FUNDING OF LIQUIDATIONS A DEBATE SET IN THE CONTEXT OF: INSTRUCTIONS TO COUNSEL

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1 FUNDING OF LIQUIDATIONS A DEBATE SET IN THE CONTEXT OF: INSTRUCTIONS TO COUNSEL Chair: Martha Maher of Guildhall Chambers Speakers: Hugh Sims, Guildhall Chambers Adrian Owen, Bond Pearce Martha Maher (1987) is a senior insolvency junior with wide experience in corporate and personal insolvency. She has numerous reported cases including Mullins v BKR Haines Watts. Her practice also embraces shareholder disputes, breach of directors duties, unfair prejudice petitions and partnership disputes. She has been on the panel of Treasury Counsel for over 10 years in the field of directors disqualification. Hugh Sims (1999) specialises in insolvency and commercial litigation. His insolvency work covers both corporate and personal. He is a contributor to Gore-Browne on Companies and was a contributor to Insolvency and the Enterprise Act 2002 (Jordans) and has had several articles published, including Escaping Bankruptcy (Insolvency Lawyer [2002] Issue 1) and Enterprise Act 2002 Corporate Wrinkles (Insolvency Lawyer (2004) Vol 17 No 4). He is a member of the Insolvency Lawyers Association and R3. Adrian Owen joined Bond Pearce from Freshfields in 1990, subsequently passing the JIEB examinations to qualify as a solicitor insolvency practitioner, whilst helping to establish the firm s corporate recovery practice in Southampton. In 1998 Adrian returned to the City and worked on a high profile restructuring in the Far East, before joining the Treasury Solicitor where he led a large litigation team working for the DTI and The Insolvency Service. In addition to public interest winding up and disqualification proceedings, Adrian worked on notable cases including Spectrum Plus and Ferrotech. Adrian rejoined Bond Pearce s Southampton office in

2 FUNDING OF LIQUIDATIONS A DEBATE SET IN THE CONTEXT OF: INSTRUCTIONS TO COUNSEL Chair: Martha Maher of Guildhall Chambers Speakers: Hugh Sims (Counsel) of Guildhall Chambers and Adrian Owen (Instructing Solicitor) of Bond Pearce The Instructions to Counsel in the case of Lightsout Limited are enclosed. A List of Authorities which may be referred to in the course of the discussion follows the Instructions. 2

3 IN INTENDED PROCEEDINGS IN THE HIGH COURT OF JUSTICE BRISTOL DISTRICT REGISTRY CHANCERY DIVISION IN THE MATTER OF LIGHTSOUT LIMITED AND IN THE MATTER OF THE INSOLVENCY ACT 1986 INSTRUCTIONS TO COUNSEL TO ADVISE Introduction 1. Instructing Solicitors act for Charles Smith of Doubtful & Co (Liquidator), who is the liquidator of Lightsout Limited (Company). Counsel is instructed to advise generally on the future conduct of the liquidation, and specifically in relation to possible claims that are available to the Liquidator and/or the Company. Background 2. The Company was incorporated in 1955 to acquire the well known lamp shade manufacturing business of Lightsout & Sons. This included its freehold factory premises in the old Bristol docks area (Factory). For many years the Company continued to be owned by the Lightsout family until they sold their shareholding at the height of the lighting boom in 2000 to John Fail and Paul Safe (Mr Fail and Mr Safe respectively) of Failsafe Securities PLC (Failsafe). Mr Fail and Mr Safe have been the sole shareholders and directors of the Company at all relevant times. 3. Initially the Company continued to trade much as before but by 2004 work at the Factory had reduced significantly and was confined to design, administration and the wholesale of bespoke lamp shades, the majority of the Company s manufacturing having been outsourced to the Far East in order to reduce costs. Despite this, the Company was coming under considerable pressure from its main customer, Lights R Us, to reduce prices even further and this, coupled with higher production costs, led to the near collapse of the Company in the summer of 2005, when it was balance sheet insolvent and faced with large claims from HM Revenue & Customs (HMRC) that it was not able to pay. 3

4 4. As a result, the Company was refinanced in August In broad terms this involved the sale of the Factory to Failsafe for 1m, with the Company relocating its remaining operation to Keynsham, where it took a 25 year lease of a unit at Failsafe s existing premises at a rent of 100,000 per annum. The 1m was used in part to repay a secured bank facility of 200,000 provided by the Company existing bank, Old Bristol Bank PLC (OBB), which had been guaranteed by Mr Fail and Mr Safe. The remainder was used to pay pressing creditors, although many creditors remained unpaid and, with hindsight, all that the refinancing appears to have achieved was a postponement of the inevitable. 5. As part of the restructuring, the Company s banking was moved to Avon Banking Corporation PLC (ABC), who provided an overdraft of 100,000 secured by the usual full debenture security. With the sale of the freehold, the only real security available to ABC was the Company s debtors (not subject to invoice discounting arrangements) and stock. Post- Spectrum, ABC accept that these assets all fall under their floating charge. 6. By November 2005, the Company was again in serious difficulties, having accrued large liabilities to HMRC. On this occasion, HMRC was not prepared to negotiate and HMRC therefore presented a petition in December 2005 for the winding up of the Company. The winding up order was made on 18 January 2006 and the Official Receiver was appointed as liquidator. The Liquidator was appointed by the Secretary of State in succession to the Official Receiver on 21 February Possible claims 7. The Liquidator considers that the sale of the Factory in August 2005 may have been a transaction at an undervalue that could be challenged pursuant to section 238 insolvency Act The main evidence for this is the fact that Failsafe sold the Factory on to Legal Pads PLC (Legal Pads), the well known developer of luxury dock side apartments for lawyers, in December The consideration is not known but, given that the site is being advertised on the basis that there will be 30 luxury apartments for the discerning Bristol lawyer with prices starting from 500,000, it is difficult to see how Failsafe could have avoided making a substantial profit at the expense of the Company. Counsel is accordingly asked to advise on the possible claim which the Liquidator may have against Failsafe and/or Legal Pads. 8. The Liquidator also considers that there may be a claim against Mr Fail and Mr Safe. First, there is the possibility that in paying off the OBB bank debt which they had personally guaranteed, Mr Fail and Mr Safe preferred themselves at the expense of other creditors and 4

5 that, accordingly, a claim is available to the Liquidator pursuant to section 239 Insolvency Act Secondly, it seems clear that in agreeing the refinancing and allowing the Company to enter into an onerous new lease, Mr Fail and Mr Safe were in breach of their fiduciary duties to act in the best interests of the Company and should accordingly be held accountable by the Company and/or by the Liquidator in a misfeasance action pursuant to section 212 Insolvency Act Funding 9. Apart from the need to investigate the claims referred to above, the reason why this case was transferred by the Official Receiver was the fact that the Company had some limited assets that could be realised by a liquidator. Sums received to date from the immediate sale of equipment and stock, net of the costs of sale, are 30,000. It is anticipated that the debtor book will realise a further 150,000. As at the date of liquidation ABC was owned approximately 190,000 and preferential claims are thought to be no more than 10,000. Counsel is accordingly asked to advise whether all or any part of the sale proceeds can be used to fund the potential claims. 10. As an alternative, Instructing Solicitors ask Counsel to consider whether this is a case which is suitable for after the event legal costs insurance with Instructing Solicitors being retained to act on a conditional fee agreement. If so, there remains the issue of how the insurance premium will be funded. Initial informal discussions with ABC, HMRC and the two largest trade creditors suggest that there is little appetite for the establishment of a fighting fund, although the trade creditors have made 5,000 available to fund the initial advice which is now sought. Other issues 11. Counsel may be aware from the press that Failsafe was raided by the police earlier this year and is now subject to an investigation by the Serious Fraud Office. It is thought that as a result Mr Fail and Mr Safe may well be charged with fraud offences later this year. Mr Fail has so far refused to return from his holiday home in Spain to answer questions, but has issued a statement through the leading West End criminal defence solicitors, Ali, Bye & Co, claiming his innocence. Mr Safe, by contrast, has apparently been admitted to hospital for an unspecified life threatening illness. 5

6 12. Following preliminary research by Instructing Solicitors, it would appear that Mr Safe is the joint owner of the matrimonial home with his wife, a property in Bristol. Instructing Solicitors are conducting further enquiries in relation to Mr Fail but, at the time of writing, have been unable to identify whether or not he has any assets registered in his name in this country. The asset position of Failsafe is also under investigation. Conclusion 13. Counsel is asked to advise initially in conference and subsequently in writing. If any further information is required, he should not hesitate to speak with Mr Hart of Instructing Solicitors. Feint, Hart & Co Bristol May

7 IN THE HIGH COURT OF JUSTICE BRISTOL DISTRICT REGISTRY CHANCERY DIVISION IN INTENDED PROCEEDINGS IN THE MATTER OF LIGHTSOUT LIMITED AND IN THE MATTER OF THE INSOLVENCY ACT 1986 LIST OF AUTHORITIES 1. Sections 115, 175, 212, 238, 239 and 423 Insolvency Act Amended Rule Insolvency Rules Re Barleycorn Enterprises Limited [1970] Ch Lewis v IRC, Re Floor Fourteen Ltd [2001] 3 All ER 499, [2002] BCC 198, [2002] BCLC Buchler v Talbot, Re Leyland DAF [2004] 2 AC Clause 868 of the Company Law Reform Bill, proposed new section 174A Insolvency Act Re Wilson Lovatt & Sons Limited [1977] 1 All ER Metalloy Supplies v MA (UK) Ltd [1997] 1 WLR 1613, [1997] 1 BCLC Re Yagerphone Ltd [1935] Ch Grovewood Holdings Plc v James Capel & Co Ltd [1995] Ch 80, [1995] BCC Ward v Aitken, Re Oasis Merchandising Services Limited [1998] Ch ANC Ltd v Clark Golding and Page Ltd [2001] BPIR 568, [2001] BCC Re Exchange Travel (Holdings) Ltd [1997] BCC 479, [1997] 2 BCLC Norglen Ltd (in liquidation) v Reeds Rains Prudential Ltd [1999] 2 AC 1, [1998] BCC Camdex International Ltd v Bank of Zambia [1998] QB Re Speedfix Building Products Pty Ltd (in liquidation) (1987) 5 ACLC Walker v Walker [2000] 1 All ER Ninemia Maritime Corporation ( The Niedersachsen ) [1983] 1 WLR 1412, [1984] 1 All ER DPR Futures Ltd [1989] 1 WLR RBG Resources Plc v Rastogi [2002] BPIR

Insolvency Malmaison, Birmingham

Insolvency Malmaison, Birmingham Insolvency Seminar @ Malmaison, Birmingham Wednesday 8th February 2012 Malmaison, One Wharfside Street, Birmingham, B1 1RD Good and concise seminar which I would not hesitate to attend again and recommend.