Personal liability of liquidators for charges under CFA (Stevensdrake v Hunt)

Nick Oliver, a director and head of the insolvency & business turnaround team at Verisona Law, examines the decision in Stevensdrake Ltd v Hunt and it’s practical implications.

Original news

Stevensdrake Ltd (trading as stevensdrake solicitors) v Hunt and another [2016] EWHC 342 (Ch), [2016] All ER (D) 258 (Feb)

The Chancery Division held, among other things, that the defendant liquidator was not liable to the claimant firm of solicitors (the firm) for its charges, basic costs and uplift or for interest on unpaid or late payment of disbursements in respect of work done, pursuant to a conditional fee agreement (CFA), in respect of the liquidation of a company. A letter sent to the firm by the liquidator and its acceptance by the firm’s principal, had had the effect of importing into the CFA that recovery of assets into the estate was a precondition to the firm rendering an invoice to the liquidator for work done by the firm.

What was the background to the judgment?

At a generic level, this was a case that concerned an exception to the parol evidence rule—a rule which would normally prevent a party to a written contract presenting additional evidence that adds to or varies the terms of a written contract that appears unambiguous.

However, the case is of particular interest to those undertaking work in the insolvency sector. The detailed evidence and legal issues referred to in the judgment relate to the contractual relationship between an insolvency practitioner, acting as liquidator of a company, and solicitors that he had instructed to act for him on a CFA basis in relation to a claim brought by the liquidator against a third party.

CFAs are commonly used by solicitors conducting litigation for liquidators and trustees in bankruptcy but, unlike most personal injury litigation, the defendants to such claims are often not insured and a judgment or settlement will not always lead to a monetary recovery.

The liquidator in this case ultimately entered into a settlement with the defendant third party in relation to the claim, triggering the operation of the express written ‘success’ clause in the solicitors’ CFA. There was, however, only a very limited monetary recovery from the defendant who subsequently went bankrupt. The solicitors raised an invoice for their fees, a sum in excess of £900,000, but the liquidator denied he was liable to pay them. The solicitors then commenced proceedings to recover their fees.

The earlier reported decision in this matter (Stevensdrake Ltd v Hunt [2015] EWHC 1527 (Ch), [2015] All ER (D) 229 (May)—see blog post: Liquidator personally liable for CFA costs (Stevensdrake Ltd v Stephen Hunt)) related to a strike out application by the solicitors. In that earlier decision the solicitors succeeded in establishing the liquidator’s liability for disbursements (including counsel’s fees) under the terms of the CFA. The solicitors failed, however, to strike out the defence to the claim for their own fees, which was the subject of this trial.

What were the legal issues the judge had to decide?

The judge was required to analyse the true nature of the contractual relationship between the liquidator and the solicitors and, specifically, whether it was properly reflected in the express written terms of the CFA. He was also required to consider a number of secondary issues, including whether the solicitors breached their duties to the liquidator in relation to the advice they gave him about the terms of the CFA.

What were the main legal arguments put forward?

The liquidator argued that the express written terms of the CFA did not accurately reflect the true contractual position between him and his solicitors.

He argued, in this respect, that there was a ‘practice’ in the insolvency sector whereby solicitors and barristers acting for Insolvency Act 1986 officeholders on a CFA basis in nil/limited asset cases (a) provide their services on terms that they will become entitled to payment only out of recoveries made in the litigation, (b) to the extent that there are insufficient recoveries, the entitlement to payment would abate pro rata, (c) nevertheless, and so as not to breach the indemnity principle, the strict legal rights created by the conditional fee arrangements stipulate that success in the litigation triggers a liability to pay the fees, and (d) it is known and understood that the parties will not enforce their strict legal rights but operate ‘recoveries only’ liability (the practice).

The liquidator argued that the practice was an established method of working between himself and the solicitors and had been expressly adopted in relation to the liquidation and litigation which were the subject of the claim for the solicitors’ costs. He argued that this practice overrode the express CFA terms.

The liquidator also argued that, if the express written terms of the CFA applied (as contended by the solicitors), he was subject to undue influence by the solicitors in entering into the CFA, and that the solicitors had breached their duties to him in failing to properly advise him of the terms of the CFA.

The solicitors denied all of these assertions by the liquidator and sought to enforce the express written terms of the CFA.

What did the judge decide, and why?

With regard to the practice, despite ‘similar fact’ evidence from a number of other insolvency practitioners and insolvency solicitors, the judge did not find that the practice as pleaded (ie all the elements specifically pleaded by the liquidator—see above) was a general practice adopted between insolvency practitioners and lawyers dealing with contentious matters in nil asset estates. He noted that, although there was a general recognition by the ‘similar fact’ witnesses that insolvency practitioners were unwilling to expose themselves to liability for lawyers’ charges in nil asset matters, there was no common ground on how this would be achieved—whether by contractual agreement, voluntary act, or mutual understanding.

The central element of the judgment however, on the specific evidence before him (including a large volume letters, emails and attendance notes—both pre and post the date of the CFA), was the judge’s finding that the express written terms of the CFA did not accurately reflect the contractual position between the liquidator and his solicitors in this case. He found that some elements of the practice pleaded by the liquidator did apply and did override the express written terms of the CFA—particularly those limiting the liquidator’s liability to recoveries.

…it is not open to serious doubt that the CFA was subject to a mutual understanding and acceptance by [the solicitors] that [the solicitors’] right to payment of its basic charges and a 100% success fee was conditional or contingent upon there being funds available from realisations or recoveries…The evidence to support this finding is inescapable.

…the exclusion of personal liability for [the solicitors’] fees on the part of [the liquidator] and agreement that payment should be conditional or contingent on and limited to recoveries cannot be found in and runs contrary to the CFA but it was a stipulation communicated to and accepted by [the solicitors] and is fundamental to the scope and the meaning of [the solicitors’] retainer and, therefore, a necessary and implicit term their agreement and it overrides or negates any contrary term in the CFA.

The judge acknowledged that this was an unusual situation, given that there was a detailed written contract (the CFA) but felt that such a finding was the correct one on the facts of this case:

I recognise that this conclusion may, at least superficially, seem at odds with the principles governing construction of and implication of terms into a contract but the volume, quality and sheer weight of the contemporaneous evidence does not admit of any other conclusion.

As a result he found that the liquidator was not liable for the solicitors’ costs and dismissed their claim.

The judge went on to make a number of obiter comments, which contain some important guidance for solicitors entering into CFAs.

He held that, if the CFA had been effective as per its express written terms (as alleged by the solicitors) to create unlimited personal liability for the liquidator, then the solicitors would have been found to have exerted undue influence over the liquidator in failing to expressly draw the personal liability provisions to his attention. In such circumstances, and for similar reasons, he would also have found that the solicitors had been negligent and in breach of their fiduciary duties.

Finally he held that, based on the voluminous evidence, if the CFA had been effective as per its express written terms then the solicitors would have been estopped by convention from recovering their fees from the liquidator personally.

To what extent is the judgment helpful in clarifying the law in this area?

It must be remembered that the decision was based on the particular facts and, as the judge noted ‘the sheer weight of the contemporaneous evidence’ that was available to the court.

The judge did not clarify the law as such. He did, however, identify important issues for solicitors to consider when acting for insolvency practitioners on litigation matters in low/nil asset cases.

What practical lessons can those advising take away from this case?

Most importantly, to ensure that the contractual position between Insolvency Act 1986 officeholders and solicitors/counsel is valid, clearly agreed and properly documented—particularly where the express written terms of any CFA vary significantly from terms that have applied to their previous dealings.

In an interesting footnote to the judgment, the judge made reference to the importance of not overlooking the impact of the indemnity principle on such arrangements:

This has been a trial in which an elephant has been lurking in, or at least peering through the glass panelled doors into, the courtroom. The issues as presented and decided have not called for consideration of or a decision upon whether the arrangements that [the liquidator] insists upon in few or nil asset estate cases offend the indemnity principle, the essence of which is that if a solicitor expressly or impliedly agrees that the firm will not in any circumstances charge the client no costs are recoverable from the other party (Cook on Costs 2015 [12.3]).

There is a public interest in there being a practical means by which insolvency practitioners are able to obtain the assistance of lawyers to advise and represent them in the pursuit of misfeasant and dishonest officers and former office holders in nil asset estate cases where no creditor is willing to provide an indemnity, and it is the case that litigation funding is evolving, but at present the indemnity principle remains the law.

Properly drafted CFAs which limit the office-holder’s liability to the solicitor (eg by reference to amounts recovered in the litigation) should not offend the indemnity principle. The amendment of section 51(2) of the Senior Courts Act 1981 by section 31 of the Access to Justice Act 1999, and the corresponding amendment to CPR 43.2(3), made it clear that such arrangements could form a sound basis for inter-partes recovery. See also Re The Accident Group Test Cases Tranche 2 Issues Sharratt v London Central Bus Co [2003] Lexis Citation 11, at para [383], and Duffy v Port Ramsgate Ltd [2004] Lexis Citation 06, at para [26].

Solicitors should exercise great care, however, in agreeing to side letters, additional terms or caveats which are not properly drafted and set out in the CFA itself and which may have the effect of offending the indemnity principle and/or rendering the CFA invalid.

Interviewed by Alex Heshmaty.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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Bringing a claim on behalf of an insolvent company's insolvency office-holder—overview

Funding of insolvency litigation and investigations—overview

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First published on LexisPSL Restructuring and Insolvency

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