The importance of evidence to support a conspiracy theory—Capital For Enterprise Fund A LP v Bibby Financial Services

Simon Mills, barrister at Five Paper, and Harold Brako, partner at Shoosmiths LLP, discuss Capital For Enterprise Fund v Bibby Financial Services and argue that the case serves as a reminder about the dangers of pleading a claim in conspiracy without first rigorously analysing the available evidence.

Original news

Capital For Enterprise Fund A LP and another v Bibby Financial Services Ltd [2015] EWHC 2593 (Ch), [2015] All ER (D) 117 (Nov)

The Chancery Division considered whether there had been an unlawful means conspiracy in circumstances where the director of an insolvent company had conspired to transfer the assets of that company to a company that he controlled. The court held that, in the circumstances, the claimants had failed to establish the loss they had alleged in the action they had brought for damages. Accordingly, the claim failed.

What was the background to the case?

A software company (Qire) became insolvent, and a director and shareholder (Mr Cooper) was advised by an insolvency practitioner who suggested that Qire should enter into a pre-pack administration to enable its assets to be sold to a newco (Qivox), a company owned by Mr Cooper (30%), and one of Qire’s principal creditors, Voxeo (70%). It was inevitable there would be a shortfall for the creditors, including the claimants. Bibby agreed to provide finance to Qire and Qivox by purchasing their debts, but Mr Cooper did not inform the board of Qire about the planned restructure. Bibby then purchased the debts of Qire and it entered administration. Qivox continued the business of Qire using its software, but Capital For Enterprise Fund (CFE) and Maven Capital Partners (Maven) blocked the sale of Qire’s assets to Qivox. The claimants lost their £2m investment in Qire.

The claimants, as assignees, subsequently compromised any claims they had against Mr Cooper, Qivox and Voxeo and transferred Qire’s software and intellectual property rights to Qivox in return for £595,000.

What was the main argument?

CFE and Maven claimed the balance of their losses from Bibby on the grounds that Bibby’s involvement in agreeing to fund Qire/Qivox in the pre-pack administration was part of a conspiracy between them, Mr Cooper and Voxeo to transfer the business and assets of Qire to Qivox by unlawful means that had the inevitable consequence of causing the claimants loss.

Bibby argued that its role in the restructure was a common commercial arrangement that was lawful. It did not know that the Qire board had not been informed about the restructure, and it denied that any loss was caused to the claimants as a result of what was alleged to have been the conspiracy because Qire was insolvent. In any event, Qire’s assets were worth less than the £595,000 paid by Qivox and therefore the claimants could not have suffered any loss.

What were the legal issues the judge had to decide in this case?

Unlawful means

The allegation of unlawful means raised two important points:

  • did the transfer of Qire’s business to Qivox by a pre-pack administration involve unlawful means consisting of Qire breaching its obligations under its finance agreements with the claimants, and Mr Cooper breaching his fiduciary duties as a director of Qire
  • was it sufficient for the claimants to prove Bibby knew the facts on the basis of which the acts were unlawful (per Belmont Finance Corp v Williams Furniture Ltd (No2) [1980] 1 All ER 393), or was it a defence for Bibby to say it believed it had a lawful right to do what it was doing (per Meretz Investments NV and another v ACP Ltd and others [2007] EWCA Civ 1303, [2007] All ER (D) 156 (Dec))? Which of these conflicting decisions of the Court of Appeal should the judge follow?

Causation and loss

If the conspiracy was proven, did it cause the claimants any loss? Damage is the essence of a claim founded in conspiracy and, therefore, it is a defence for a defendant to show that no loss has been caused to the claimant—although the court is not limited to awarding only the loss that can be strictly proven.

What were the main legal arguments put forward?

Unlawful means and breach of finance agreements

Bibby argued that this could not count as ‘unlawful means’ because Qire was insolvent. As a result of the insolvency, in exercising their functions the directors were obliged to have regard to the interests of the creditors as a class, and were not entitled to have regard only to the interests of the members (West Mercia Safetywear Ltd v Dodd [1988] BCLC 250). The directors were therefore obliged to put Qire into administration and thus the breach of the finance agreements was the inevitable consequence of protecting the creditors by formal insolvency process.

Unlawful means and breach of fiduciary duties

Bibby contended that Mr Cooper did not breach his fiduciary duties to Qire because, firstly, he did not act in a position of conflict by becoming a member of Qivox with the intention of seeking to purchase the assets of Qire in the pre-pack administration, or, secondly, he was not obliged to disclose his interest in Qivox to the Qire board because Qivox was not trading and was not in competition with Qire.

Unlawful means and knowledge

The claimants contended that it was sufficient for the claimants to prove that Bibby knew the facts on the basis of which the acts were unlawful (Belmont v Williams). Bibby submitted that this was not—or is not any longer—the law following the decision of the Court of Appeal in Meretz Investments v ACP in which the majority held that it would be a defence if an alleged conspirator believed he had a lawful right to do what it was doing.

What did the judge decide and why?

Firstly, Qire breaching its finance agreements did not constitute unlawful means for the tort. Qire was not in a position to meet its obligations under the agreements because it was ‘hopelessly insolvent’ and ‘could not meet its obligations to CFE or to its other creditors’. Indeed, ‘the claimants had been giving consideration to whether itself to appoint administrators’ and ultimately did so ‘because Maven appreciated that Qire was hopelessly insolvent’ (para [88]).

Secondly, Mr Cooper breached his fiduciary duties to Qire by planning and carrying into effect the formation of Qivox and the transfer to it of Qire’s business, and that constituted unlawful means for the tort. The only persons who could benefit from the plan were Mr Cooper and Qivox, and he concealed the truth from the Qire board (para [89]).

Third, the judge held that he was bound to follow the decision of Norris J in First Subsea Ltd v Balltec Ltd and others [2014] EWHC 866 (Ch), [2014] All ER (D) 239 (Mar)—who at para [157] held he was bound to follow Belmont v Williams rather than Meretz Investments v ACP. Although Asplin J followed Meretz Investments v ACP in Lictor Anstalt v Mir Steel UK Ltd and another [2014] EWHC 3316 (Ch), [2014] All ER (D) 186 (Oct), First Subsea was not cited to her (paras [13]-[14]).

Fourth, Qire was hopelessly insolvent and, on any analysis, the best that could be hoped for was for the company to be placed into administration and for its assets to be sold, probably on a pre-pack basis (para [115]). The only purchaser was likely to be Voxeo, whose offer to purchase the assets had been blocked by the claimants. The highest offer for the assets was £150,000, so although the judge held that there was no evidence as to the true value of the assets, it was ‘inconceivable that they could be worth more than the £595,000 paid’ by Qivox (para [118]) and therefore the claimants failed to establish that they had been caused any loss and damage.

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

The decision is the second of two first instance decisions in which a judge has held that he was bound by Belmont v Williams rather than Meretz Investments v ACP, so that it is sufficient to prove that an alleged conspirator knows the facts on the basis of which the acts were unlawful, and it is no defence if he believed he had a lawful right to do what he was doing. Reversing Belmont v Williams will require further development of the law at Court of Appeal or—possibly—Supreme Court level (para [13]).

What practical lessons can those advising take away from this case, especially in relation to pre-pack sales?

In relation to pre-packs, three points arise:

  • where one director of a company about to enter administration is the principal contact, ensure that they are not acting alone and that they are authorised to arrange for the qualifying floating charge holder to put the company into administration
  • where it is proposed that any of the directors/shareholders of oldco will not be involved in newco, ensure that they are aware of—and consent to—the proposed pre-pack and its terms
  • failure to ensure transparency and bear in mind the requirements of Statement of Insolvency Practice 16 can give rise to suspicion, particularly in a connected party transaction

This case serves as yet another warning about the dangers of pleading a claim in conspiracy without first rigorously analysing the available evidence. At the costs hearing, the judge noted that damage was an essential element of a conspiracy by unlawful means and that as the claimants had always been aware that Qire was insolvent, they should have been advised that there was no claim before the claim against Bibby was issued. The claimants were ordered to pay 70% of Bibby’s costs, so their decision to launch speculative proceedings transpired to be an expensive one (see Capital For Enterprise Fund A LP v Bibby Financial Services Ltd (Costs) [2015] Lexis Citation 284, [2015] All ER (D) 222 (Nov)).

Do you have any predictions for future developments?

Although the case provides some helpful guidance as to the requisite mental element required on the part of conspirators to found the cause of action, it may be a long time before the tension between the conflicting Court of Appeal decisions in Belmont v Williams and Meretz Investments v ACP is resolved.

Simon Mills principally works in banking and finance, insolvency and asset recovery. He is widely recognised in the field of factoring, invoice discounting and receivables finance law and has been engaged to edit the forthcoming edition of Atkins Court Forms on ‘Sale and Supply of Goods & Services’, vol.35 (2016 Reissue).

Harold Brako is head of the Manchester office of Shoosmiths LLP and leads the receivables finance & litigation practice. He is experienced in handling all aspects of receivables finance, asset finance and banking disputes, including contractual/commercial disputes, recoveries involving fraud, securities enforcement/reviews, injunctive processes and insolvency proceedings.

Interviewed by Barbara Bergin.

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

Further Reading

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First published on LexisPSL Restructuring and Insolvency

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