Burnden Holdings (UK) Ltd & Anor v Fielding & Anor [2017] EWHC 2118 (Ch)

Case No 3LV30284[2017] EWHC 2118 (Ch)IN THE HIGH COURT OF JUSTICECHANCERY DIVISIONVenue The Rolls Building,LondonDate Friday 28 th July 2017
Before
HIS HONOUR JUDGE HODGE QC(Sitting as Judge of the High Court)
B E T W E E N:
Between
BURNDEN HOLDINGS (UK) LTDClaimant(In Liquidation)ClaimantSTEPHEN JOHN HUNTClaimantGARY JOHN FIELDINGDefendantSALLY ANNE FIELDINGDefendant
MR CHRISTOPHER PARKER QC and MR MATTHEW SMITH (instructed by Enyo Law LLP) appeared for Claimants.MR DAVID CHIVERS QC and MR MATTHEW PARFITT (instructed by Addleshaw Goddard LLP) appeared for Defendants.
Transcribed by Opus 2 International Ltd.(Incorporating Beverley F. Nunnery & Co.)Official Court Reporters and Audio Transcribers5 New Street Square, London EC4A 3BF Tel: 020 7831 5627 Fax: 020 7831 7737civil@opus2.digital
J U D G M E N TIf this Transcript is to be reported or published, there is a requirement to ensure that no reporting restriction will be breached. This is particularly important in relation to any case involving a sexual offence, where the victim is guaranteed lifetime anonymity (Sexual Offences (Amendment) Act 1992), or where an order has been made in relation to a young person.This Transcript is Crown Copyright.  It may not be reproduced in whole or in part other than in accordance with relevant licence or with the express consent of the Authority.  All rights are reserved.JUDGE HODGE QC:
[1]This is my extemporary judgment in the case of Burnden Holdings (UK) Limited and Stephen John Hunt (as claimant) v Gary John Fielding and Sally Anne Fielding (as defendants), case no.3LV30284. This is yet another skirmish in what I fear will prove to be a long running battle between the parties to this litigation. The claimants are represented by Mr Christopher Parker QC leading Mr Matthew Smith. The defendants are represented by Mr David Chivers QC leading Mr Matthew Parfitt.[2]Both sets of counsel have provided detailed written skeleton arguments to me. I do not intend to reproduce the contents of those skeleton arguments in this extemporary judgment but I must make it clear that I have borne their contents firmly in mind. I also make it clear that if I have not dealt with all of the individual arguments advanced before me that is because I do not consider them to be relevant for the purpose of arriving at my ultimate decision and not because I have overlooked them. Both parties invited me to pre-read the case summary which so far as material I adopt by way of background.[3]This is a claim brought by Burnden Holdings (UK) Limited (in liquidation) which was formerly the holding company of the Burnden Group. The liquidator of the first claimant, Mr Hunt, is the second claimant. The defendants, Mr and Mrs Fielding, were two of the directors and the principal shareholders of the first claimant company. A new company, BHU Holdings Limited (BHU), was incorporated to become the first shareholder of the first claimant to whom, in October 2007, the entire issued share capital of one of the first claimant’s subsidiaries, Vital Energi Utilities Limited (Vital) was transferred, ostensibly by way of dividend. BHU then entered into members’ voluntary liquidation and, acting by its liquidators, sold the share capital of Vital to another new holding company, Vital Holdings Limited (VHL), the shareholdings in which reflected the original shareholdings in the first claimant company.[4]The second defendant, Mrs Fielding, then sold some of her shares in VHL, representing 30 per cent of the share capital, to a subsidiary of Scottish and Southern Energy for some £6 million odd. The first claimant and two others of its subsidiaries entered into administration just under a year later. Three months before the sale transaction, on 9th July 2007, the first claimant and its subsidiaries had granted the defendants fixed and floating charges over all of their assets in connection with existing loans totalling a little over £4 million owed to the defendants. The claimants’ case is that in 2008 the defendants purchased the business and assets of the first claimant and some of its subsidiaries from the administrators by way of reduction of their alleged secured debt. The defendants say that what happened was:(1) the second defendant purchased from the administrators of the first claimant the shares it owned in K2 Glass Limited; and(2) K2 Glass Limited then purchased certain of the business and assets of the first claimant and some of its subsidiaries from the administrators. The consideration for those transactions was the subject of a funds flow letter agreed by the administrators for the selling companies which essentially involved the reduction of the secured debt owing to the defendants.[5]The first claimant alleges that the transfer of the entire issued share capital of Vital in October 2007 was an unauthorised benefit to the defendants. Alternatively, it was an unlawful distribution in breach of s.263 of the (then applicable) Companies Act 1985 and therefore a breach of duty by the defendants who recommended the dividend and caused the first claimant company to pay it. The first claimant also alleges that the distribution was made at a time when the first claimant was insolvent or that it caused the first claimant to become insolvent; and that that fact, even if the distribution was otherwise lawful, constituted a breach of duty on the part of the first and second defendants. It further alleges that the grant of security in favour of the defendants was also a breach of duty.[6]The second claimant brings a claim under s.423 of the Insolvency Act 1986 that(a) the distribution and(b) the earlier grant of security by the claimant in favour of the defendants in July 2007 were transactions defrauding creditors. The first claimant also challenges the validity of the meetings and resolutions which ostensibly approved the distribution. Alternatively, it requires the defendant to prove the date on which the distribution took place. The first claimant relies on s.21(1)(a) and (b), and also s.32, of the Limitation Act 1980.[7]The defendants maintain that the distribution was lawful by reason of interim accounts under s.270(4) of the Companies Act 1985 which showed that the first claimant had sufficient profits available for distribution within the meaning of s.263 of the 1985 Act and was entered into on the basis of professional advice. They further plead that if the defendants did breach any duty in making the distribution it was ratified by the members of the first claimant. They deny that the first claimant was insolvent at the time, or that it became insolvent as a result, of the distribution. They maintain that all relevant meetings did take place, that all relevant resolutions were duly passed, and that the dividend in specie of the first claimant’s shares in Vital took place on 12th October 2007. The defendants deny that the grant of security in their favour involved any breach of duty on their part. They say that the transactions were for the benefit of the first claimant (amongst other reasons) because they enabled the defendants to lend £3 million from the proceeds to the Burnden Group. Further or alternatively, the defendants plead that they acted honestly and reasonably and ought fairly to be excused pursuant to s.1157 of the Companies Act 2006. The defendants also plead that the first claimant’s claims are statute barred on the basis that they never received any property belonging to the first claimant. The shares in Vital were transferred first to BHU, then to VHL and remain held by that entity.[8]The defendants deny the second claimant’s claims on the basis:(1) that s.423 of the 1986 Act is not capable of applying to either the dividend in specie or the grant of security; and(2) that neither transaction was entered into with the requisite purpose. They also say that the claim in relation to the grant of security is statute barred.[9]This claim has already acquired a great deal of interlocutory and procedural baggage which I can take from the defendants’ skeleton argument. The claim form was issued on 15th October 2013. It was served with the particulars of claim at the very limit of the four-month window for service under cover of a letter dated 12th February 2014. There had been no pre-action correspondence in relation to the claim. An application by the defendants for security for costs was dismissed by the Vice-Chancellor, Norris J, on 15th May 2014. The neutral citation reference to that case is [2014] EWHC 1908 (Ch). It is appropriate for me to refer to certain passages in the Vice-Chancellor’s judgment. At para.18 the Vice-Chancellor said this:
“… on the evidence as it stands before me at the date of the interlocutory decision, I think the action has a real prospect of success. (a) I do not accept the submission of [counsel then appearing for the claimants] that on that material it has such a high probability of success that one can discount any order for security for costs at all: but I do think one can properly weigh in the balance as one of the factors the prospects of success of this action. (b) The transaction and the steps in the transaction are not in doubt and there has been no suggestion that any issue arises in relation to them. (c) The consequences of the transaction are not in doubt and there cannot really be any issue about the outcome of the transaction. (d) The only question, it seems to me, is whether the directors thought that the only way of securing the benefit to Holdings of a £3 million loan to be injected into its business was by conferring benefits on themselves personally worth £10.48 million. That may well have been their view and they may well have formed that view on advice, but it seems to me that there is a real prospect of the liquidator proving otherwise.”
[10]I interpose to add that a great deal of water has passed under the bridge in terms of the nature of this claim since the Vice-Chancellor delivered that judgment in May 2014. At para.19 the Vice-Chancellor said that Holdings was undoubtedly impecunious. It was in liquidation with very substantial creditors’ claims from persons other than the Fieldings but it seemed to the Vice-Chancellor, on the material that he had on that occasion, that the impecuniosity had in part been caused by the transaction which the Fieldings had procured Holdings to enter into by which Holdings had lost the value of a business worth £10.48 million in return, as the Vice-Chancellor understood it, for a loan of £3 million.[11]At para.22 the Vice-Chancellor said that he did not regard it as unjust that directors who had personally benefited to the tune of £10.48 million by receiving an asset which used to belong to a company now in liquidation should run the risk of being unable to recover their costs of explaining to the creditors how that had come about and why. At para.23 the Vice-Chancellor emphasised that he was addressing the security for costs application actually made at the time when it was made and on the basis of the material before the court on that occasion. He added this:
“If the time comes for a substantial Defence to be put in and if the defendants do put in such a substantial Defence, then Holdings will be in a position to see exactly what case it has to meet in answer to the prima facie case which it has pleaded out in its Particulars of Claim. The Defendants might then justifiably say: 'Now the court can see what the real issues in the action are. Now the court can see that you are able or ought to be able to obtain after the event insurance because you know exactly what the issues in the claim are.’ Then, it seems to me, the Defendants might well have a proper case for bringing a properly focused application for security for costs. But I consider that the outcome of the present application must be that it is dismissed.”
[12]The defendants had in the meantime applied for summary judgment on limitation grounds on 2nd May 2014. The basis of the application was that the limitation period was six years from the accrual of the cause of action, which had occurred on the declaration of the dividend in specie on 12th October 2007. That period had expired by the time the claim was issued on 15th October 2013. I granted summary judgment against the first claimant on this basis on 18th November 2014. I rejected the first claimant’s arguments that the cause of action had accrued later and that time did not start to run immediately because of deliberate concealment of a breach of duty under s.32 of the Limitation Act 1980. Before me, the first claimant had not taken any point under s.21 of the 1980 Act, accepting that six years was the appropriate limitation period.[13]The first claimant obtained leave to appeal from the Court of Appeal and new counsel and solicitors were instructed by it. The grounds of appeal were amended to include an argument, not made below, that pursuant to s.21(1)(b) of the 1980 Act there was no limitation period, rather than the six years conceded below. Section 21 of the Limitation Act (headed “Time limit for actions in respect of trust property”) provides, by subsection (1), that:
“No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action— (a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or (b) to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use.”
[14]That argument succeeded before the Court of Appeal. That court also held that the question of deliberate concealment under s.32 of the 1980 Act could not be resolved on a summary basis. Accordingly, my order was set aside. The neutral citation reference for the Court of Appeal’s decision is [2016] EWCA Civ 557 and the case is reported at [2017] 1 WLR 39. The defendants have obtained permission to appeal the Court of Appeal’s decision to the Supreme Court and that appeal has been set down for December 2017. If the defendants succeed in their appeal, the claimants will need to establish fraud in order to overcome the defendants’ defence of limitation: see s.21(1)(a). The outcome of this appeal may alter how the trial of the underlying claims plays out if judgment is handed down in time (as I strongly suspect it will be).[15]Following the Court of Appeal decision, a case management conference was listed for hearing on 20th January 2017. Despite chasing the promised amended statements of case, the defendants complain that things were left until the last minute by the claimants. On 30th December 2016 the claimants served draft amended particulars of claim and made a formal application to amend on 10th January 2017. The defendants filed evidence in response. Ultimately, a compromise was reached on the day before the hearing which was embodied in a consent order made by HHJ Raynor QC on 20th January 2017. This consent order gave directions as far as close of pleadings and ordered a further case management hearing to be listed. In the event, that further hearing was listed before me in Manchester on 4th May 2017.[16]The amendments to the particulars of claim were extensive. The first claimant’s original claims were completely reframed. A new claim on behalf of the first claimant relating to the grant of security to the defendants was added. The second claimant was also joined so as to bring claims in his name under s.423 of the Insolvency Act 1986 in relation to the distribution in specie and the grant of security. Thus the hope expressed by David Richards LJ at the conclusion of his judgment in the Court of Appeal that the proceedings should from thenceforward be focused on what he described as “the determinative issue”, that was whether the distribution in specie of the share in Vital was lawful, has not been fulfilled: see para.56 of his judgment.[17]An amended defence was filed in March and a reply was served in April 2017. Since July 2016 the defendants had made it clear that they intended to make a further application for security for costs if such security was not provided voluntarily. A final letter seeking voluntary security for costs was sent by the defendants’ solicitors on 5th April 2017. Some thirteen days later, on 18th April, the claimants’ solicitors confirmed that no security for costs would be offered voluntarily. A security for costs application by the defendants was therefore sent to the claimants on 21st April and the application was issued on 24th April. The application for security is supported by the fifth witness statement of Mr Christopher John Mitchell, a managing associate with Addleshaw Goddard LLP, who are the defendants’ solicitors.[18]At the case management hearing on 4th May I ordered interim payments on account of the costs of and occasioned by the amendments to the statements of case and gave directions in relation to the way in which disclosure would take place. At that hearing, the claimants obtained an adjournment of the security for costs application, and directions were given for evidence to be served by both sides. The second witness statement of Mr Hunt (the second claimant) and the third witness statement of Mr Fielding (the first defendant) were served in accordance with those directions. After the deadline for serving the claimants’ evidence, a further witness statement from Mr Hunt (his third) was sent to the defendants at or around close of business on Friday 26th May, immediately prior to the bank holiday weekend. Mr Fielding addressed this witness statement - he says as well as he was able to in the short timeframe available - in a further (and fourth) witness statement dated 6th June 2017. That was against the background that the adjourned hearing of the security for costs application was scheduled to take place before me in London on 8th June 2017. The claimants have made a separate application to rely on Mr Hunt’s third witness statement. Given the time which has now elapsed, and the further directions that were given on 8th June, the defendants do not oppose that application, save in relation to costs.[19]Just before the adjourned hearing of the security for costs application, on 6th June 2017, the claimants made a summary judgment application. The claimants also made an application to extend the time for payment of the costs that they had been ordered to pay by my order of 5th May. There were difficulties with the bundles at the hearing on 8th June 2017. I was accordingly limited in what I was able to hear on that date. I should make it clear that those difficulties were not the responsibility of the parties to this litigation. I granted a limited extension of time on the extension application on debarring terms, with the claimants ordered to pay the defendants’ costs of that application. Paragraph 1 of my order provided that the security for costs application, the summary judgment application, and the application in relation to Mr Hunt’s third witness statement, and all other matters to be dealt with at this case management hearing, be adjourned to be heard over two days on Monday of this week, 24th July, starting at 10.00 a.m., and today, 28th July, for judgment, with a day set aside for pre-reading on the previous Friday. I gave directions for evidence to be filed in respect of the summary judgment application.[20]There had been some discussion at the hearing on 8th June as to whether the basis upon which the claimants were seeking summary judgment was adequately pleaded in the existing amended particulars of claim. I therefore set a deadline for service of any proposed amendments to the application notice or particulars of claim, although I did not give permission for such amendments. Paragraph 2 of my order directed that any amendments the claimants might seek to make to the application notice on the summary judgment application, or to re-amend the particulars of claim insofar as they sought to rely on such re-amendments for the purposes of the summary judgment application, should be served by 4.00 p.m. on Monday 12th June, 2016. An amended application notice and draft re-amended particulars of claim were served by the claimants in accordance with that order.[21]A formal application to re-amend the particulars of claim was issued by the claimants on 17th July. The draft re-amended particulars of claim attached to that application differ from the draft served following the hearing on 8th June. However, at the outset of this hearing Mr Parker made it clear that, for the purpose of the summary judgment application, reliance was placed on the 8th June version of the draft re-amended particulars of claim. The application to re-amend the particulars of claim is supported by the sixth witness statement of Louise Susan Bell, a solicitor and member of Enyo Law LLP, who are the claimants’ solicitors.[22]Evidence on the substantive applications was then filed by the defendants in the form of the fifth witness statement of Mr Fielding and the first witness statements of Mrs Fielding (the second defendant), Mr Beckett, and Mr Whitelock. Mr Beckett was the group finance director of VHL and a former finance director of certain of the Burnden Group companies. Mr Whitelock was the joint managing director of VHL.[23]On 13th July 2017 the claimants filed evidence in reply in the form of the first witness statement of Miss Emma Fayers. She is a forensic accountant and an insolvency practitioner with the investigations specialist Griffins. Her evidence deals solely with the SGI Tooling issue in a quasi-expert manner. As a result of this focus on the correct accounting treatment of the SGI Tooling issue, the defendants have obtained a letter dated 19th July 2017 from Grant Thornton which discusses the treatment of SGI Tooling in the first claimant’s accounts. This material, together with some limited further information obtained from Tenon, is exhibited to a further (and sixth) witness statement of Mr Fielding which was served on 19th July 2017. The defendants require permission to rely on that evidence but there has been no opposition to that request.[24]Also on 19th July 2017 the claimants served a further (and fourth) witness statement of Mr Hunt. That witness statement simply exhibits some board minutes dating from 2008 and a fee note from Addleshaw Goddard to the first claimant in respect of those minutes. On 20th July a witness statement was served on behalf of the claimants by Miss Josephine Elizabeth Mathew. She is a solicitor at Enyo Law LLP, the claimants’ solicitors. That witness statement was made to update the court as to the progress made to date in obtaining adverse costs insurance, or a contractual indemnity from a litigation funder, in response to the defendants’ application for security for costs. Those witness statements again require the permission of the court for reliance to be placed upon them but, again, there is no opposition to the admission of those witness statements.[25]In addition to other matters to be addressed at this case management hearing, there are two specific applications which fall to be addressed on a preliminary basis. It is to these that this extemporary judgment is directed. The first in point of time is the defendants’ application for security for costs. The second in point of time is the claimants’ application for summary judgment. It is, however, common ground that it is both logical and sensible for the application for summary judgment to be taken before the application for security for costs. That is how the matter was dealt with at the hearing on Monday 24th July which continued for about an hour on the following day. For the claimants, Mr Parker addressed me first. Mr Chivers followed, and Mr Parker then replied on the morning of Tuesday 25th July. Both counsel then briefly addressed me, effectively by way of rejoinder. As originally provided by my order of 8th June, I then adjourned to today at 10.00 a.m. to deliver this extemporary judgment.[26]By way of summary, the substantive evidence relied upon by the claimants is the second, third and fourth witness statements of Mr Hunt and the first witness statements of Miss Fayers and Miss Mathew. The substantive evidence relied on by the defendants is the fifth witness statement of Mr Mitchell, the third, fourth, fifth and sixth witness statements of Mr Fielding, and the first witness statements of Mrs Fielding, Mr Beckett and Mr Whitelock. The claimants also rely on statements made earlier by Mr Fielding on 2nd May 2014 and 11th July 2014 (Mr Fielding’s first and second witness statements) made in support of the defendants’ own summary judgment application on limitation grounds in 2014.[27]I deal first with the application for summary judgment. As amended, the application notice issued by the claimants asks the court to make an order(1) granting the first claimant summary judgment pursuant to CPR 24.2 and(2) requiring the defendants to make an interim payment in the sum of £10.48 million plus interest pursuant to CPR 25.6(1). The application is made on the basis that: (1) the company was insolvent or of doubtful solvency at the time of the distribution of the Vital shareholding or that it became insolvent as a result of that distribution; and. (2) that the so-called interim accounts were not interim accounts within the meaning of s.270(4) of the (then applicable) Companies Act 1985 since they did not allow a reasonable judgment to be made as to the matters listed in the statute and were not prepared with the formality contemplated by it.[28]If the first claimant is successful in relation to the second of those limbs, the court is also asked to make an order granting summary judgment on terms that execution be stayed and time for appealing extended until after the Supreme Court has given judgment in the appeal from the Court of Appeal’s decision on limitation. The application is said to be made because the first claimant believes that on the evidence the defendants have no real prospect of successfully defending the issues to which the application relates. The first claimant is said to know of no other reason why the disposal of those issues should await trial.[29]In section 10 of the application (as amended) the first claimant is said to rely on the following:(1) It is plain that the company was insolvent at the time of the distribution of the Vital shareholding or became insolvent as a result of that distribution or was of doubtful solvency and the board approached the proposed distribution without regard to the interests of the first claimant’s creditors. Alternatively, insofar as they considered the position of creditors at all, the board relied on Mr Joyce, who is a solicitor with Addleshaw Goddard, to advise them and it is said that he gave no relevant advice.(2) The so-called “interim accounts” were not “interim accounts” within the meaning of s.270(4) of the 1985 Companies Act since they did not allow a reasonable judgment to be made as to the matters listed in the statute and were not prepared with the formality contemplated by the statute.[30]Mr Fielding’s third witness statement is said to admit that the interim accounts were materially inaccurate and did not enable a reasonable judgment to be made pursuant to s.270(4) and/or is said to admit that the interim accounts were relied on without any proper consideration as to their accuracy and/or is said to admit that the distribution was made in breach of s.263 of the 1985 Act in that (contrary to s.270(2)) the amount of the distribution was not made by reference to the relevant items there listed “as stated in the company’s accounts.” In particular, it is said that:(1) The interim accounts wrongly suggested that the company had an investment in SGI Tooling Limited worth £250,000 when the defendants admit in their amended defence (at para.26.1) that SGI Tooling Limited had been dissolved in February 2003 and now aver (at para.90(e) of Mr Fielding’s third statement) that the sum of £250,000 included a receivable due from the Burnden Group Plc of £100,000 which was not an investment in a subsidiary, SGI Tooling Limited, as stated in the interim accounts but cannot otherwise explain the balance of £150,000 or why the interim accounts should show any value attributable to an investment in a dissolved company.(2) Neither the minutes of the meeting alleged to have been held on 29th August (as exhibited to the third witness statement of Mr Fielding) in the form prior to their amendment by Mr Joyce or the meeting alleged to have been held on 12th August 2007 are said to record any discussion or approval of the adequacy or accuracy of the so-called interim accounts.(3) The interim accounts omit any mention of guarantees given by the company to its subsidiary’s bankers or trade suppliers.[31]In the course of his oral submissions Mr Parker relied on the existence of guarantees given by the claimant to the landlord of one of its subsidiaries, K2 Conservatory Systems Limited (to which I shall refer as “K2 Conservatories”). Mr Chivers objected that the application notice, and even the latest iteration of the proposed re-amended particulars of claim, did not contain any reference to guarantees given by the company to its subsidiary’s landlord, as distinct from guarantees given by the company to its subsidiaries, bankers or trade suppliers. This prompted Mr Parker to produce a further iteration of the re-amended particulars of claim on the morning of the second day of this hearing, and after completion of Mr Chivers’s submissions. I note that there is no re-amended application notice proffered to the court. Mr Chivers objected to reliance being placed on this late amendment for the purposes of the present summary judgment application. He pointed out that the court had expressly required any amendments to be in by 4.00 p.m. on Monday 12th June. There had been no explanation for the lateness of the further amendment. The latest iteration of the re-amended particulars of claim had been produced after the completion of Mr Chivers’s submissions. He said that the court could not be sure that this was not a deliberate tactical move to keep the latest iteration of the re-amended particulars of claim back and to avoid pleading any reference to guarantees given by the company to its subsidiary’s landlord in order to avoid any potential request for further information. He pointed out that the defendants had forewarned the claimants that they would be taking pleading points and my order of 8th June had been intended to address that position. Mr Chivers did not suggest that the late proposed re-amendment had affected the content of the defendants’ evidence; but he did make the point that he had drawn attention to the omission of any pleaded reliance on the guarantees given by the first claimant to its subsidiary’s landlord in submissions. The matter had not been pleaded, and there had to be an end put to matters upon which reliance was to be placed for the purposes of this summary judgment application.[32]In response, Mr Parker acknowledged that an error had been made in omitting any reference to a landlord’s guarantee. He also accepted that he had no explanation for this oversight; but he disavowed any suggestion by Mr Chivers that this had been a tactical decision. I accept Mr Parker’s disavowal. I accept that this was a genuine mistake and omission. I would allow the claimants to rely upon the guarantee given by the first claimant company to its subsidiary’s landlord since it features in the list of guarantees which is to be found at appendix A to Mr Fielding’s third witness statement. I am satisfied that there is no substantive prejudice to the defendants in allowing the claimants to rely upon it. The point was addressed on the merits in Mr Chivers’s oral submissions by reference, in particular, to para.89 of Sch.4 to the (then applicable) Companies Act 1985.[33]In support of the claimants’ application for summary judgment and an interim payment the claimants say, by way of overview:(1) that the distribution constituted a breach of duty by virtue of the company’s doubtful solvency; and(2) that the distribution was unlawful for non-compliance with the statutory requirements of s.263 of the Companies Act 1985 because it was not justified by reference to the company’s last annual or interim accounts in accordance with s.270. More particularly, the claimants say: (1) that the distribution was a plain breach of duty because newly disclosed company board minutes show that the directors considered the company to be of doubtful solvency but had had no regard to the interests of creditors when approving the removal of Vital from the company by way of a distribution in specie; and (2) that the distribution was in any event unlawful because there were no interim accounts within the meaning of s.270(4) of the Companies Act 1985 in that the so-called interim accounts: (a) misdescribed and overstated the company’s investment in SGI Tooling Limited, which had been dissolved; (b) were not considered or approved by the board; and (c) omitted any mention of guarantees.[34]Those submissions were developed at paras.18 through to 58 of Mr Parker’s skeleton argument. They were further developed in oral submissions. Mr Park submitted that one could get confused by the level of detail, but he said that the position was quite clear from the evidence before the court. The companies in the Burnden Group were loss-making and had cash flow difficulties or were anticipated to have such difficulties. In those circumstances, the directors had made a distribution of £10.48 million, leaving the company with a net asset position of only £54,000 ignoring guarantee liabilities. That was said to be indefensible. It was said that the directors had not decided on the appropriate level of dividend having regard to the financial position of the company shown by the accounts. It was decided to pay the in specie dividend regardless of the financial position of the company, provided only that distributable profits in excess of the sum could be found. That exercise, it is said, was carried out ineptly as the statutory requirements of the Companies Act were not complied with. There had been no dividend declared in previous years so it is said that it is odd that the directors should then choose to pay away virtually the entirety of the company’s distributable profits. It is said that the defendants accept that there is a connection between the extraction of the company’s assets and its cash flow difficulties because one of the justifications put forward for the distribution is that it was to enable the company to receive a loan of £3 million in order to assist in meeting those cash flow difficulties. Mr Parker acknowledged that that argument had a superficial attraction; but he submitted that that superficial attraction soon faded away when it was appreciated that the distribution had been made to the person who was to make the loan. In other words, he said that the company had given away cash in return for a small part of it back by way of a loan: £10.48 million was exchanged for a £3 million loan.[35]The company had never sought to rely upon a transaction - the sale of an interest in Vital to a subsidiary of Scottish and Southern Energy - which would have realised £6 million in cash for the first claimant company. The company could have alleviated its cash flow position without placing itself in a position of marginal solvency. Why had the company not decided to sell its assets in order to raise cash but instead had chosen to give it to the Fieldings in return for a smaller sum by way of loan? Mr Parker submitted that no adequate explanation had been provided as to why the transaction had not proceeded by way of sale. The position had, he said, remained wholly unexplained. Why, he asked rhetorically, had the directors resolved to remove from a company of doubtful solvency its most valuable asset? There was no evidence that the directors had addressed this issue or thought that it was in the best interests of the company’s creditors. We were talking about money that the defendants were given, and which the company had needed in order to support its operations and to pay its creditors or those of its subsidiaries.[36]The Vice-Chancellor was said to have identified the real issue in the extracts from his judgment on the summary judgment application previously cited. It was whether the only way of providing the company with cash to meet its cash flow difficulties had been to make this £10.48 million distribution in return for a loan of only £3 million. It was said that the Vice-Chancellor had posed the right question: why was the proposed course of conduct in the interests of the company’s creditors when compared with other alternative courses of action which an honest director should have considered? It was said by Mr Parker, by reference to the evidence, that the directors had already decided that the investment in Vital needed to be sold. The Fieldings could, however, have purchased 70 per cent of the interest in Vital and the company could have sold the remaining 30 per cent to the subsidiary of Scottish and Southern Energy, retaining the cash proceeds of some £6 million. Mr Parker submitted that Vital could have been taken out of the Burnden Group of companies in such a way that the company received full value for that 30 per cent holding in Vital. He submitted that there was no suggestion that the Fieldings had ever been told that they could not proceed in that way. He submitted that no one had ever suggested that the demerger of Vital from the Burnden Group of companies could only be achieved by distributing £10.48 million to the Fieldings. He submitted that it would have been better for the company to have sold Vital and to have paid any corporation or capital gains tax rather than giving its interest in that company away to the Fieldings. Therefore, he said, the only issue to be looked at on this aspect of the summary judgment application was whether the company was insolvent or of doubtful solvency. If it was then, he said, the breach of fiduciary duty on the part of the defendants was absolutely plain.[37]It was unrealistic, Mr Parker said, on the full state of the evidence, to come to any conclusion other than that this was a company of doubtful solvency. Its financial fragility was said to be plain. The effect of the distribution was to put the company on what Mr Parker described as “a knife edge”. Mr Parker took me through the various pieces of evidence on which he relied in support of his submission that cash flow difficulties were either immediate or anticipated. Whichever the true position was, he submitted that it was clear that there was concern whether the companies within the group could pay their debts as they fell due. He pointed to the fact that K2 Conservatories was not paying its debts as they fell due and had failed to make a required payment of value added tax. Insolvency must have been anticipated, not necessarily as inevitable, but as something that needed to be considered when making financial decisions for the company. He submitted that it was clear that the defendants had in fact anticipated an insolvent liquidation because they had decided that they needed security for loans that they had already made to the company of over £4.4 million (excluding the later advance by Mrs Fielding of £3 million). Mr Parker submitted that it was simply fabrication for the defendants to say that they had not contemplated an insolvent liquidation because they had taken a charge over the group assets and then they removed from the company its one cash-generating subsidiary. Excluding Vital, the group was said to be clearly loss-making and had a negative balance sheet. All indicia of insolvency were present. There were cash flow difficulties; there was a doubtful balance sheet; and there was a history of making losses. The two conservatory companies, K2 Conservatories and Cestrum, were loss-making concerns. The only cash-generative business was Vital and that was to be taken out of the company. The hope of turning around a loss-making business did not, Mr Park submitted, entitle the directors to ignore the interests of the company’s creditors because of the fear that the company would enter into insolvent liquidation.[38]The defendants’ point that the group’s deficit of £1.6 million by the end of February 2008 was addressed by the £3 million loan was no answer because the loan was balance sheet neutral since it had to be repaid. Mr Parker submitted that with continuing ownership of Vital the company was borderline insolvent but without Vital the company was clearly insolvent. In those circumstances, Mr Parker said it was little wonder that the Fieldings had thought that they needed a charge over the company’s assets. In fact, K2 Conservatories and Cestrum continued to make losses. It was obvious that the group was of doubtful solvency.[39]As for the defendants’ reliance upon the fact that the company was a holding company with no outstanding debts, that was an unrealistic position to adopt because of the inter-company guarantees. It was at this point that Mr Parker referred to the rental liabilities of K2 Conservatories that had been guaranteed by the company. If K2 Conservatories went under because of those rental guarantees so would the company. In fact, K2 Conservatories proved unable to meet its rental obligations; and that was cited by Mr Fielding as one of the explanations for the company’s eventual insolvency. Reference in that regard was made to para.126 of Mr Hunt’s second witness statement where Mr Hunt records the Official Receiver’s account of the first defendant’s explanation for the insolvency of the company. I quote:
“The director states that the company was put into administration as it had guaranteed debts of one trading company and would therefore become liable for these. The director states that as Burnden Holdings (UK) Ltd was a non-trading company it had no way of servicing this debt. Gary Fielding attributes the failure of the company to the guarantees given on the leases of a trading subsidiary company which has since gone into administration. This led to Burnden Holdings (UK) Ltd being liable for the debt but with no way of paying this as it was a non-trading company.”
[40]Thus the insolvency of the subsidiaries was not irrelevant to the position of the holding company because of the existence of the inter-company guarantees. Mr Parker submitted that an analysis of the minutes showed that the directors were well aware of the company’s financial difficulties.[41]Reliance had been played by the defendants upon cost recoveries from the Ultraframe litigation coming into the group. Mr Parker said that a recently obtained version of the minutes of the 29th August 2007 board meeting showed that the confidence as to the recovery of these monies expressed in the witness statements of the defendants was not borne out by what was being said at the time. Reference was made to the version of the minutes signed by Mr Kavanagh as chairman of the meeting of the board on 29th August 2007 at B4, divider 42, pp.1208 to 1211. Under section 3 (at p.1210) reference was made to Ultraframe’s ability and willingness to pay without protracted negotiations being very uncertain. That was reiterated in section 4 where reference was made to uncertainties in timing and Ultraframe’s ability to pay any legal costs. There was concern expressed in those minutes about the willingness and ability of Ultraframe to pay the costs ordered against it and also as to the timing of the payment.[42]Mr Parker pointed to the fact that what actually happened about the costs recovery appears from the draft minute produced in advance of a meeting in February 2008. This can be found at B6, divider 67, at p.1704. In the end the only recovery in respect of costs was of £1 million, much less than had been anticipated. Mr Parker submitted that at the time of the earlier distribution, and based on the minutes of the 29th August 2007 meeting (to which I have already referred), the directors knew that recovery of a large sum of money from Ultraframe was far from certain. As a result, it was said that the distribution of £10.84 million was “cavalier” at its kindest. It had reduced the company to a position of borderline insolvency and had taken too great a risk with the interests of creditors. The defendants had focused on the £3 million loan whilst ignoring the distribution. When there was a situation of doubtful solvency the interests of creditors were engaged. Even if the directors might think that there was a reasonable prospect of avoiding insolvency, why had the company chosen to give away £10.84 million in order to secure a £3 million loan? To that question it was said that the defendants had provided no answer. Indeed, the fact that a £3 million cash injection was needed recognised the company’s financial difficulties.[43]Mr Parker pointed to two Risk disk reports in the evidence which showed that as of 24th September 2007, both the company and K2 Conservatories were considered to be financially valueless. He also pointed to what he said was a significant error in the minute of a board meeting of 27th June 2007 where there was a statement that monies were to be lent to the companies by the Fieldings when, in fact, those monies (some £4.6 million) had already been lent. In those circumstances, for the Fieldings to have taken a charge followed by a distribution in specie of assets valued at £10.48 million in order to receive a loan back of only £3 million had been “insane”. The company could and should instead have sold the 30 per cent interest in Vital for some £6 million and distributed the balance to the directors.[44]The minutes of the 29th August 2007 meeting were said by Mr Parker to have originally proceeded on the basis of a sale of the interest in Vital. That was the obvious thing to have done, rather than to have made a distribution in specie. Those draft minutes had been sent to Mr Joyce, the company’s solicitor, on 29th August and he had responded on the following day with a complete revisiting of the minute, even though he had not been present at the meeting. The revised minutes were said to be inaccurate. Moreover, it was said that the directors had already decided that the interest in Vital should be sold. Mr Joyce had then hijacked the transaction, for the benefit of the Fieldings, on the basis of a distribution in specie, but with no justification or explanation being provided as to why a sale could not have gone through instead.[45]A later minute of a board meeting on 12th October was also drafted. It was produced before any meeting and the claimants say that no meeting in fact took place. The minute was clearly not a contemporaneous record of any meeting. There is no evidence of any due and careful scrutiny being given, as asserted at section 7 of that minute. There was, in fact, no justification for the move from a sale to a distribution in specie and no one had provided any justification for that. There was no rationale for a distribution rather than a sale and no consideration of the impact on creditors or, indeed, any reference to them. Nor was there any mention of any loan from the Fieldings. It was said to be quite clear that the interests of creditors had been engaged and that the directors had known of the financial difficulties of the company. Despite that, they had decided not to proceed by way of sale but to distribute the share to the Fieldings. There was no explanation for that.[46]There was said to be no consideration of the directors considering what distribution was appropriate to be made in the light of any accounts. Some figures had been produced to justify what was said to be a lawful distribution but the directors had completely passed over the stage of considering whether the accounts actually showed that the distribution could lawfully be made. There was said to be quite clearly a breach of fiduciary duty by the directors. On the basis of the interim accounts the company was left with a surplus of only £54,000. There were loss-making subsidiaries, cash-flow difficulties, and yet the directors proposed to change the asset position of the company from one in excess of £10.5 million to a mere £54,000. The directors were in breach of fiduciary duty in failing properly to consider whether they should recommend a dividend at the level of £10.48 million or, indeed, at all. In the situation in which the company found itself of doubtful solvency, the creditors’ interests had to be taken into account. The distribution had put the company on “a knife edge”.[47]None of the defendants’ explanations addressed the question posed by the Vice-Chancellor of why the matter had proceeded by way of dividend rather than sale. There could be no question of relief from liability under s.1157 of the Companies Act 2006 because the authorities made it clear that it was not appropriate to grant relief to the detriment of the company’s creditors. Here there are creditor claims for some £10.7 million, which is in excess of the distribution of £10.48 million. Having failed to have the interests of the creditors in mind, it was said that the directors had not acted honestly.[48]Mr Parker acknowledged that there could be cases where a failure to have regard to the interests of creditors might be negligent rather than dishonest. However, that would only be the case where there was simply a failure to appreciate a situation of insolvency. It is not the case where, as here, the directors had been fully aware of the insolvent financial circumstances of the company. If, however, the court found that the directors had only acted negligently, then pending the outcome of the appeal to the Supreme Court the appropriate course would be to grant summary judgment but to grant a stay of any interim payment. The truth was that the directors had known of the financial difficulties because the Fieldings had taken a charge in respect of their previous indebtedness even though they had not at that stage been offering to lend any more.[49]The second limb of the summary judgment application was said not to depend on showing that the company was of doubtful solvency. On the basis of the figures that were used for any meeting on 12th October 2007, there had been no true interim accounts sufficient to justify the declaration of a dividend. There was said to be no disagreement about two matters. The first was that the distribution in specie could not be made in reliance on the last available annual accounts. The second was that on the figures put before the meeting, a distribution could lawfully be made if those figures could be said properly to constitute interim accounts within s.270(4). Mr Parker submitted that any accounts relied on for that purpose must truly be accounts of the company. He submitted that the accounts were not accounts of the company and were not sufficient to enable a reasonable judgment to be made as to the company’s profits, losses and liabilities. He pointed to passages in the evidence that he said demonstrated that the accounts now relied upon had been produced to the claimants by one of the company’s directors and that they were not found within the company’s records. He referred to passages in the evidence that showed that the accounts now relied on had not been viewed as accounts of the company or as company documents at all.[50]Mr Parker submitted that interim accounts might be flawed either because there was no investment as described in them or because there was no investment as described at all. He submitted that one must be able to see the true position from the accounts themselves. He accepted that immaterial omissions could be disregarded because they would not prevent a material judgment being made; but he submitted that if an item in the accounts was mislabelled, one could not make a reasonable judgment so as to decide whether a distribution was lawful. He submitted that because the error in the present case was in excess of £54,000, which was all that remained after the distribution, the distribution was thereby rendered unlawful. He submitted that the accounts were flawed because they made no reference to the contingent liability of the company to the landlord of its subsidiary, K2 Conservatories. He also submitted that they could not be accurate because they included a dividend that had in fact been made in September when the accounts purported to cover the period from 1st to 31st August 2007. He conceded that the revaluation of the Vital share had taken place and that the interim accounts were therefore not invalid on that basis; but they were invalid because a £300,000 dividend had been included within them when that dividend had only been declared after 20th September 2007 on the evidence that was before the court. Mr Chivers submitted that there was nothing wrong about accounts being adjusted to reflect a post-accounting date event that had already taken place, which was the situation as at 12th October 2007.[51]So far as the investment in SGI Tooling was concerned, that had clearly been overstated by at least £100,000. That was because it was common ground that SGI Tooling had been dissolved in February 2003 and therefore any investment in it was worthless. The investment should have been written down to zero. That was the end of the matter even apart from the fact that the accounts purported to record £250,000 against SGI Tooling Limited. The balance of the £150,000 was said to be a misdescription by the defendants. It was said to represent an additional £150,000 investment in Burnden Group Plc. Even if that was correct, however, that was a misdescription which was said to invalidate the accounts; but Mr Parker principally relied upon the £100,000 attributed to the value of a company which had in fact been dissolved some years earlier and which investment should have been written down to zero. The explanations now put forward by Mr Fielding and by Grant Thornton were said to amount to pure speculation as to how a further £100,000 could be justified in the accounts. It was pure speculation to say that a debt from the company to the Burnden Group had been written off or that a debt from K2 Conservatories to SGI Tooling had in some way been assigned to the company. There was said simply to be no evidence to support that. In any event, it was said that these explanations were not only speculative but also inconsistent.[52]The reality was, according to Mr Parker, that the accounts were inaccurate and, therefore, not such as to enable a reasonable judgment to be formed as to the company’s assets and liabilities. Had they been accurate there would have been no distributable reserves. The error was a massive one. Even if the error was that of the company’s auditors or accountants (Tenon), that did not go to the issue of liability but merely to the issue of relief under s.1157. The distribution had been carried out on the basis of inaccurate accounts and therefore not on the basis of “interim accounts” for the purposes of the statute.[53]Any attempted reliance on s.1157 would not avail the defendants because of the position of the creditors. The amount of creditor claims exceeded the amount of the distribution. In any event, any application under s.1157 would effectively be a counterclaim by the Fieldings; and security should not be given for the costs of such a counterclaim, as to which the defendants would be in the position of claimants.[54]Mr Parker also relied once again on the omission of any reference to company guarantees. The rental obligation in respect of K2 Conservatories’ lease was a significant contingent liability which had not been mentioned. How could a reasonable judgment be made as to that contingent liability when it did not even feature in the accounts?[55]In his reply, Mr Parker emphasised that Vital had been the only cash-generative company within the group and the only entity capable of supporting it. It was taken out as a result of the distribution. That had taken place in circumstances where the remaining companies were loss-making. The directors had been selling off the family silver; but they had done so in circumstances where losses had been ongoing from 2005 and the directors needed to return the companies within the group to profitability. There was not a lot of family silver left to sell. Insolvency was inevitable for loss-making companies and, in the event, it was the final outcome. The defendants had known of the company’s insolvency because they had taken a charge. They had done so precisely to give them priority on an insolvent liquidation. The Fieldings must therefore have thought that the company was fragile. The logic of that was said to be irrefutable; and Mr Chivers was said to have made no attempt to refute it.[56]Mr Chivers had relied on references in the board minutes to a “demerger”; but there was no evidence of what Mr Beckett had meant or understood by that term. Mr Parker submitted that the minutes, read by a layman such as Mr Beckett, could only be construed as contemplating a sale rather than a distribution. Mr Joyce had effectively rewritten the minutes of a meeting he had not attended. He had deleted a reference from the minutes of an inability to pay Tenon for a revaluation of the Vital asset. Mr Parker submitted that Mr Joyce had not just doctored the minutes; he had completely rewritten them, even though he had not been present at the relevant meeting. Mr Parker submitted that even Mr Joyce’s rewritten minutes referred to a previous meeting at which a decision had been made to sell Vital rather than proceed by way of a redistribution. It had been changed to a distribution, but with no explanation for that change.[57]As to the interim accounts limb of the application, Mr Parker acknowledged that there was no authoritative guidance in the case law as to the meaning and effect of the section. He therefore submitted that one needed to look at the terms of the statute itself. That required one to make a reasonable judgment of what the assets and liabilities of the company were; but one could not do that if the accounts included reference to a non-existent asset. He submitted that the defendants’ error had been to focus on the position of the draftsman of the accounts when the reasonable judgment that needed to be made was that of the person reading the accounts: he needed to know what the assets of the company were. For that reason, a misdescription of the assets rendered the accounts incapable of complying with the statutory requirements.[58]Mr Chivers was also said to have submitted that one could ignore the amount of the distribution. Mr Parker’s response was that a reasonable judgment had to be made in all the circumstances, and that the interim accounts must be fit for their purpose. If one was making a massive distribution of £10.48 million, leaving only a marginal asset position of £54,000, there had to be a considerable degree of accuracy in the accounts relied upon. Mr Chivers had fallen into error in comparing the mistake with the size of the distribution. The true comparison was said to be with what remained after the distribution. The bigger the distribution, the more important it was that the accounts were accurate.[59]The investment in SGI Tooling had been put in at cost but that asset was no longer existent. As for the suggestion that the entry should be taken to refer to a debt, there was no evidence as to what that debt was actually worth or that anyone had ever intended that SGI Tooling should ever get its hands on it. One could not value the asset at £100,000 cost if the asset had ceased to exist. As to the suggestion that it represented a debt due to the company, no one had ever had in mind restoring the company to the register to enable it to collect in the debt; and, in any event, the costs of restoration would have had to be factored in to the valuation of the asset. Those were Mr Parker’s submissions in support of the summary judgment application.[60]Mr Chivers’s submissions are set out at paras.43 through to 73 of his written skeleton argument. They were expanded upon in oral submissions during the afternoon of Monday 24th July. I find it unnecessary for me to rehearse Mr Chivers’s submissions in full because I accept that this is not an appropriate case for summary judgment. In my judgment, it cannot be said that the defendants have no real prospect of succeeding in defending either of the two aspects of the case on which the claimants seek summary judgment. I am not satisfied that the defences lack reality.[61]I deal first with the principles governing applications for summary judgment. Mr Parker submitted, in reliance on observations of Neuberger J, in Re Richbell Strategic Holdings [1997] 2 BCLC 429 that it is:
“... important to emphasise that a judge, whether sitting in the Companies Court or elsewhere, should be astute to ensure that, however complicated and extensive the evidence might appear to be, the very extensiveness and complexity is not being invoked to mask the fact that there is, on proper analysis, no arguable defence to a claim, whether on the facts or the law.”
[62]I accept that submission. Mr Chivers reminds the court that the test for summary judgment under CPR Part 24 is whether the defendant has no real prospect of succeeding in defending the claim or issue. The test does not require one to look at probability but at an absence of reality. He submits that it is for the claimants to demonstrate that the defence lacks reality. Again, I accept that submission. Mr Chivers accepts that when a company is insolvent, or of doubtful solvency, its directors owe a duty to the company to consider, or to act in, the interests of the company’s creditors. He points to the recent discussion in the decision of Rose J in the case of BTI v Sequana [2016] EWHC 1686 (Ch) at paras.456 onwards as setting out the correct approach to such cases. The duty arises where the company is insolvent and also where the company is of doubtful insolvency. Quite when that situation occurs may be open to some doubt. In the Sequana case Rose J considered many of the authorities and set out her conclusions at paras.477 to 478. I accept Mr Chivers’s analysis of her observations at para.46 of his written skeleton that the claimants need to show that the company was on the verge of insolvency, was precarious, or was in a parlous financial state at the time of the distribution in specie. I accept Mr Chivers’s submission that the claimants need to show that the directors ought to have been anticipating the insolvency of the first claimant company and that there is no real argument to the contrary.[63]In the case of Colin Gwyer & Associates v London Wharf (Limehouse) Ltd [2002] EWHC 2748 (Ch), reported at [2003] BCC 885, Mr Leslie Kosmin QC, sitting as a Deputy High Court Judge, said this (at para.74):
“Where a company is insolvent or of doubtful solvency or on the verge of insolvency and it is the creditors' money which is at risk the directors, when carrying out their duty to the Company, must consider the interests of the creditors as paramount and take those into account when exercising their discretion.”
[64]Those observations were referred to with apparent approval by Norris J in Roberts v Frohlich [2011] EWHC (Ch) 257, reported at [2012] BCC 407, at para.85. They were cited again by Newey J in the case of GHLM Trading Ltd v Maroo [2012] EWHC 61 (Ch), reported at [2012] 2 BCLC 369, at para.165. Later, at para.173 of his judgment in that case, Newey J said that in a case where a company was insolvent or at any rate of doubtful solvency or on the verge of insolvency it was incumbent on the directors of the company to have regard to the interests of the company’s creditors as a class.[65]The statement of the law by Mr Kosmin was also endorsed by Mr John Randall QC, sitting as a Deputy High Court Judge, in the case of Re HLC Environmental Projects Limited [2013] EWHC 2876 (Ch) at para.92. There Mr Randall referred to the fact that where the duty extended to consideration of the interests of creditors, Mr Kosmin had said that those interests must be considered as paramount when taken into account in the directors’ exercise of discretion. Mr Randall noted that a contrary view had been expressed in the Supreme Court of Western Australia: that although the directors must take into account the interests of creditors it did not necessarily follow from this that the interests of creditors were determinative. So far as English law was concerned, however, Mr Randall respectfully agreed with Mr Kosmin that his use of the term “paramount” was consistent with the judgment of Nourse LJ in Brady v Brady [1988] BCLC 20 where that Lord Justice had observed that where the company was insolvent, or even doubtfully solvent, the interests of the company were, in reality, the interests of existing creditors alone. Mr Randall noted that the passage from Mr Kosmin’s judgment had been cited with apparent approval by Norris J in Roberts v Frohlich.[66]In her judgment in BTI v Sequana Rose J said (at para.463) that if the court decides that the creditors’ interests duty did arise but the directors did not in fact take the interests of the creditors into account in their decision-making that was not of itself a breach of fiduciary duty invalidating everything done automatically. Mr Parker points out that in the Colin Gwyer case Mr Kosmin said at para.87 that in relation to an insolvent company the directors when considering the company’s interests must have regard to the interests of the creditors. If they failed to do so, and therefore ignored the relevant question, the Chartbridge Corporation test could be applied, with the modification that in considering the interests of the company the honest and intelligent director must have been capable of believing that the decision was for the benefit of the creditors. I accept that statement of the law.[67]In the course of his submissions Mr Parker had referred to observations of Millett LJ in the case of Armitage v Nurse [1998] Ch 241 at p.251F:
“It is the duty of a trustee to manage the trust property and deal with it in the interests of the beneficiaries. If he acts in a way which he does not honestly believe is in their interests then he is acting dishonestly. It does not matter whether he stands or thinks he stands to gain personally from his actions. A trustee who acts with the intention of benefiting persons who are not the objects of the trust is not the less dishonest because he does not intend to benefit himself.”
[68]Mr Parker relied on that passage for the proposition that a director acts dishonestly if he acts in a way which he does not honestly believe is in the interests of the company or, in a case where their interests are engaged, the company’s creditors. When he came to address the court, Mr Chivers submitted that Millett LJ was not saying that if directors act with deliberation and get it wrong then they are nevertheless acting in bad faith or dishonestly. Mr Chivers submitted that one needed to read the whole passage from Millett LJ’s judgment beginning at p.251A:
“Breaches of trust are of many different kinds. A breach of trust may be deliberate or inadvertent; it may consist of an actual misappropriation or misapplication of the trust property or merely of an investment or other dealing which is outside the trustees’ powers; it may consist of a failure to carry out a positive obligation of the trustees or merely of a want of skill and care on their part in the management of the trust property; it may be injurious to the interests of the beneficiaries or be actually to their benefit. By consciously acting beyond their powers (as, for example, by making an investment which they know to be unauthorised) the trustees may deliberately commit a breach of trust; but if they do so in good faith and in the honest belief that they are acting in the interest of the beneficiaries their conduct is not fraudulent. So a deliberate breach of trust is not necessarily fraudulent. Hence the remark famously attributed to Selwyn LJ by Sir Nathaniel Lindley MR in the course of argument in Perrins v Bellamy [1889] 1 Ch. 797, 798: ‘My old Master, the late Lord Justice Selwyn, used to say: “The main duty of a trustee is to commit judicious breaches of trust.”’”
[69]In my judgment, acting with deliberation is not the same thing as acting in conscious breach of trust or duty. In the present context, I accept that for dishonesty to be established, a director must know that he is acting contrary to the interests of the creditors or must be recklessly indifferent to their interests. In other cases, he may be in breach of duty; but he is not acting dishonestly.[70]Against that legal background, I deal first with the issue of doubtful insolvency and the interests of the creditors, the first limb of the claimants’ application. I am satisfied that the defendants have a real prospect of successfully defending the claim that the company was on the verge of insolvency, precarious, or in a parlous financial state in August to October 2007. I am not satisfied that the defendants have no real answer to the claimants’ claim that they ought to have been anticipating the insolvency of the company. The most telling point advanced by Mr Parker is that guarantees in respect of pre-existing loans to the company were extracted by the defendants in July 2007. But company directors who have lent to a company in the past may well wish to obtain security before making any further advances to the company without necessarily anticipating that company’s insolvency. As Mr Chivers pointed out (at para.51 of his written skeleton argument), having sold some of her shares in VHL to Scottish and Southern Energy in October 2007 Mrs Fielding lent the group £3 million. As Mr Fielding says in his witness statements, the Fieldings would never have done this if the solvency position was as painted by the claimants. Mr Fielding says he truly believed that the loan would help the group get through its cash flow difficulties and that it would go on to thrive, so that the Fieldings would ultimately be repaid. The unprecedented and unforeseen financial crisis that occurred in 2008 was the reason that the first claimant went into administration in October of that year: see paras.99 to 100 of Mr Fielding’s third witness statement. On this application for summary judgment I cannot ignore or disregard that evidence. In those circumstances Mr Chivers submits:(1) That in October 2007 the company was not in a parlous financial state such that the duty to consider the interests of creditors arose. On the contrary, the company was solvent with net assets on the liquidator’s figures in excess of £10 million.(2) The wider group had cash requirements but steps had been identified and were then undertaken to cure that. The very transaction the subject of complaint was instrumental in addressing the cash flow needs of the group.(3) The company’s auditors did not raise concerns about its solvency or future solvency, notwithstanding their close involvement in the proposed transaction.(4) There is no evidence that the directors did or ought to have determined that the company was put on the verge of insolvency or in a parlous financial state by the distribution of the Vital share. After all, the distribution made no difference to the continuing operations of the group save to bring about a cash injection of £3 million, a wholly positive step.(5) Nor has it been, nor could it be, suggested that the directors ought reasonably to have supposed that £3 million was an insufficient cash sum to deal with the problem which had been identified by the directors.(6) Even if the directors did not take the interests of the creditors into account, an intelligent and honest man in their position could, in the whole of the existing circumstances, have reasonably believed that the dividend in specie was for the benefit of the company – and, I would interpose to say, its creditors - because of the substantial cash injection which was going to result to the benefit of the group, and hence the company – and, I would again interpose to say, its creditors itself.[71]Mr Chivers then says this: the directors do not have to show, not least on a summary judgment claim, that some other route might have produced a greater cash injection into the group. Mr Parker criticises that last sentence. He says that it is simply wrong. He says that it is obvious that a sale of the subsidiary would have produced a greater cash injection into the group. Mr Chivers is said to be wrong because he focuses only upon the alleged benefit to creditors of the £3 million loan and ignores the accompanying loss to the company of £10.48 million otherwise available to meet the needs of its creditors. He says that obviously the loss to the company outstrips the benefit. He poses the question: what if the £10.48 million share had been sold for £3 million? In that event the directors could not have said that they had been acting in the interests of the creditors of the company because they then lent £3 million back to the company. The reality was, according to Mr Parker, that an asset worth £10.48 million had been given to creditors in return for a £3 million loan. That could not reasonably be said to have been in the interests of creditors. So, unless the interests of the creditors were not engaged, obviously the directors were not acting in their best interests. The position was even more so when the transaction did not even produce any obligation on the Fieldings’ part to make the loan. The defendants had accepted in evidence that if the sale had fallen through, they would not have been able to afford to make the loan and would not have done so. The evidence is said to show that the directors had decided to sell the subsidiary, Vital, in the light of the company’s cash flow difficulties but had then decided, instead of selling, that they would make a distribution to the Fieldings against the possibility that they would make a loan to the company. The decision had been to distribute rather than to sell. There had been a complete absence of any explanation as to why they decided to distribute rather than selling. They had not attempted to provide any explanation as to why they had thought that that course was in the best interests of either the company or its creditors, and there could be no honest explanation.[72]I have already indicated that I am not satisfied that the interests of creditors were engaged. I would accept that, if they were, then the directors would arguably have to do more than to show that the dividend in specie was for the benefit of the company’s creditors because of the substantial cash injection that might result. I accept that it is certainly arguable that the directors would have to go further and demonstrate that there was no more beneficial alternative solution to the company’s cash flow difficulties that was realistically achievable. But, for the purposes of this summary judgment application, I am satisfied that the defendants have provided an explanation for the series of linked transactions that can withstand scrutiny at this pre-trial interlocutory stage and which raises issues which will have to go for determination at trial.[73]Mr Chivers emphasised that there was in fact no cash distribution because the company did not have any cash to distribute. Rather, there was a distribution of the company’s shares. The reason why the transaction did not proceed by way of sale was set out in detail at paras.52 through to 66 of the amended defence. Even on Mr Beckett’s original version of the minutes of the 29th August 2007 board meeting, the directors had not resolved on a straightforward sale of Vital but on a demerger which, in turn, required a revaluation of Vital in the company’s books and then a sale. The notion of a demerger itself necessarily involved a change in the ownership of the shares in Vital, with the underlying asset being made available to the new shareholders. In the light of Scottish and Southern Energy’s stated requirements I am satisfied that the defendants have shown an arguable case that the company had to demerge Vital before it could sell the share in that company, and that this in turn gave rise to tax considerations which were addressed by the company’s solicitors and accountants.[74]In determining to proceed in the way that was done with the benefit of advice from the company’s solicitors and accountants, in my judgment it cannot be said, at least on this application for summary judgment, that no intelligent and honest director in the position of the defendants could have honestly and reasonably believed that the transaction was for the benefit both of the company and of its creditors. Those are matters which, in my judgment, have to be investigated at trial and cannot be determined on the papers on an application for summary judgment.[75]The second limb of the application is that there were no proper interim accounts. I accept Mr Parker’s submission that to qualify under s.270 interim accounts must properly qualify as accounts of the company. That seems to me to follow from the terms, and the structure, of s.270. In my judgment, the accounts that are relevant under s.270(4) must refer back to the company’s accounts mentioned in section.270(2). Under subsection (4) the accounts relevant under the section are those necessary to enable a reasonable judgment to be made as to the amounts of the items mentioned in subsection (2). Subsection (2) states that the amount of a distribution which may be made is determined by reference to the following items, as stated in the company’s accounts. Subsection (3) provides that, except in a case falling within subsection (4), the company’s accounts which are relevant for this purpose are its last annual accounts. Everything in the section is directed to the company’s accounts and, therefore, I accept Mr Parker’s submission that to qualify under s.270, the accounts must properly qualify as accounts “of the company”.[76]I also accept that the relevant accounts must be considered by the directors for the purpose of determining the question whether a distribution may be made by a company without contravening s.263. If that were not the case, s.270 would be a dead letter with no real meaning or content. However, I accept Mr Chivers’s submission that the management accounts relied upon represented accounts of the company which entitled the board to make a reasonable judgment of the items in s.270(2) and that they were carefully considered by the board. As Mr Chivers pointed out, that was addressed by Mr Fielding at paras.119 through to 122 of his fifth witness statement. There he says that management accounts and financial projections were considered at all of the monthly meetings and that would have been the case at the meeting on 29th August 2007. He points out that the first signed minute recorded, at para.3, that the board reviewed the financial projections for the group including the budgeted cash flow. He says they also considered up-to-date management accounts as that was part of the standing agenda item of “Financials”. He says that so far as the meeting on 12th October 2007 was concerned, the copy of the minute of that meeting recorded at para.5 that there was produced to the meeting a copy of the company’s management accounts for the month of August 2007, which is what the interim accounts were. At para.121 he explains why he says it is clear that the board carefully considered the interim accounts. At para.122 he says that, for the avoidance of doubt, he confirms that the board did consider the interim accounts and that they considered them to be both adequate and accurate. They had no reason to consider that they were not. He then sets out his reasons for saying that.[77]In my judgment, I cannot go behind that evidence on this summary judgment application. Mr Chivers submitted that one did not include within interim accounts contingent liabilities, except to the extent that a provision had been made. He submitted that whether a dividend was lawful was a balance sheet question, and that contingent liabilities could only be addressed by a provision rather than a note. He submitted that notes are not necessary in interim accounts. He submitted that interim accounts are false if an asset does not exist but not if it is merely misdescribed. He submitted that if an asset is fairly stated, even if by accident, that will suffice to enable a reasonable judgment to be made as to the assets and liabilities of a company for the purposes of s.270(2). He submitted that here, even though SGI Tooling had ceased to exist, there was a sum receivable by it before its dissolution and the entitlement to receive it could not have disappeared merely because the recipient had been dissolved. The asset still existed after dissolution because of the potential for the company to be restored to the register. There was a legal route to recover the asset. A company’s accounts should not be falsified merely because a subsidiary had been dissolved. The debt remained an asset of the company. In 2007 it was still possible to restore SGI Tooling to the register to get the benefit of the outstanding asset in the form of a debt due to it.[78]It is common ground between counsel that there is no authoritative guidance on the meaning and effect of s.270. In my judgment, it is not appropriate for this court to give such guidance on an application for summary judgment heard on the papers and without the benefit of admissible expert opinion evidence and, in this case, in a partial factual vacuum. In my judgment it is arguably open to the defendants to rely on the £100,000, and, indeed, on the entire £250,000, attributable to SGI Tooling as enabling a reasonable judgment to be made. If those sums were available as an asset of the company, even though they have been misdescribed, the question whether the directors are entitled to rely upon the entry is essentially a matter of factual and expert evidence which can only be determined at trial.[79]I accept Mr Parker’s submission that a reasonable judgment needs to be made by the person reading and utilising the accounts. But the question is what the reasonable director, receiving and reading the interim accounts with all the background knowledge available to him, would have understood the asset position to be with a view to forming a reasonable judgment as to the amount of the items mentioned in subsection 270(2). That is not something which, in my judgment, can be undertaken in the context of a summary judgment application, where the underlying facts, even after so much scrutiny and analysis, remain unclear. For the reasons given by Mr Chivers, it does seem to me that there is at least an arguable case that the directors were entitled to rely upon the relevant management accounts as proper interim accounts for the purposes of s.270. As to £150,000 of the amount attributed to SGI Tooling, on the evidence it would appear that this properly represented an increase in the value of the company’s investment in Group. As to the balance of £100,000, it does seem to me that there is no absence of reality in Mr Chivers’s submission that this remained an asset notwithstanding the dissolution of SGI Tooling, and that the entitlement to receive the £100,000 did not irrevocably disappear for all time with the dissolution of the company. It does not seem to me that there is an absence of reality in the submission that it could have been gathered in by the restoration of SGI Tooling Limited to the register.[80]In any event, it seems to me that even if the interim accounts were not proper interim accounts for the purposes of s.270, the defendants might arguably be entitled to claim relief under s.1157 of the Companies Act 2006. Subsection (1) provides that if, in proceedings for negligence, default, breach of duty or breach of trust against an officer of a company, it appears to the court hearing the case that the officer may be liable but that he acted honestly and reasonably and that, having regard to all the circumstances of the case, he ought fairly to be excused, the court may relieve him, either wholly or in part, from his liability on such terms as it thinks fit.[81]Mr Parker submits that relief will not be granted to the detriment of the creditors of an insolvent company except above and beyond the level of creditor claims. Since the company has unsecured creditors totalling £10.7 million plus statutory interest, and since the company is seeking an interim payment of only £10.48 million plus commercial interest, Mr Parker submits that there is no possibility of the interim payment sought exceeding the value of the claims of creditors. On that basis, he submits that, if the claimants succeed on the second limb of their summary judgment application, there should be summary judgment and an interim payment of £10.48 million plus interest on terms that execution be stayed and time for appealing extended until after the decision of the Supreme Court following the hearing in December as to whether s.21(1)(b) and s.32 of the Limitation Act 1980 can be invoked by the claimants.[82]In support of the submission that relief will not be granted to the detriment of the creditors of an insolvent company except beyond the level of creditor claims, Mr Parker relies upon the decision of Rimer J in the case of Inn Spirit Limited v Burns [2002] EWHC 1731 (Ch), reported at [2002] 2 BCLC 780. Mr Parker relies upon the passage at para.30 of Rimer J’s judgment where he pointed out that relief under what was then s.727 of the Companies Act 1985 requires the applicant for relief to satisfy the court that he ought fairly to be excused for his breach of duty. As to that, Rimer J said that he could not see that the court could or should excuse directors from liability at the expense of the creditors of the companies; and in his judgment it followed that it could and should order them to repay every penny of the £1.9 million and interest necessary to enable the companies to pay all creditors what would otherwise have been paid to them if the money had not been removed from the company in the first place. In my judgment, those observations have to be read in the context of the facts and circumstances of that particular case. That was a case in which, as appears from para.17, there was no question of the directors being able to justify the £1.9 million payment as being a lawful dividend by reference to any accounts. There were no accounts that would qualify as accounts for the purposes of the legislation. There was no question of any interim accounts having been produced sufficient to justify a dividend of £1.9 million. It was obvious that at the relevant time the company did not have distributable profits in that sum or anything like it. The purported dividend was in those circumstances paid unlawfully and amounted to an improper misapplication of almost the entirety of the company’s assets.[83]At para.29 Rimer J referred to observations of Hoffmann J in an earlier case, pointing out that the whole point of the section was to provide a jurisdiction affording relief against the commission of wrongs of various types. The reasonableness or otherwise of a director’s actions had to be assessed at the time of the payment rather than by reference to the unfortunate chapter of events that had since unfolded. On that basis, Rimer J did not regard it as impossible that the directors might be able to satisfy the court that they had done what they did in perfect good faith and with every intention of preserving sufficient of the £1.9 million to pay all liabilities of the companies which still remained unsatisfied and that the due fulfilment of their plans was thwarted because they had been let down by another party. In those circumstances Rimer J had been prepared to accept that the directors had at least a real, meaning more than a fanciful or imaginary, prospect of persuading a court that they had acted reasonably for the purposes of the relevant section. It was then that he went on to say that they could not arguably show that they ought fairly to be excused because of the creditor position; but that, it seems to me, depended upon the prior finding that there had simply been no accounts by reference to which the lawfulness of the dividend could be established.[84]In my judgment, the decision is no authority for an invariable rule that relief should not be granted to the detriment of creditors of an insolvent company. In my judgment, everything depends upon all the circumstances, including the nature of the breach of duty which has given rise to the claim against the directors. If there was reliance on inaccurately drawn interim accounts, endorsed by the company’s professional advisors, and if, also, accurately drawn interim accounts would have enabled a distribution properly to be made - and all of those are matters for trial - then I would not necessarily exclude the availability of the grant of relief under s.1157 of the 2006 Act. Applications for such relief are fact-specific. I have previously been criticised by the Court of Appeal in this litigation, in the context of the potential application of s.32 of the Limitation Act, for determining, on an application for summary judgment, fact-sensitive issues which could only be resolved at trial. I do not feel I should fall into that error again or run the risk of doing so.[85]I would not necessarily say that there was a complete absence of reality in any prospect of relief under s.1157 if the accounts were not proper interim accounts but it were to be found at trial that, had the accounts been accurately drawn, they would have produced precisely the same result. The Inn Spirit Limited v Burns case was one where there were not, and could not have been, any properly drawn interim accounts; and it can be distinguished on that basis. I therefore dismiss the application for summary judgment and turn to the application for security for costs.[86]CPR 25.13(1) provides that the court may order security for costs under CPR 25.12 if(a) it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order and(b) one or more of the conditions in CPR 25.13(2) applies. The condition relied upon is that set out at CPR 25.13(2)(c), that the claimant is a company and there is reason to believe that it will be unable to pay the defendants’ costs if ordered to do so.[87]Mr Chivers sets out his submissions on security for costs at paras.75 through to 103 of his written skeleton argument. I do not propose to repeat what is there said, but I have had regard to its contents. In his oral submissions, Mr Chivers pointed to the fact that on 4th May 2017 the defendants’ solicitors had been told that Mr Hunt’s insolvency practice was not prepared to fund this litigation any further. Since then sums totalling some £275,000 have been spent by the claimants in the pursuit of this litigation. That is a significant proportion of the sum for which security is presently sought. Mr Chivers pointed out that, when pushed to do so, as, for example, by my unless order with regard to the costs addressed on 8th June, the claimants are able to pay up; so, he submitted, the court cannot accept that this action would be stifled if an order for security for costs is made. Mr Chivers referred me to the principles to be applied in Keary Developments Ltd v Tarmac Construction Ltd [1995] 3 All ER 534 at p.539H to the end of p.540. He also referred me to passages at p.541. He also took me to the decision of Park J in the case of Brimko Holdings v Eastman Kodak Company [2004] EWHC 1343 (Ch) at para.11 on the issue of the stifling of a genuine claim. There Park J said that two other propositions needed to be considered:
“First, the burden of establishing that a claim would be stifled by an order for security rests on the claimant. He or it must put evidence before the court of his or its means and must satisfy the court, not to a standard of certainty but at least to a standard of probability, that the claim would be stifled if security was ordered. Second, the court should not restrict its evaluation of the ability of a claimant to provide security to the means of the claimant itself. If the claimant cannot provide the security from its own resources, the court will be likely to consider whether it can reasonably be expected to provide it from third parties, such as, in the case of a corporate claimant, shareholders or associated companies or, in the case of an individual claimant, friends and relatives. If the case moves to the stage of considering whether security should be regarded as being available from third parties, the burden still rests on the claimant. He or it has to show that, realistically, there do not exist third parties who can reasonably be expected to put up security for the defendant’s costs.”
[88]Mr Chivers submitted that the liquidator has not put in any evidence of attempts to raise funding from creditors, or of the ability of creditors, or the liquidator himself, to fund the action. He submitted that the claimants cannot satisfy the burden that clearly lies upon them of saying that the action would be stifled by the grant of security. Mr Chivers pointed to the fact that:(1) the liquidator has been funding this claim in substantial sums of money to date; and(2) that there is no evidence at all from the creditors as to their position or attitude. He submitted that there is nothing to demonstrate that the merits go one way or the other. He invited the court to bear in mind also the way in which the liquidator’s case had chopped and changed. The case is very different from the one that had been advanced before the Court of Appeal. He also invited the court to bear in mind the fact that the action had been brought without any pre-action protocol conduct or correspondence. The amendments to the particulars of claim made in January had been made many months after the Court of Appeal’s decision and, again, without any pre-action correspondence. He invited the court to note that the way the litigation was being conducted by the claimants gave the defendants legitimate cause for concern. The liquidator only paid up in response to orders for costs when absolutely compelled to do so. This is an action, Mr Chivers submitted, that requires proper security for costs. There would be a significant injustice to the defendants if they beat off the action only to find that there was nothing in the pot against which to enforce any order for security.[89]Mr Parker addressed the issue of security for costs at paras.61 to 71 of his written skeleton argument. Again in this lengthy extemporary judgment I do not propose to reproduce its terms in this judgment. Again, I have borne his written submissions, as supplemented orally, firmly in mind.[90]I therefore come to give my decision on the security for costs application. First, I am satisfied that it is open to the defendants to pursue their security for costs application before me notwithstanding the dismissal of a previous application by the Vice-Chancellor. That was expressly contemplated by the Vice-Chancellor at para.23 of his judgment (previously cited). I am satisfied that this present application for security for costs is amply justified by three material changes of circumstance. The first - and unforeseen by Norris J - was that the nature of the claimants’ case has undergone material revision and expansion since the matter was before the Vice-Chancellor. The second - foreseen by Norris J - was that a substantial defence has now been pleaded, not only to the original but also to the amended claim. Thirdly - also foreseen by Norris J - is that it now looks as though appropriate adverse costs insurance, or a contractual undertaking from a litigation funder, may now be available.[91]It is common ground that the first claimant company is in insolvent liquidation. Absent any appropriate adverse costs insurance policy or contractual indemnity, or their equivalent, I am satisfied that the first claimant will be unable to pay the defendants’ costs if ordered to do so. I am satisfied on the evidence that it cannot be said that the claimants’ case is highly likely to succeed at trial. It may do so, but I can say no more than that at the present stage. On the evidence, I am not satisfied that an order for security would create any injustice or significant problems for the claimants. They have been able to fund the ongoing litigation in substantial sums and to discharge adverse costs orders to date, albeit sometimes only at the thirteenth hour and under the compulsion of court order. I am satisfied that the application for costs is not being used oppressively but as a legitimate tactic in the context of ongoing commercial litigation. Whether the first claimant’s impecuniosity is due to reprehensible conduct on the part of the defendants is one of the issues that falls to be resolved in this litigation at trial.[92]I am satisfied, as a result, that this is an appropriate case for security for costs to be given in the exercise of the court’s discretion. I am satisfied that the real battle at trial will not only be over the issue of the defendants’ entitlement to claim relief under s.1157 of the Companies Act 2006. There are real issues on liability to be decided before any question of relief falls to be considered, so the defendants are not substantially in the position of claimants. Even if s.1157 proves to be the only defence to a challenge on the basis of interim accounts and s.270 of the Companies Act 1985, this claim is also being pursued on other grounds in relation to which the Fieldings are undoubtedly the defendants. They are therefore entitled to pursue an application for security for costs; and, in my judgment, they are entitled to such security.[93]In the light of observations of Snowden J in Premiermotor Auctions Ltd & Anor v PriceWaterhouseCoopers LLP & Anor [2016] EWHC 2610 (Ch) at paras.41 to 43, and after having heard submissions on the issue, I am satisfied that the appropriate order to make is along the lines of an order that the claimants are to offer, by way of security for costs, a proposed adverse costs insurance policy or a contractual indemnity from a litigation funder, or their equivalent, in the sum of at least £790,000 plus VAT by a particular date. If the defendants show that there is reason to believe that the provider will not make payment to, or for the benefit of, the defendants under that arrangement, then security for costs will have to be provided in a cash sum or some other way of that amount, again by a particular date. There will need to be provision to apply in relation to the carrying out of that order for security, but I am anxious to avoid yet another expensive hearing if that can be avoided. That is my judgment on the summary judgment application and the security for costs application. LATER[94]For almost three hours this morning I delivered an extemporary judgment on the applications(1) by the fist claimant for summary judgment and an interim payment and(2) the defendants for security for costs. I now have to deal with the other matters arising at this case management hearing, with the exception of the issue of the costs of those applications. A minute has been put before the court by the claimants’ counsel. An alternative proposal for the security for costs section of that order has been put before the court by counsel for the defendants. I propose to proceed with this judgment by reference to the claimants’ form of order.[95]The first recital should make it clear that I am sitting as a Judge of the High Court. It is already acknowledged that the third recital should make it clear that this is the adjourned hearing of the first claimants’ application for summary judgment. The “Upon hearing” recital should include reference to the appearance of junior counsel for both parties and should include the names of all four counsel. There is no issue as to para.1, that the first claimant’s application for summary judgment is dismissed.[96]As between the two formulations of the section on security for costs, it seems to me that my substantive judgment on that issue is more fairly reflected by the form of order proposed by the claimants, provided that para.2 begins that: “On the defendants’ application for security for costs there be an order for security in the following form,” and it should then follow the terms of the claimants’ draft. I accept that the written evidence provided for in subparagraph 1 should be provided by 5.00 p.m. on 10th August.[97]In subparagraph 3 I see no reason why the application for security for costs should necessarily be restored before me. No doubt, if it is to be restored before some other judge, it may be appropriate for the parties to have obtained a transcript of my extemporary judgment but, having done that, I see no reason why, on the basis of properly prepared submissions from counsel, some other judge should not be able to hear the restored application. If the case is to be transferred to London, then there is no reason why I should be the judge before whom the restored application should necessarily come. It would be different if the case were remaining in Manchester and, as between the two and a half specialist Chancery Judges, I would be a natural choice because of my prior knowledge of the case; but that consideration does not apply if the matter is being transferred to London. So far as that issue is concerned, the claimants seek a transfer to London for the convenience of counsel and, no doubt, the claimants’ solicitors. On that the defendants’ position is, according to Mr Chivers, agnostic. I have expressed my concern for the position of the lay and any expert witnesses, but the last two hearings have taken place in London for the convenience of counsel, albeit they were interlocutory hearings without witness evidence. If the parties either wish for a transfer to London, or are agnostic on that position, then it seems to me there should be a transfer to London.[98]There is no issue as to the re-amendment of the particulars of claim in the form that was handed up to the court on 25th July, or with dispensing with re-service. Paragraph 5 provides for the filing and service of a re-amended defence in consequence of the re-amendments to the particulars of claim and so as to set out the defendants’ case on the sum of £100,000 ostensibly attributed to the value of SGI Tooling Limited in the document relied on by the defendants as the company’s interim accounts. Mr Chivers points out that whilst he does not object to setting out the defendants’ case in that respect, he is not asking for permission to do so and his clients should not be obliged to pay the consequential costs. I accept that submission. It seems to me that the re-amendment to the defence, even in that respect, is consequential upon a change to the claimants’ case and, therefore, the costs of and occasioned by all of the re-amendments should be borne by the first claimant.[99]There is no issue as to the provision for the filing and service of an amended reply consequential upon the other re-amendments. The costs of and occasioned by the amendments directed by paras.4 and 5 should be paid by the first claimant to the defendants. Mr Chivers seeks an order that that should expressly extend to the costs thrown away by the abandonment of the revaluation issue. Mr Parker objects to that on the footing that the company minutes that have shown that the revaluation issue was approved by the directors had not been produced earlier. It seems to me that there is force in that point and, therefore, I would not include the formula proposed by Mr Chivers that there should be included express reference to including the costs thrown away by the abandonment of the revaluation issue. It follows from what I have said that there is to be no provision along the lines of the existing para.8 that the costs of and occasioned by the re-amended reply, if any, arising out of the re-amendments as to the £100,000 should be paid by the defendants to the first claimant. No issues arise as to the provisions for disclosure and inspection of documents. So far as witness statements are concerned, in view of the timing of the hearing in the Supreme Court it seems to me appropriate that witness statements of fact should not be served until 21st December, being the last working day before the Christmas holiday.[100]So far as expert evidence is concerned, it seems to me that I should not leave the parties simply with permission to apply for directions as to expert evidence. I should seize the nettle by addressing the issue of the nature and directions for expert evidence at this stage since I have received substantial submissions on that point. I have borne in mind the submissions, in particular, of Mr Chivers that solvency is not a matter at large for any expert witness but is to be directed to the material that was available to the directors of the company at the material time. It seems to me that the appropriate formulation is as follows: that each party has permission to adduce expert evidence in the field of forensic accountancy to address the issue of the solvency of the claimant as at 12th October 2007 on the material then available to the directors of the company and on the basis of the issues identified in the statements of case, including the accuracy of the document relied on by the defendants as constituting interim accounts and whether they were capable of enabling a reasonable judgment to be made as to the amounts of the items mentioned in s.270(2), and as to the financial consequences of any inaccuracies in those accounts, limited to one expert on each side.[101]Mr Chivers argued for a sequential exchange of experts’ reports with the claimants, as the party seeking to falsify the interim accounts, going first and the defendants going second. Mr Parker indicated that he was not averse to a sequential exchange but he submitted that the order should be the other way round since it is the defendants who are seeking to support the interim accounts. In my judgment there should be a straightforward exchange of experts’ reports. Subparagraph (2) provides that the experts shall, before they exchange their reports, discuss and narrow the issues between them. If that exercise takes place on a structured and sensible basis, then it seems to me that simultaneous exchange is appropriate. Mr Chivers has cautioned the court by reference to CPR 35.1 and the duty of the court to restrict expert evidence to that which is reasonably required to resolve the proceedings but I am satisfied that a formulation of the expert evidence along the lines I have indicated, preceded by a discussion between the experts before reports are exchanged and a consequent narrowing of the issues between them, will achieve that laudable objective of the Civil Procedure Rules. There is no objection as to the provisions for the holding of further discussions between experts or the preparation and filing of a joint statement in accordance with subparagraphs (4) and (5).[102]I acknowledge the wish of the parties to limit costs in the matter and it is therefore appropriate to include a provision in the form of a slightly extended subparagraph (6) providing that, without further permission of the court, no party shall be entitled to recover by way of costs from any other party more than £40,000 plus VAT for the fees or expenses of an expert. Mr Chivers was concerned that, unlike the claimants, the defendants do not have in-house expert forensic accountancy expertise to which they can have resort. It seems to me that an equality of arms will be achieved, and the interests of both parties will be protected, by including a provision along those lines. It will be open to any party, either at the pre-trial review or at the commencement of the trial, to seek an extension of the £40,000 (exclusive of VAT) limitation. I would sincerely hope that no more than £40,000 will have been incurred before either the pre-trial review or the commencement of the trial on expert evidence.[103]The trial will take place in London during the period commencing with 1st October 2018 and the end of the Hilary Term 2019. There will need to be a slight adjustment to the directions for trial to incorporate the fact that the trial is to take place in London but I cannot see that that will occasion any difficulty to the parties or their solicitors. LATER[104]Inevitably, I now have to address the incidence of the costs of the application by the first claimant for summary judgment and by the defendants for security for costs. For the defendants Mr Chivers’s position is simple. He says that he has succeeded both in resisting the application for summary judgment and in securing an order for security for costs. Even at the hearing on 8th June there was no acknowledgement of the entitlement to security for costs in principle, nor has there been any acknowledgement of such entitlement since then. The security for costs application has been resisted to the bitter end. As soon as an insurance policy was mooted, the defendants responded that they would accept one so long as its terms were satisfactory and, in default, there should be a consequential order for security for costs. On the summary judgment application, the defendants have been successful. The defendants have therefore comprehensively succeeded on both applications and should recover their costs.[105]For the claimants, Mr Parker reminded me that the claimants had suggested adjourning the security for costs application until after 10th August when the position with an insurance policy or a contractual indemnity from a litigation funder would have been resolved so that they could put a proper offer of security forward. Despite that, the defendants had insisted on this hearing taking place. That was pertinent because one of the arguments raised in opposition to the application for security for costs was that the court should appreciate that the claimants had a good case and a strong case on the merits. That dovetailed in with the application for summary judgment. The hearing of the summary judgment application would, in Mr Parker’s submission, assist the parties on the way to trial. The defendants have now spent a lot of money but they will save that money in the course of trial preparations. Insofar as the argument on the security for costs and summary judgment application was about the merits of the case, the appropriate order should be that the defendants’ costs should be costs in the action. That is because the defendants will secure long-term benefits in the future conduct of this litigation from resisting the instant application. Mr Parker suggested that the defendants should be entitled to their costs up to the 4th May hearing but thereafter the defendants’ costs should be costs in the action. In addition, the defendants ought not to have any costs attributable to an attack in Mr Fielding’s evidence on the conduct of Mr Hunt. There was much material concerning other actions which were not material to the instant litigation. The costs of paras.8 to 55 of Mr Fielding’s third witness statement should therefore be disallowed, and Mr Parker pointed to the fact that those matters were also addressed at paras.11 to 15 of Mr Fielding’s fourth witness statement and paras.5 to 9 and 18 to 19 of Mr Fielding’s fifth witness statement, but Mr Parker did not seek any specific disallowance of those costs separate from the disallowance of the costs of paras.8 to 55 of Mr Fielding’s third witness statement.[106]In his reply Mr Chivers submitted that whilst the pre-CPR practice had been to order the costs of a successful resistance to a summary judgment application to be defendants’ costs in the case, that was no longer the current practice. Costs now should follow the event as the case proceeded. The principle was one of “pay as you go”. One did not know the extent to which the work done to date might inform the further work on the case as preparations for trial proceeded. This was said to be an opportunistic application for summary judgment, made a matter of a mere couple of days before the hearing of the defendants’ application for security for costs. The summary judgment application had been wholly unsuccessful and had failed. It should never have been brought. It was made at a time when the defendants were wholly unsecured as to their costs. The defendants should be entitled to have those costs paid forthwith. The liquidator of the first claimant company should not be entitled to put the defendants at risk as to costs by bringing an application which failed at a time when the defendants were at risk as to costs. When one considered the circumstances in which the summary judgment application was made, the way it was conducted, by reference in part to wholly new material not present in the pleadings, and in certain respects also in ways not foreshadowed by the application notice, it was, Mr Chivers submitted, clear that the defendants should have their costs. The way the case had developed so far could give the court little comfort that the expenditure of costs in connection with either the summary judgment or security for costs applications would be of any value in the defence of the ongoing litigation. The claimants’ case was shifting all the time. The costs of the summary judgment application should follow the event of its lack of success. The court should not take the view that the costs incurred by the defendants in defending the summary judgment application were something for which they should thank the claimants. If the costs of the action going forward were less than they might otherwise be, that would be reflected in lower bills in the future. As to that, I point out that whether those bills fall to be paid by the claimants or the defendants will, of course, depend upon the ultimate outcome of that litigation, and it cannot be said that the claimants will necessarily have to pay the defendants’ costs in the future.[107]Mr Chivers pointed out that the witness statements had been made without the benefit of any disclosure and they would all therefore have to be gone through again. The work will need to be revisited in the light of disclosure, the documents provided, and, in the case of the issue of the company’s solvency, the expert evidence. The general rule of the Civil Procedure Rules was that litigants should pay as they went and the claimants in this case have adopted a policy of not paying up on interim costs orders unless compelled to do so by the court.[108]The costs of the present exercise for the claimants had been in the order of £275,000 and for the defendants some £380,000. That was all expenditure that could have gone towards the financing of the future conduct of the action. Instead, it was likely that it would all be wasted. That was something for which the claimants were wholly responsible. They had brought the summary judgment application. They had needlessly resisted the security for costs application. Unless an interim payment on account of costs was ordered now it was unlikely that the defendants would see any payment at all. It would be unjust to make a contingent one-way costs order with no guarantee that they would be met in the future.[109]As to the suggested disallowance of part of the costs of Mr Fielding’s witness evidence, it was not Mr Fielding who had first raised the issue as to the liquidator’s conduct of other litigation. It was Mr Hunt who had first raised the issue at paras.44 to 45 of his second witness statement. Mr Fielding had merely responded to that, and the reason why no issue had been raised in oral submissions was that the defendants had “scotched the point”, in Mr Chivers’s words, “good and proper”. Mr Chivers made the point that without the defendants’ application for security for costs, there was no assurance that any insurance policy or equivalent would have been put in place.[110]I accept Mr Chivers’s submissions. In my judgment, and in the exercise of the court’s discretion, costs should follow the event here and there should be no disallowance for the passages in Mr Fielding’s witness evidence relating to Mr Hunt’s conduct of other proceedings since that was something that Mr Hunt had raised himself in his evidence originally in support of the security for costs application. I cannot be satisfied that the expenditure of costs incurred by the defendants in connection with the summary judgment application will be expenditure of time and costs well spent, and, in any event, it has been incurred only because the summary judgment application was mounted. Having launched that application and failed, it is only just, as between the parties, that the claimants should bear the costs of that exercise. I also accept Mr Chivers’s submissions that the security for costs application could have been addressed by a more constructive response on the part of the claimants. Instead, it was fought tooth and nail, and to the bitter end, and, in those circumstances, the costs of that application should be borne by the claimants as well. So I will order, without any discount or disallowance, the claimants to pay the costs of both applications. They will be ordered to be assessed by way of detailed assessment on the standard basis and I will now entertain an application for an interim order for payment on account. LATER[111]This is, I think, my fourth extemporary judgment today in this case. I have to undertake the quantification of a payment on account of the costs orders I have made. The total sum sought in respect of the extension of time and re-amendments applications is some £35,000 and the total sum sought in respect of the summary judgment and security for costs applications is some £350,000. The latter figure is to be contrasted with the claimants’ fee for the corresponding two applications of £275,000. On that basis, Mr Chivers asks for me to order an interim payment on account in the sum of £250,000 having regard to the £275,000 incurred by the claimants against an expenditure of £350,000 for the corresponding work by the defendants. He submits that if £275,000 is a reasonable and proportionate figure for the claimants’ costs, then £250,000 must be a reasonable figure for the defendants’ costs. He also draws attention to the lower hourly charging rates levied by the defendants’ solicitors by comparison with the solicitors acting for the claimants.[112]Mr Parker has stigmatised these figures as utterly absurd and simply offensive. He has suggested £6,500 for the two minor applications and he submits that 50 per cent of the figure claimed would be overgenerous. He suggests £120,000 should be allowed by way of interim payment on the security for costs and summary judgment applications, making a total interim payment of £126,500.[113]Mr Chivers, in response, submits that the expenditure by the defendants on counsel’s fees is far more reasonable than the expenditure on the claimants’ side. He submits that the purpose of an interim payment on account is to protect the receiving party pending a detailed assessment of costs at the end of the trial. That does not work unless the court makes a reasonably significant gesture towards the total costs figure at the present stage.[114]Summary assessment is a rough and ready process, and the quantification of an interim payment on account is even more rough and ready than that. It does not affect ultimate entitlement as between the receiving and the paying parties. It merely regulates the position pending a detailed assessment. I do have to consider what is reasonable and proportionate. I bear in mind that apportionments of costs as between the different applications is likely to be arbitrary and that what one loses on the swings one tends to gain on the roundabouts and vice versa. At the end of the day I have to come up with an interim payment that is both reasonable and proportionate, that will protect the interests of the receiving and the paying parties pending a detailed assessment, and will not result in a payment in excess of the minimum which I am satisfied would be recoverable on a detailed assessment. Bearing those principles in mind, and bearing also in mind that it is a process that is really incapable, particularly at a few minutes after five o’clock on a Friday at the end of July, of admitting of any mathematical accuracy or explanation, the figure that I have come up with is that there should be an interim payment on account in the total sum of £175,000. For the reasons I have given, I consider it to be idle to attempt to apportion that between the four applications, so the interim payment on account will be £175,000. Normally, that would be payable in 14 days. I do not know whether Mr Parker is going to ask for longer.

Cited in 1 later judgment