Section 236 and third parties—striking a balance

Restructuring & Insolvency analysis: What does the latest Comet Group case tell us about applications made by insolvency office-holders for information from third parties pursuant to the Insolvency Act 1986, s 236 (IA 1986)?

Original news

Re Comet Group Ltd (in liquidation); Khan and others v Whirlpool (UK) Ltd and another [2014] EWHC 3477 (Ch), [2014] All ER (D) 336 (Oct)

Mr John Baldwin QC, sitting as a Deputy Judge of the Chancery Division, was faced with the issue of whether the court had jurisdiction to make an order for production of information and documents sought by the liquidators of Comet Group Ltd (Comet) against Whirlpool (UK) Ltd (Whirlpool) and Embraco Europe srl (Embraco) pursuant to an application made under IA 1986, s 236. If it did, the second issue for the judge was whether the court should exercise its discretion in favour of the liquidators.

The judge held that the court did have jurisdiction (once the liquidators confirmed they were content with a slight variation to the order originally sought). Further, taking all relevant matters into account, and being careful not to impose an unreasonable burden on the respondents, the judge ordered that the respondents provide to the liquidators the documentation sought.

Why is this case of interest?

For office-holders, this case provides some guidance as to what the court can and cannot order under IA 1986, s 236, and calls for some precision when drafting the application as to what relief is sought, to ensure that it falls within the court’s jurisdiction.

This case also confirms that office-holders need to be as specific as possible as to the classes of documents sought, and that a fishing expedition will generally not be tolerated.

What does IA 1986, s 236 say?

IA 1986, s 236 forms part of the armoury available to administrators, administrative receivers, liquidators, or provisional liquidators to assist in their investigations into the assets, affairs and dealings of the company in respect of which they have been appointed.

Where appropriate, the office-holder can apply to court under this section seeking an order that an officer of the company, or any relevant third party, be summoned to appear before it to be questioned or, alternatively, that they provide a witness statement setting out their dealings with the company. The court may also order that any books, papers or records in that person’s possession or control relating to the company or their dealings with it be delivered up to the office-holder.

What were the facts of the case?

Whirlpool was a supplier of white goods, including fridges and freezers to Comet. Embraco is a manufacturer and supplier of refrigeration compressors for use as components in fridges and freezers. Whirlpool and Embraco (together the respondents) form part of the same corporate group. Embraco supplied compressors to manufacturers of fridges and freezers within that group, who then in turn supplied them to Whirlpool.

In December 2011, the European Commission held that Embraco and its parent, Whirlpool SA had infringed art 101 of the Treaty on the Functioning of the European Union by participating in a cartel between April 2004 and October 2007, and were fined circa €54m.

Comet considered that it might have a damages claim against the respondents as a ‘victim’ of the cartel, where it was believed that inflated prices might have been paid.

The liquidators’ solicitors sent a letter before action to the respondents, quantifying the claim at just over £49m, and said that steps would be taken to issue proceedings in the event that no satisfactory response was received. That letter was met with a response to the effect that the claim was misconceived, and that Embraco could demonstrate that even direct customers of compressors were not harmed by the conduct of the cartel.

Further correspondence followed, including a request for disclosure from the respondents for sales data, input cost data and pricing methodology for the period from April 2004 to October 2007. Ultimately, the liquidators made their application to court pursuant to IA 1986, s 236 for production of this, asserting that it was needed in order to investigate whether (and, if so, to what extent) Comet suffered recoverable loss as a result of the cartel and to decide (for the benefit of Comet’s creditors) whether or not to commence formal proceedings for damages.

What were the respondents’ grounds of opposition, and what did the court decide?

The respondents opposed the liquidators’ application firstly on the ground of jurisdiction, and secondly on the ground of discretion, with each ground made up of separate heads:

Jurisdiction
Head one

The respondents submitted that the court had no jurisdiction to order production of anything beyond material relating to the company itself, or its business, dealings, affairs or property, and that this therefore excluded any pricing information relating to third parties.

The judge held that this information may very well bear directly on the business and affairs of Comet, and that the court therefore had jurisdiction to order production of that specified information.

Head two

The respondents submitted that the jurisdiction to order production did not extend to anything other than books, papers and records, and therefore did not include ‘information’ as sought by the liquidators.

The judge considered that it was not appropriate to mix up requests for information and documents, and held that the court had no jurisdiction to order production of information other than pursuant to a summons to appear or via interrogatories or the submission of witness statements (ie in accordance with the Insolvency Rules 1986, SI 1986/1925, r 9.2—the liquidators had not sought this relief). The judge did however agree that the liquidators could amend their application so as to seek documentation containing the sales and other data, which would then bring the request within the court’s jurisdiction. The judge also made it clear that documents included documents in electronic form.

The respondents further submitted that the documentation sought should be framed by particular books, papers or other records in their possession or control.

The judge considered that this was a factor to be considered on the issue of discretion, not jurisdiction. If an applicant adequately describes documentation by reference to the subject matter it contains, that should be sufficient. In this case, the respondents knew what documentation they had—the liquidators did not.

Head three

The respondents submitted that the court has no jurisdiction to order production of documents which are not in the possession or control of the respondents.

The judge accepted that point, but that none of the documentation sought by the liquidators fell into that category.

Discretion
Head one

The respondents submitted that the documents sought were not reasonably required for the purpose contended, and that it was clear from the letter before action that the liquidators had already decided to issue proceedings. The real purpose behind their application was to seek early disclosure of documents and gain an unfair advantage in litigation.

Having taken into consideration the correspondence between the parties, the asymmetry of information between the parties and the difficulties in proving causation in cartel damages claims, the judge held that the liquidators reasonably required the documents sought in order to properly carry out their functions and obligations.

Head two

The respondents submitted that production of the documents would be oppressive.

The judge accepted that the court had no jurisdiction to order the respondents to provide a summary of the information sought, which was an option the liquidators had offered to the respondents.

The respondents made the following further submissions:

  • The liquidators would have a clear and unfair advantage if they were to have available documents which would ordinarily only become available during disclosure or through witness evidence. The judge held that, in light of the admitted infringement by Embraco of the anti-cartel provisions, the only benefit was of early sight of the documentation, and that might lead to a saving of costs.
  • The English courts might not have jurisdiction to hear and determine any cartel damages claim, and that Whirlpool had not admitted any wrongdoing and was a mere customer of the Whirlpool group. The judge held that this was an important factor when carrying out the balancing exercise.
  • The order sought was extremely and unjustifiably wide and was in the context of a long period of time (three and a half years). The production of the documents would be burdensome and costly. The judge was not impressed by the respondents’ evidence on this point, which did not address the liquidators’ detailed evidence to the effect that the respondents must already have collated the relevant documentation bearing in mind the cartel finding and the various claims arising from it. The judge further held that the classes of documents sought were sufficiently described by reference to their subject matter.
  • As a cartel damages claim is variety of fraud, the claimant alleging fraud is required to prove their case. It was submitted that it is oppressive to use IA 1986, s 236 to run contrary to that requirement. The judge held that it was another important matter to consider, especially in relation to Whirlpool, although Embraco had admitted to being party to an infringing cartel.
  • The respondents were third parties, and an order made pursuant to IA 1986, s 236 is more readily made against an officer or former officer of the insolvent company than a third party. The judge accepted that point, and that it would be taken into account, but that it did not carry as much weight. The aim of price fixing manufacturers’ cartels is to achieve profits at the expense, usually, of retailers or consumers.

Having taken everything into account in conducting a balancing act, and being careful not to impose an unreasonable burden on the respondents, the judge held that it was appropriate to make the order sought (subject to the permitted amendment mentioned above). In doing so, the judge concluded that the benefit likely to be gained by the liquidators as a result of making the order substantially outweighed the burden likely to be imposed on the respondents.

What are the practical lessons for restructuring and insolvency professionals?

IA 1986, s 236 provides administrators, administrative receivers and liquidators with an important court-backed power of investigation into the assets, affairs and dealings of the company in respect of which they have been appointed. That extraordinary power must, however, be used reasonably, and the court will carry out a careful balancing exercise between the benefit to the office-holder, and the burden imposed on the respondent, as demonstrated in this case.

For office-holders, this case provides some guidance as to what the court can and cannot order, and calls for some precision when drafting the application as to what relief is sought, to ensure that it falls within the court’s jurisdiction.

This case also confirms that the office-holder needs to be as specific as possible as to the classes of documents sought, and that a fishing expedition will generally not be tolerated.

Further, although the court cannot order summaries of documents to be provided (as held in this case), the willingness of an office-holder to accept these, or to otherwise come up with options to minimise the burden on the respondent, would appear to be in the office-holder’s favour when it comes to the matter of discretion.

As a general rule, any indication that an office-holder has decided to issue substantive proceedings will cause them difficulties if they subsequently make an application pursuant to IA 1986, s 236. Care should therefore be taken in any pre-action communications.

For those advising respondents where production of documents is sought, it would appear to be important to properly consider what those documents are, whether those documents properly relate to the assets, affairs and dealings of the insolvent company (which is likely to be construed widely), whether those documents are in the possession or control of the respondent, and to discuss with the respondent what steps would need to be taken to produce those documents.

The office-holder should be asked to explain why the documents are required, and it is likely that the court would expect to see some evidence of engagement with the office-holder. In this case, the judge stated that the respondents had done nothing to help themselves in declining to respond positively to the liquidators’ requests.

*Randi blog update on 27 November 2014—it has been announced that the respondents will not be appealing this decision* 

Further Reading

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First published on LexisPSL Restructuring and Insolvency

Stephen Leslie, solicitor in the Lexis®PSL Restructuring & Insolvency team

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