICHARDS

Between

Clydesdale Financial Services Ltd & OrsClaimant

Smailes & OrsDefendant

B E T W E E N:

CLYDESDALE FINANCIAL SERVICES LIMITED and OTHERS

ROBERT SMAILES and OTHERS

Transcript from a recording by Ubiqus

Venue Cliffords Inn, Fetter Lane, London EC4A 1LD

Tel: 020 7269 0370

Mr G Bompas QC and Mr L Ife (instructed by Salans, Solicitors) appeared on behalf of the 1 st and 2 nd Claimants

Mr N Jones QC and Ms S McCann (instructed by Just Costs Solicitors) appeared on behalf of the 3 rd Claimant

Mr L Tamlyn (instructed by Colman Coyle, Solicitors) appeared on behalf of the 1 st, 2 nd and 5 th Defendants

Mr T Dutton QC and Ms B Lucas (instructed by Ozon, Solicitors) appeared on behalf of the 3 rd Defendants

JUDGMENT

[1]There are before the Court a number of applications all arising out of the insolvency of a solicitors’ practice which was carried on first by a firm with the name Alexander Samuel & Co and then from a time in about mid-2008 by a limited partnership called Alexander Samuel LLP. I will refer to them as the firm and LLP respectively. The prime mover behind both the firm and LLP was Joseph Denenza[?], a US citizen and a foreign-registered lawyer.

[2]The practice comprised making and pursuing claims for damages for personal injuries arising out of road traffic accidents, which accounted for some 80% of its cases, and employers liabilities claims accounting for the balance. It was high volume low value work with all or virtually all clients being referred by claims handling companies. Cases were undertaken on a conditional fee basis and the practice was funded by lenders including the first claimant, Clydesdale Financial Services Limited (CFS), a subsidiary of Barclays Plc, and the second claimant, Justice Capital Limited (JCL). It is not in dispute that on the 2nd April 2009 when LLP went into administration substantial amounts were due to CFS and to JCL from LLP and/or the firm. CFS claims to be owed some £3.6 million by LLP and some £4.7 million by the firm and JCL claims to be owed approximately £3 million by the firm.

[3]On the 2nd April 2009 a sale agreement was made or purportedly made under which LLP sold its work in progress and retainers, its rights in respect of disbursements and other assets for a total price of £1.9 million payable as to £150,000 on completion and as to the balance by 30 equal monthly instalments of £58,330 each starting on the 30th April 2009. The bulk of the price was attributed by the contract to the work in progress and retainers (£1.2 million) and disbursements (£645,993). The purchaser was a newly-formed entity, Jiva Solicitors LLP (Jiva) established to purchase these assets and carry on the practice in succession to LLP.

[4]Jiva was formed and is owned by Mohammed Hussain Jiva, a solicitor admitted in 1999. He has carried on a practice in Bolton since 1999, specialising in personal injury claims. He resigned from this practice on the 30th March 2009 in order to pursue the proposed acquisition of cases from LLP. Since the 2nd April 2009 Jiva has been carrying on the practice acquired from LLP from the same premises in London and with largely the same staff.

[5]The sale agreement was signed by the parties immediately before LLP went into administration. The members of LLP appointed joint administrators under Schedule B1 to the Insolvency Act 1986, as applied to limited liability partnerships by the Limited Liability Partnership Regulations 2001 (as amended in 2005). The agreement provided for completion to occur immediately after the appointment of the administrators and provided also that the agreement would be null and void if the administrators were not appointed. The terms of the sale agreement had been negotiated in the preceding weeks with the active participation of the administrators.

[6]The sale and the administration were therefore in substance a pre-pack administration, differing from the paradigm pre-pack administration only because the sale contract was made by LLP immediately before it went into administration rather than by LLP acting by its administrators immediately afterwards. As is notorious there has been widespread public concern in relation to pre-pack administrations in terms of whether they achieve the best outcome for creditors. This is not to say that in any particular case or even in the generality of cases they do not achieve the best outcome but the hallmarks of a lack of widespread marketing of the business, often combined with the involvement of the directors of the insolvent company in the purchaser, create the conditions in which the result may be called into question.

[7]To go some way to meeting this concern the Institute of Chartered Accountants in England and Wales issued Statement of Insolvency Practice 16 effective from the 1st January 2009. It requires information detailed in the statement to be provided to creditors at an early stage of the administration.

[8]The first notification of the sale to Jiva to any creditor of LLP was an email sent to CFS minutes before the contract was signed on the 2nd April 2009, which was followed, as I have mentioned, immediately by the signing of the contract and the appointment of the administrators. CFS responded quickly, indicating its opposition to the sale. I will need to refer a little to the events of the 2nd to 5th April 2009, but at 7.45am on Monday 6th April 2009 CFS, JCL and the third claimant in these proceedings, Focus Insurance Company Limited applied on short notice to Warren J. for interim relief in respect of the sale. No substantive order was made by Warren J except for an order for inspection of the files relating to the cases which had been funded by CFS and JCL. I should mention that this order has proved ineffective because it appears that clients were not required by the firm or LLP to sign client care letters evidencing their consent to inspection of their files by funders.

[9]As completion of the contract had to a large extent occurred on the 2nd April 2009 it was too late to obtain an injunction restraining completion which would have any significant effect. Instead by their application notice issued on the 7th April 2009 the claimants sought, as the principal interim relief, an order that Jiva return to LLP the files relating to the cases funded by CFS and JCL and an order requiring the administrators to appoint a named solicitor or such other person as might be nominated by the Law Society, as practice manager of LLP for the purpose of managing the returned files pending a run off or disposal. In addition, the claimants sought an injunction against the administrators restraining them from taking any outstanding steps to sell or complete the sale of the business to Jiva.

[10]At a hearing before Lewison J.on the 8th April 2009 directions were given for the hearing of the claimant’s application at a date to be fixed not before the 13th May 2009. In the meantime Jiva gave undertakings the effect of which was to freeze all monies received by it in respect of disbursements and solicitors profit costs on each of the cases which had been funded by CFS or JCL up to the amount of the funding on each such case.

[11]By the start of the hearing before me the scope of the relief sought by CFS and JCL had significantly narrowed. At a hearing before Proudman J. on the 21st May 2009 they consented to the dismissal of the application so far is it sought the appointment of a named solicitor as practice manager although it remained open to them to seek the appointment of a different practice manager. In the skeleton argument of counsel for CFS and JCL served on the 5th June 2009, they abandoned the application for the return of files and the appointment of any practice manager and instead stated that they would seek a continuation until trial of the undertakings given at the hearing before Lewison J., together with provision of certain disclosure and an undertaking by the administrators not to take any outstanding steps to complete the purchase. The administrators have indicated in their skeleton argument that they were content to give this latter undertaking principally because so little remained to be done.

[12]Mr Bompas QC fully opened the application for relief against Jiva and Mr Dutton QC for Jiva responded fully to it. It was described before me as the main application. However, in the course of the hearing CFS, JCL and Jiva reached agreement on undertakings to be given by Jiva pending trial. They repeat the undertakings given to Lewison J. but provide that Jiva may deduct and retain sums in respect of overhead costs. It is therefore not necessary to consider the merits of the application by CFS and JCL against Jiva.

[13]The third claimant, Focus Insurance Company Limited, is separately represented. It provided after the event and financial guarantee indemnity insurance in respect of the practice of the firm and LLP. It is content with the agreement reached by the other claimants with Jiva but in addition it seeks an order for inspection of the files on cases in respect of which it has issued policies. This is resisted by Jiva and I will deal with it later in this judgment.

[14]The main issue now arising from the hearing relates to an order sought by CFS for the removal of the administrators and the appointment of a replacement administrator. If made, this would, of course, be a final not an interim order. The application is expressed as made either under paragraph 88 of schedule B1 for the removal of the administrators or under paragraph 74(4)(d) for their appointment as administrators to cease to have effect. The jurisdiction under paragraph 88 is expressed in very general terms, the paragraph providing simply that the court may by order remove an administrator from office. There must of course be a good ground for doing so although it need not involve misconduct or personal unfitness on the part of the administrators. There is a discussion of relevant considerations in paragraphs 82 to 90 of the judgment of Warren J. in Sisu Capital Fund Limited v Tucker

[2006] BPIR154

. One factor is that the court will have regard to, but will certainly not be bound by, the wishes of the majority of creditors.

[15]In view of the breadth of paragraph 88 it is really unnecessary to rely on paragraph 74. The jurisdiction under paragraph 74 is more limited. Paragraph 74(1) provides that a creditor or member of a company in administration may apply to the court claiming that a) the administrator is acting or has acted so as unfairly to harm the interests of the applicant whether alone or in common with some or all other members or creditors, or b) the administrator proposes to act in a way which would unfairly harm the interests of the applicant whether alone or in common with some or all other members or creditors. Paragraph (74)(3) provides that the court may take a number of courses which include(a) grant relief and

(b) make any other order it thinks appropriate. Paragraph 74(4) provides without limiting the powers of the court under paragraph 74(3), that the court may make a number of specified orders including under paragraph 74(4)(d), relied on by CFS, that the appointment of an administrator cease to have effect. I should say here that the effect of an order under that provision is not simply the removal of an administrator but the company or LLP would cease to be in administration: see paragraph 1(2)(c) of schedule B1. However, I have no doubt that under the general power conferred by paragraph 74(3) the court could remove an administrator and appoint a replacement.

[16]The grounds on which CFS seeks the removal of the administrators is set out in its application notice dated the 29th May 2009. Those grounds are set out in six paragraphs as follows: “(4) Removal of the Defendants as administrators is in the real substantial and honest interests of the administration and the purpose for which the administrators were appointed; (5) The applicant believes that the Defendants have colluded with AS LLP, Alexander Samuel and Co (“AS & Co”) and Jiva Solicitors LLP in pushing through completion of the sale of the business of AS LLP and AS & Co and in failing to consult the creditors of AS LLP (including the Applicant) until it was effectively too late for the Claimant to stop the sale, whilst pretending to the Claimant that it was so consulting it; (6) The Claimant believes that the Defendants have facilitated a sale of the business at a gross undervalue by failing to ensure that a proper valuation on proper information was obtained prior to the sale, by failing to consult the minority designated member of AS LLP and by failing to consult the creditors of AS LLP; (7) The Defendants have misconducted themselves in the ways set out in paragraphs (5) and (6) above, and further in failing to comply with SIP16, in failing to conduct the administration with transparency and to inform creditors of the sale as soon as possible, and in failing to call a meeting of creditors of the sale as soon as possible, but instead making a without notice application to court to extend the time for convening a creditors’ meeting in the face of a creditor’s request to convene such a meeting and circulate proposals; (8) the Defendants are conflicted between their duty to creditors and their desire to protect their own interests in this litigation (as demonstrated by their approach to disclosure of documents); (9) the Claimant has lost all confidence in the Defendants’ ability properly to discharge their duties as administrators”.

[17]In essence these grounds raise three issues: first, the fact and terms of the sale of LLP’s work in progress and disbursements to Jiva; secondly, the failure to involve and consult the creditors of LLP including CFS before the sale was agreed; and thirdly the conduct of the administrators since their appointment on the 2nd April 2009. The grounds are expressed in very strong terms, as have been witness statements made on behalf of CFS and indeed the submissions of counsel, and the administrators unsurprisingly take great exception to the grounds and the manner in which they are expressed. One of the joint administrators, Mr Robert Smailes, has provided witness statements on which he has not been cross-examined. He is entitled to have his evidence treated as honestly given.

[18]I will start with the facts as they appear from the evidence on the events leading up to the sale. By February 2009 Mr Denenza realised that LLP was in serious difficulty and, as is now known, it was substantially in breach of its obligations to CFS and perhaps, as successor to the firm’s cases, to JCL to repay them out of disbursements and profit costs received on the successful conclusion of cases. He sought help from Michael Ozon, a solicitor who had acted for LLP and who had also acted for Mr Jiva’s firm. Mr Ozon knew that Mr Jiva was interested in new opportunities and he put Mr Jiva in touch with Mr Denenza. They had previously been unknown to each other. They met for the first time on the 16th February 2009 in Manchester. Mr Denenza told Mr Jiva that he needed knew capital to keep LLP afloat. They had two further meetings in London and Mr Jiva was given a tour of LLP’s offices. Mr Denenza made clear that his main objective was continuity of employment for LLP staff and the ability properly to service his clients.

[19]As to the negotiations which led to the sale agreement Mr Jiva says just this in paragraphs 14 and 15 of his first witness statement:

“14. The negotiations were conducted between me and Mr Denenza and bearing in mind I am a solicitor and Mr Denenza is a registered foreign lawyer, there was no need for legal representation. There was a reasonable community of interests between my aspirations and the future of the staff of the LLP and its clients. I agreed a remuneration package with Mr Denenza and required him to enter into a restrictive non-solicitation covenants’. 15. I signed the agreement on Wednesday 1st April 2009 and forwarded the same to Mr Denenza. I believe Mr Denenza counter-signed and provided the agreement to Coleman Coyle also that day”

. Coleman Coyle were solicitors acting for the administrators.

[20]The evidence of Mr Smailes demonstrates that he was intimately involved in the negotiations which led to the sale agreement. He was first consulted on the 9th March 2009 as an insolvency practitioner. He had no prior involvement with Mr Denenza or the firm or the LLP. A meeting with him was attended by Georgina Kyriacou, a partner in Coleman Coyle who acted as his solicitors in relation to this matter, Mr Denenza and Mr Ozon as LLPs solicitor. It is important to note that it appears that Mr Ozon continued to act as LLP’s solicitor until the 2nd April 2009. At the meeting Mr Smailes was told that the LLP was in extreme financial difficulties and was insolvent. He was asked whether his firm was prepared to assist LLP in seeking an administration.

[21]Mr Smailes did not consider that the primary objective of an administration, that of rescuing the LLP as a going concern, was feasible. It would require substantial cash flow funding over a lengthy period and the continued employment of over 100 staff. He did however think that the second objective, achieving a better result for LLP’s creditors as a whole than would be likely if it were wound up, was a possibility. His contemporaneous file note reads in this respect as follows. ‘In this instance it would appear that an immediate sale of the business based on valuations and advice of professional agents may produce greater asset realisations than would have been achievable with an immediate winding up and indeed is likely to be substantially less costly than a sustained period of trading. It is certain that this will produce sufficient realisation to enable unsecured creditors to receive a dividend. My comment to any pre-pack sale was that any offer received would need to be in excess of my agent’s valuation. I mentioned that we had used a firm of accountants in a number of cases recently and indeed they were likely to be asked to provide a valuation in this case. To this extent we would require full co-operation from all parties together with timely information being provided to enable such a valuation to take place. Indeed until such time as this valuation was provided it was impossible to put any real value on the business due to the large volume of files and indeed some of the concerns raised at the meeting but to all intents and purposes some of the files might already be dead in the water’.

[22]Mr Ozon stated that he was aware of a possible purchaser who, as the note records, may wish to employ the use of Mr Denenza to maximise recoveries. This was a reference to Mr Jiva. Mr Smailes’ firm had previously used Littlejohn LLP, chartered accountants, as valuers and Mr Mark Ling, a partner, was engaged to provide a valuation. His engagement was by LLP and his report was to be addressed to LLP. In fact it was never seen by Mr Denenza or anyone else at LLP and was seen only by Mr Smailes and others at his firm.

[23]Over the following two weeks Mr Ling sought information as to LLP’s business so as to conduct a desktop review. He did not examine LLP’s files even on a sample basis and was entirely reliant on the information provided to him by Mr Denenza and Mr Ozon. CFS is very critical of the information provided to Mr Ling. There is a good deal of evidence before the court on this issue. There is no evidence from Mr Denenza but CFS relies on evidence from others who had recently worked for LLP or were still doing so on the 2nd April 2009. These include Miss Jamalson[?] Clark who was the other member of LLP and responsible for its employers liability cases, which she says produced greater income and had a much greater success rate than Mr Ling assumed from the information provided to him.

[24]Other evidence suggests a higher level of potentially valid claims for road traffic accident cases. Mr Jiva, however, gives evidence as to his experience with the files since the 2nd April 2009, as against which Mr Jones QC for Focus points out that Jiva received nearly £1.1 million in respect of transferred cases in the first six weeks. Criticism is made also of Mr Ling’s methodology in failing to give appropriate value to files on which much of the work had been done. In such cases Jiva as the transferee should make a large profit as all income is received at the conclusion of the case. Moreover he discounted for the cost of reading into files following transfer which assumes a third party purchaser. In fact as Jiva was taking over LLP’s employees no reading in was required.

[25]The value at which Mr Ling arrived was a range of £810,000 to £1 million on the basis of an immediate payment. This was very significantly less than the value of £2.3 million which Mr Denenza attributed to it. The price agreed of £1.9 million was of course much higher than Mr Ling’s valuation albeit that it was on deferred payment terms. CFS argues from its evidence that the work in progress and disbursements had a significantly higher value than that agreed. They question also whether the contract should not have been negotiated on an entirely different basis linked to actual recoveries.

[26]It is impossible on this application to resolve the issue as to whether the sale was at a significant under value, still less to decide whether legal responsibility for any value lies with any of the participants. I do, however, consider that the evidence raises a serious issue for investigation. The question of undervalue is relevant to the claims made against Jiva in the proceedings brought against it and for the purposes of the application for interim relief against Jiva it was prepared to accept, rightly in my view, that it raised a seriously arguable issue. I should mention that the administrators contend that on the proper construction of the sale agreement Jiva took the work in progress and disbursements subject to security rights in favour of CFS. If this is right the price paid was a substantial over value. It is of course rejected by Jiva and it is not, as yet anyway, embraced as a proposition by CFS. It is not a point which can be decided at this stage.

[27]There are other aspects of the negotiations on which CFS relies. Central to this is the role played by Mr Ozon. As I have already mentioned Mr Ozon was, it appears, LLP’s solicitor until the 2nd April 2009. He was closely involved in the provision of information both to Mr Smailes as to the liabilities of LLP and more significantly to Mr Ling as to the quality of LLP’s business. It is to be noted that in at least one of the emails Mr Ozon lays some stress on negative factors, in particular drawing attention to the adverse conclusions drawn from an audit conducted by or on behalf of JCL in February 2009 in respect of 42 cases being conducted by LLP. While Mr Jiva says that he negotiated the contract terms with Mr Denenza the evidence of Mr Smailes and [Lydia Scalley?], an assistant solicitor with Coleman Coyle, is that the price and contract terms were negotiated on behalf of the administrators with Mr Ozon acting for Jiva.

[28]I am confident that the evidence so far does not fully disclose the course of negotiations, in particular as to how the price of £1.9 million and the deferred payment terms were arrived at and as to the parts played by the various individuals involved. There is a further aspect to the negotiations which has, with justification in my view, been called into question by CFS. Mr Smailes knew that Jiva proposed to employ Mr Denenza but he took no steps to find out the proposed terms of employment. They are obviously important because the more generous they are the more incentive would Mr Denenza have to encourage a sale. In fact the proposal was to employ Mr Denenza at a salary of £120,000 a year with £20,000 of expenses. How much of an incentive this was to Mr Denenza, faced as he was with the collapse of LLP, is a question of fact which cannot be determined on this application.

[29]The conclusion on this is that the terms and circumstances of the sale are a legitimate matter for consideration and perhaps investigation by an officeholder acting in the interests of the creditors. I have not separately considered the complaint that financial support should have been sought from the existing funders as an alternative to a sale. This is an issue which no doubt an office holder could consider.

[30]This is not of course to say that any consideration or investigation would finally disclose that there was anything untoward in relation to the sale. It simply cannot be determined at this stage. What is, however, clear is that Mr Smailes and his firm were so closely involved in the negotiations that he cannot be expected now to conduct an independent review. His case, it should be remembered, is that the price was negotiated by Coleman Coyle acting on his instructions and subject to his final approval. In this context it should also be noted that a significant body of major creditors of LLP representing a majority of the creditors in value, have expressed a wish to see the removal of Mr Smailes and his co-administrator and the appointment of the administrator proposed by CFS. For the reasons given above the concerns of those creditors are legitimate and as creditors their views, if reasonably held, are entitled to consideration especially when it is recalled that the present administrators were appointed not by the creditors or the court but by Mr Denenza. These grounds provide in my judgment proper basis on which the court could exercise its jurisdiction under paragraph 88 to remove the joint administrators. It is not, I wish to emphasise, a basis which involves any imputation against the integrity of the administrators.

[31]I can deal more shortly with the other grounds relied on by CFS. For the most part in my judgment there is nothing in them. First, it is said that Mr Smailes colluded with other parties to keep the sale secret from creditors and that the notification sent to CFS immediately before the agreement was signed, was intended to create the illusion of consultation. Mr Smailes in his evidence makes no bones about it, that he deliberately kept creditors in the dark for fear that some of them might intervene in a way which would ruin the one practical opportunity which he saw of securing value for creditors. This raises some interesting questions but if honesty held it is does not in view provide a ground for removal. All it does is to point up the necessity of being confident on reasonable grounds that the best available deal had been done.

[32]As to the notification to CFS I remain puzzled as to its purpose. Mr Smailes in evidence says that he intended it to be in fulfilment of SIP16 but it does not contain all the information required by SIP 16 and it was sent to only one creditor. This does not however, as I see it, provide a ground for his removal. Much has been made of correspondence between Coleman Coyle and the claimant’s solicitors in the period of 2nd to 5th April 2009. It is suggested that the administrators were engaged in a deliberate campaign of misleading the claimants as to the extent to which the sale had been completed. These allegations have been pursued despite the evidence of Miss Scalley and Mr Coleman, a partner in Coleman Coyle, which fully and candidly explains the misunderstandings which led to the emails of which CFS complains. On the evidence there is nothing in this allegation.

[33]Complaint is made of the failure to provide a copy of the sale agreement and the valuation until after the hearing on the 8th April 2009. The administrators took the position that they were entitled to know the allegations against them before disclosing these documents. In adopting this stance they were, I think, forgetting that their sole task had been to act in the interests of creditors who were surely entitled, although perhaps not as a matter of enforceable right, to see the agreement made for their benefit and the valuation which was said to support it. The delay in producing them it was not sinister and itself provides no ground for removal, although it does indicate a defensive position on the administrators’ part which illustrates the conflict of interest facing them in relation to any examination of the sale.

[34]Complaint is further made of the bland notification to creditors on the 9th April 2009 by the administrators of their appointment which referred neither to the sale nor to the litigation by then underway, and of the letter sent on the 18th May 2009 in purported compliance with SIP 16. There are certainly some points to be made about these letters but they are not of a sort which could justify the removal of the administrators. In short I reject all the allegations of impropriety made against the administrators but for the reasons already given grounds do exist which would justify an exercise of the power of removal.

[35]In the course of his able submissions, Mr Tamlin, for the administrators, put forward a proposal that the administrators should proceed to convene a meeting of creditors to consider LLP passing into creditors’ voluntary winding - up on the basis that the administrators would not seek appointment as liquidators. In this way creditors would be consulted within a short period. Implicitly this proposal recognises the difficult position in which the administrators find themselves. For two reasons I do not consider this to be a more appropriate alternative to a change of administrators. First there should not be delay in at least considering whether to investigate more fully the circumstances of the sale. A new administrator having assessed the position will be able to put proposals to creditors as to whether it should be further pursued. Secondly, the views of a substantial majority by value of creditors is that there should be a change in administrators.

[36]CFS has put forward a licensed insolvency practitioner, Stephen Hunt, as a suitable appointee. There is no suggestion that he is not suitably qualified or lacks the experience for this appointment. Mr Tamlin questioned whether it was appropriate to appoint as administrator a person whose name has been put forward by CFS which has claims to be a secured creditor. Mr Hunt will not be appointed by CFS but by the court and once appointed he will be required to carry out his statutory responsibilities. I can see no objection to his appointment.

[37]Mr Tamlin raised in the course of his oral submissions the issue as to the service of the application for removal of the administrators. Rule 2.122 of the Insolvency Rules deals with such applications and sub-rule two is in the following terms:

“Service of the notice of the application shall be effected on the administrator, the person who made the application for the administration order or the person who appointed the administrator, the creditors committee if any, the joint administrator if any, and where there is neither a creditors committee or joint administrator to the company and all the creditors including any floating charge holders, not less than five business days before the date fixed for the application to be heard.”

[38]Mr Tamlin submits that as there is no creditors committee the application should have been served on all the creditors. CFS accepts that it has notified only major creditors. It might be suggested that a literal construction of the sub-rule required service on all the creditors only where there is no joint administrator but that cannot be right in circumstances where the application is for the removal of both or all the joint administrators.

[39]The court has power to dispense with this failure either under rule 7.55 or CPR 6.28 which is incorporated by rule 12.11. I should mention that the exclusion of CPR part 6, paragraph 6.17 to 6.35 in rule 12 is a reference to the provisions of part 6 before the substitution of a new part 6 in 2008. In my judgment the circumstances of the present case justify the exercise of the dispensing power. First, the views of the majority by value of the creditors is known. Secondly, even if all the other creditors had supported the position and submissions of the administrators, it would not have altered my assessment of the position. It is hard to think that they could have made points not already made on behalf of the administrators. Thirdly, although responsibility for service lies on the applicants, the administrators could themselves have notified creditors. Fourthly, the administrators were not themselves appointed by the creditors nor has their appointment been approved by the creditors. Accordingly I propose to order the removal of the current administrators and the appointment in their place of Mr Hunt.

[40]I turn to the remaining issue between Focus and Jiva, the claim by Focus to be entitled to inspect client files now held by Jiva. Focus provided both after the event or legal expenses insurance to clients of the firm and LLP and financial guarantee insurance(FGI)to CFS which was in effect a guarantee of the liabilities of the firm or LLP to CFS. The claim by Focus for an interim order requiring Jiva to give inspection of the files has developed in a somewhat haphazard fashion. It has never issued an application notice for the order it seeks which would have had the great advantage of making clear the grounds on which it was sought. The claim appears to have first surfaced in a witness statement made by the managing director of Focus, Colin Sayer[?], on the 19th May 2009. In paragraph 19 he referred to the order for inspection made on the 8th April 2009 in favour of CFS and JCL and stated that Focus as agents of CFS pursuant to the FGI arrangements, had sought inspection but had been refused on the grounds that the clients had not given consent.

[41]He produced consents obtained from three clients on which he relied for an order for inspection of their files. He also relied on the witness statement of Michelle Oldfield, the compliance officer at the firm until the 8th April 2008, who gave evidence that clients of the firm signed a proposal form for ATE insurance with unnamed insurers in terms which contained a consent to inspection of their files by the insurer. He further referred to the terms of the ATE policies issued by Focus which contain a right for Focus to inspect the files.

[42]Jiva objected to Focus communicating directly with their clients, pointing out that their clients were entitled to their advice before providing the consent requested by Focus. One or more of the three clients have subsequently withdrawn their consent. I would not be prepared to make an order for inspection on the basis of these recent consents unless given following legal advice.

[43]In Mr Jones’ skeleton argument for this hearing he referred to the issue of Focus’s claim to inspection “In advance of disclosure in the action”, adding that, “The files are obviously important to an understanding of the value of D4/D5 and the protection afforded to the claimants by allowing the status quo to remain pending trial”. The claim was not put on the basis of contractual rights under the ATE policies. Only in the course of submissions did it emerge that Focus sought inspection on the basis of the ATE policy terms. In response Mr Dutton for Jiva pointed to evidence which appeared to show that substantial sums by way of commission were paid by Focusto the firm and LLP. If correct this raised a serious issue as to the enforceability of the policies by Focus in consequence of provisions of the Financial Services and Markets Act 2000 FSMA.

[44]Arranging insurance, such as the firm and LLP were doing with regard to the ATE insurance, has since 2005 been a regulated activity and therefore falls subject to the general prohibition in section 19 of FSMA. Only authorised or exempt persons are permitted to carry on a regulated activity in the UK. Like most solicitors the firm and LLP were not authorised persons but they were exempt persons provided they complied with the requirements of section 327 of FSMA, sub section (3) of which provides that the exempt person must not receive from a person other than his client any pecuniary reward or other advantage for which he does not account to his client, arising out of his carrying on of the regulated activities.

[45]Commissions or fees paid by Focus to the firm or LLP which were not accounted for to the client would clearly trigger section 327(3) so that the firm or LLP would not be an exempt person and would therefore be carrying on a regulated activity in breach of the general prohibition. The consequence under section 27 of FSMA would be that ATE policies would be unenforceable against the policyholders. On the face of it I do not see how the court could grant a mandatory injunction to enforce a right arising under an unenforceable policy. Mr Jones submitted that it could not be open to the policy-holder both to enforce the policy against Focus and to decline to comply with his or her obligations under the policy. I agree with that, but a policy holder could not be held to an election unless informed of his legal rights and furthermore I have no evidence of the extent to which the policies are being enforced against Focus.

[46]In his reply Mr Jones stated on instructions that any fees or commissions were not paid to the firm or LLP. This morning I have been provided with a further witness statement of Mr Smailes in which he states that the commissions were paid to a company called Injury Investigations Limited in which, Focus believes, neither the firm nor LLP had any interest. A facility letter dated the 8th February 2008 providing for the payment of fees to an account nominated by the firm was, he says, an offer only which was never finally agreed, at least as regards the fees.

[47]In circumstances where the court is being asked to make mandatory orders to enforce rights as against persons who are not parties to or even aware of the application I regard the present state of the evidence and submissions as inadequate to make the order sought. I decline to make the order sought by Focus but not on a basis which would preclude Focus from making a properly formulated application supported by and only by the evidence relevant to it. I am willing today to give directions for such an application if asked to do so.

[48]I come now to the remaining applications. First there is an application by Mr Smailes and his co-administrator Mr Ryman to strike out under CPR Part 3.4(2)(a) and/or(b) parts of the claim form and particulars of claim in the proceedings issued on the 7th April 2009 against them and Jiva to which the firm and LLP are also joined as defendants. Alternatively summary judgment is sought in their favour under CPR Part 24.2(a)(i). The claims made against Mr Smailes and Mr Ryman, leaving aside a claim for their removal, are first equitable compensation for breach of fiduciary duty, alternatively damages for breach of duty of care and secondly, an order under paragraph 75 of Schedule B1 to the Insolvency Act 1986 that they contribute such sum as the court thinks fit to LLP by way of compensation for breach of duty or misfeasance. Both claims relate to the sale to Jiva and the responsibility of Mr Smailes and Mr Ryman for the sale.

[49]The first of these claims is for breaches of duties owed to the company as such. As Mr Bompas accepts, they are claims vested in LLP not in the claimants. The claimant do not have standing to maintain this claim and consistently with the decision of the Court of Appeal in Pickthall v Hill Dickinson LLP

2009 EWCA Civ 543

it should be struck out and I so order.

[50]Creditors of LLP have standing to maintain claims under paragraph 75 of Schedule B1. JCL accepts that it is not a creditor of LLP and does not therefore have standing. The claim form and particulars of claim should be amended accordingly.

[51]Mr Smailes and Mr Ryman accept that CFS is a creditor of LLP and that its claim cannot be struck out for lack of standing. They do however submit that Focus is not a creditor of LLP. As regards the potential claim of Focus to be subrogated to CFS’ rights against LLP if payments are made by it to CFS under the FGI policy, and its claim to the payment of premiums under ATE policies which on their face are due from policy holders not LLP, the submission for Mr Smailes and Mr Ryman’s is well founded. Focus now maintains that it has a claim for the payment of premiums against LLP in respect of the FGI policies. This is, as yet, unpleaded and in my judgment the right course is to await an application by Focus to amend the particulars of claim by pleading its claim to be a creditor supported by appropriate evidence. Unless such claim is made within 21 days the claim under paragraph 75 as made by Focus will be struck out.

[52]Mr Smailes and Mr Ryman further submit that the claim by CFS under paragraph 75 of Schedule B1 is not maintainable because all or most of the acts or omissions complained of occurred before their appointment as administrators. While I accept the proposition advanced by Mr Tamlin that paragraph 75 is concerned with the conduct of administrators in their capacity as administrators, the facts of the present case are at present sufficiently obscure to make it difficult to divorce their actions before the moment of their appointment from their capacity as administrators. I decline to strike out CFS’ claim under paragraph 75.

[53]Finally, the claimants seek permission to institute and continue the proceedings, given that LLP is in administration, under paragraph 43(6)(b) of Schedule B1 and, so far as claims made under Section 423 of the Insolvency Act, under Section 4241a. In view of the change of administrators I think the right course is to adjourn this application to enable the new administrators to consider the position. ----------------------------------------

Cited in 13 later judgments

and 4 more of the most senior