Permission to bring a claim against a company in liquidation

In what circumstances will the court grant leave to issue CPR 8 declaratory proceedings against an LLP in liquidation? The case of Fennell v Halliwells LLP [2013] EWHC 2837 (Ch), [2013] All ER (D) 161 (Sep) had a look at this.

 

Mr Justice Strauss QC (sitting as a deputy judge) gave the applicant leave to issue CPR 8 declaratory proceedings against the defendant LLP in liquidation. The claimant sought permission to bring a claim against the defendant in liquidation for a declaration that the claim that the defendant had issued against him had been released by the defendant and could not be brought. The defendant's liquidators contended that the court should not interfere with their strategy of seeking to negotiate and mediate all claims. The Companies Court, in allowing the application, decided that the liquidators' opposition to the application was unjustifiable, given the failure of negotiations and that case management considerations favoured the grant of permission.

What happened in the case?

The application concerns Halliwells LLP (the LLP), a firm of solicitors that entered administration on 20 July 2010 and went into compulsory liquidation on 12 January 2012. The applicant was a former partner of the LLP who left (with eight other former members) before the LLP entered administration. The principal assets of the LLP were claims or possible claims against former members, including a claim against the applicant that the liquidators had asserted in a letter to the applicant amounted to £125,000. The liquidators had taken no further steps to pursue the sums and the applicant sought the court's permission under section 130(2) of the theInsolvency Act 1986 (IA 1986) to bring a Civil Procedure Rules 1998, SI 1998/3132, Part 8 claim against the LLP for a declaration that claims made by the LLP's liquidators were released by virtue of a retirement deed entered into between the LLP and the applicant when he left the firm.

What is the legal position?

Where a company (or an LLP) is in liquidation, the court will be very reluctant to allow proceedings to be issued against a company in liquidation, particularly where that claim can be dealt with within the liquidation itself. The authorities on this generally point towards cases where the applicant wishes to pursue his own claim against the company in liquidation. In these sort of cases, there is often a very good reason why the court will not allow for these claims to proceed. Typically this will be where the applicant's claim can be dealt with just as easily within the liquidation process and therefore avoids the extra expense of litigation.

What were the parties' positions?

The applicant’s position

The applicant argued the court should exercise its discretion and lift the stay for a number of reasons.

First, the claim the applicant was seeking permission to bring was not an ordinary monetary claim against the LLP, but rather a declaration that a claim the liquidators had asserted they were going to bring against the applicant could not be brought by virtue of the retirement deed entered into between the LLP and the applicant, which the applicant argued settled the claims between the LLP and the applicant.

Secondly, the dispute turned on the construction of the retirement deed—either the retirement deed meant the liquidators were barred from bringing the claim or they weren't. This issue would have to be put before the court at some point. The issue itself was not an issue that needed any more than one day of the court's time, so would not be hugely expensive.

Finally, more than two years had passed since the claim had been raised by the liquidators in correspondence. Negotiations had taken place and had failed. The liquidators had not yet issued any claim. This was causing real hardship to the applicant, including professionally with his professional credibility as a well respected insolvency practitioner and the applicant felt he could not commit to any significant expenditure on things like a new car, moving house or anything more than a modest holiday.

The liquidators’ position

The liquidators opposed the applicant's application for the following reasons:

  1. the claim should be settled by without prejudice meetings and not by litigation
  2. given the financial position of the LLP, the liquidators were seeking to achieve a global settlement of the claims against former members (circa 150)—dealing with claims against members individually would be time consuming and costly
  3. the applicant's application was not helpful for the ongoing administration of the liquidation and the LLP's estate—the liquidator's argued the applicant's application was no more than a distraction aimed at preventing the liquidators from dealing with other more pressing matters (they also argued that even if the claim concerning the retirement deed was settled, this would not be the end of the matter as the liquidators could have a number of IA IA 1986 claims against former members of the LLP including the applicant)
  4. the liquidators' also argued that if the applicant was given permission to issue his  CPR 8 proceedings against the LLP, this could open up the 'floodgates', where the liquidators could be faced with many individual claims from former members of the LLP—it simply made no sense to deal with each claim individually when the claims could be settled globally

What was the issue?

The issue for the court to determine was whether the applicant should be given permission to issue the CPR 8 declaratory proceedings against the LLP. This was against the backdrop that the court will be very reluctant to interfere with the liquidator's general control of the conduct of the liquidation and, even if the applicant's underlying claim was successful, there may still be claims that arise against him.

What did the court say?

The court gave the applicant permission to issue the CPR 8 declaratory proceedings against the LLP. This was because:

  1. the liquidators had set out the details of the claim over two years ago—at some point that claim would have to be issued or dropped
  2. as to the suggestion that the liquidators' resources were finite, this was not strictly relevant—the liquidators made a claim, which they either need to pursue or drop
  3. although the court noted there was a possibility of the 'floodgates' opening with other former members of the LLP making similar claims, those individual claims (if they were made) would have to be considered at the time and this was not a good enough reason for preventing the applicant's application
  4. the claim the applicant was seeking permission to bring was not a claim against the LLP that could be dealt with within the claims process, but was a negative declaration, ie a declaration that a claim the liquidators had asserted they had was not valid by virtue of the retirement deed—although the court was reluctant to give negative declarations, the declaration could easily be put in a positive way (the applicant had clearly shown he had a good arguable claim in respect of the underlying claim (ie that the retirement deed has settled the liquidators' claim against the applicant))
  5. as to whether other claims may arise against the applicant under IA 1986, those claims had not yet been set out, may never arise and does not prevent the applicant's entitlement to have certainty over the liquidators' claim

What should lawyers be mindful of?

This is a good example of when the court will exercise its discretion and lift the liquidation stay under IA 1986, s 130. Where the claim is a monetary claim, the court will very reluctant to lift the stay. However, where the claim is not a monetary claim and the claim is a question of construction of a document/law, the court is more likely to allow the claim to proceed.

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