Ultraframe (UK) Ltd v Rigby & Ors

LADY JUSTICE ARDEN: This is an appeal with the permission of Chadwick LJ against the order of His Honour Judge Maddocks, sitting as a judge of the High Court of Justice Chancery Division at Liverpool on 16th August 2004. By his order the judge ordered that the application of the appellant, to whom I shall refer as Ultraframe, be struck out. The application was dated 11th August 2004 and it was for an order that deeds of assignment between Quickfit Conservatories Limited and the second respondent, Gary John Fielding, dated 3rd January 2001, 30th April 2001 and 16th August 2003, be set aside, and, further, for an order that time for service of the application on Mr Rigby, the liquidator of Quickfit Conservatories Limited, Mr Fielding and the Burnden Group be abridged.

That application was made pursuant to sections 167(3) and 168(5) of the Insolvency Act 1986. Section 167(3) provides that the exercise by the liquidator in a winding up by the court of the powers conferred by this section is subject to the control of the court and any creditor or contributory may apply to the court with respect to any exercise or proposed exercise of those powers. I need not go into the powers conferred by section 167.

Subsection 168(5) provides:

The application was supported by the witness statement of Mr Clavell-Bate, dated 11th August 2004. Mr Clavell-Bate is a partner in Eversheds LLP, the solicitors for Ultraframe.

I now turn to the background. Quickfit Conservatories Limited (which I will call "QC") was ordered to be wound up by the court on 26th November 1995. Prior to its liquidation QC had carried on business selling conservatories. The principal director and shareholder was Mr Davis who ran a number of companies. Mr Davis, or his companies, owned the intellectual property rights in a system of conservatory construction called the Quickfit System.

Mr Davis was made bankrupt. In November 1998 his trustee in bankruptcy started proceedings to which the second respondent on this appeal, Mr Fielding, was a party, concerning the ownership of the intellectual property rights. I should add that Mr Fielding is the controlling shareholder of the third respondent, TBG. The first respondent to this appeal is the liquidator of QC, Mr Kenneth Brian Rigby.

In May 1999 Ultraframe took over the proceedings brought by Mr Davis's trustee in bankruptcy. On 20th October 2000 the Secretary of State appointed Mr Rigby liquidator of QC. On 19th December 2000, that is about two months after the appointment of Mr Rigby by the Secretary of State, Mr Rigby wrote to the creditors of QC stating that he proposed to sell the intellectual property rights belonging to QC to Mr Fielding and TBG. Ultraframe denied that they received this letter.

On 3rd January 2001 Mr Rigby as liquidator of QC executed an assignment dated 3rd January 2001, the first assignment, and assigned Mr Fielding all the intellectual property rights in the conservatory roofing system owned by QC for £5,000. By an assignment dated 9th February 2001 Mr Fielding assigned those rights to TBG for £25,000.

Ultraframe has two subsidiaries called Northstar Limited and Seaquest Limited. These companies were originally owned by Mr Davies.

On 15th March 2001 Ultraframe commenced an action against TBG and Mr Fielding based on the assignment by Mr Davis's trustee in bankruptcy to it of his intellectual property rights. That action ultimately failed.

On 30th April 2001 Mr Rigby assigned to Mr Fielding all his right, title and interest in to any claims, remedies and rights in respect of the infringement of QC's intellectual property rights in consideration of a further sum of £5,000. On 28th March 2002 Mr Fielding assigned these rights to TBG.

On 22nd May 2001 Mr Fielding and TBG served a defence in the action to which I have referred relying on the first and second assignments. So those assignments came to the attention of Ultraframe.

On 18th July 2001 Eversheds wrote to Mr Rigby informing him of the litigation between Ultraframe, on the one hand, and Mr Fielding and TBG on the other. On 20th July 2001 Mr Rigby responded to Eversheds.

On 10th January 2002 Mr Rigby convened a final meeting of creditors. On 22nd November 2002 Northstar and Seaquest commenced an action, called the new action, claiming that TBG's business belonged to them. They alleged that Mr Fielding was a de facto director, or a shadow director, of Northsea and Seaquest from October 1998 and that their businesses were diverted by Mr Fielding to TBG.

On 16th March 2003 Mr Rigby was reappointed liquidator of QC by the Secretary of State pursuant to section 137 of the Insolvency Act 1986. On 28th March 2003 Mr Rigby assigned to Mr Fielding all the claims and/or causes of action and/or remedies that QC had or might have arising out of the misappropriation of the goodwill and/or business and/or assets of QC by any other person. The consideration was stated to be £1,000. On 4th November 2003 Mr Fielding assigned all those rights to TBG for the same sum.

On 23rd March 2004 Mr Rigby wrote to the creditors of QC enclosing a summary of his receipts and payments. However, this letter was not received by Ultraframe.

On 8th March 2004 Ultraframe learned of the third assignment, although there is some dispute about the dates.

On 11th June 2004 TBG applied to the court to amend its defence in the action brought against it by Northstar and Seaquest in order to rely on the first assignment. However, on 18th June 2004, this application was refused. Nonetheless, on 4th August 2004, TBG started new proceedings against Ultraframe relying on the third assignment and claiming that Northstar and Seaquest stole their businesses from QC.

On 11th August 2004 Ultraframe issued its application to set aside the deeds of assignment. This is the application to which I have already referred. As I have said, it came before His Honour Judge Maddocks. He heard it on 16th August 2004 and on 17th August 2004 he gave judgment striking out the application.

I now turn to summarise the judge's judgment. Having set out the facts, the judge made the following findings about the first and second assignment:

The judge then held that it was well settled that a decision by a liquidator as to the realisation of the assets will only be taken to be interfered with by the court if it is taken in bad faith, or is so utterly unreasonable and absurd that no reasonable person could have done it. The judge referred to Re Edennote Limited [1996] 2 BCLC 389 to which I will have to refer below.

The judge held that the evidence in support of the application did not begin to satisfy that test. The value of the intellectual property rights was questionable. Ultraframe had expressed a general interest in 1997, but not pursued it. Ultraframe had had ample opportunity to challenge the assignments, but instead allowed the litigation to proceed. The judge recognised that the lapse of time was less in relation to the third assignment, but he noted that no objection had been taken to it. He held that there was no evidence that Mr Rigby had acted improperly. On the contrary, he had kept creditors informed. In addition, no case had been made out against Mr Fielding or TBG that they had notice of any propriety on the part of Mr Rigby. Finally, the judge held that the application was inspired at a late stage not genuinely to increase the realisations for the creditors, but as a tactical step in the main litigation.

Ultraframe had contended that its delay was due to the fact that it had only just become aware that the assignments were at an undervalue. The judge held that if that were true it would have been an apparent to Ultraframe all long, but it had only just become aware how the assignments might be deployed in litigation. That was not a proper reason for a delay. It was not a reason for allowing the application. For those reasons the judge struck out the application.

On 12th November 2004 Chadwick LJ gave permission to appeal and his reasons were as follows. In the light of the decision of this Court in Faryab v Smith [2001] BPIR 246, there was a real prospect of persuading the Court that the judge was wrong in his view that the challenge to the liquidator's decision to exclude assignments of the intellectual property rights formerly vested in Quickfit Conservatories Limited was so obviously hopeless that the application under section 167(3) and 168(5) of the Insolvency Act 1986 should be struck out as an abuse of the process. The judge does not refer to Faryab v Smith in his judgment, but it is clear from the transcript we have been shown that he was in fact taken to that authority.

I now turn to the appellant's submissions. Mr Andrew Hochhauser QC, who appears on this occasion but not below for Ultraframe, makes an important procedural point that the judge refused to give Ultraframe the opportunity to adduce evidence on its application. The appointment on 16th August 2004 had been fixed for directions only. The estimated length of the hearing was stated in the application to be 30 minutes. Mr Rigby produced certain documents at the hearing which were relied upon by Mr Fielding and TBG. Ultraframe wanted to adduce evidence in answer to these documents if that evidence was admitted. The judge did not accede to Ultraframe's argument that the evidence should be excluded and refused Ultraframe's request that it should be able to file evidence. Mr Hochhauser contends that the procedure was a substantial irregularity.

Mr Hochhauser also submits that the judge erred in law. Under sections 167 and 168 of the Insolvency Act 1986 the court has jurisdiction to reverse the decision of a liquidator where it is satisfied that it was taken in some way mala fides, or was so perverse as to demonstrate that no liquidator properly advised could have taken it without taking into account the possibility that a third party might well have made a better offer than he to whom it was sold. Mr Hochhauser submits that where those circumstances apply that is just such a decision that the Court can reverse. In support of his propositions Mr Hochhauser relies on the decision of this Court in Re Edennote Limited above.

Mr Hochhauser submits that the evidence in support of the application stated that it appeared that:

In Papaloizou [1999] BPIR 106, Browne-Wilkinson J held that a trustee should not assign a cause of action back to the bankrupt "unless clear and certain benefits are obtained for creditors". The same principle, on Mr Hochhauser's submission, should apply to assignments to third parties. In the present case there was no clear benefit to creditors. Indeed, there was no dividend to creditors at all following the first assignment. The dividend following the third assignment was only 7.90 pence.

Mr Hochhauser further submits that it was not necessary for Ultraframe to adduce evidence that Mr Fielding was aware of the impropriety of the part of Mr Rigby. In this connection Mr Hochhauser relies on the statement of Nourse LJ in Re Edennote Limited at page 391. However, I would interpose that in that case it was not suggested that Mr Venables had acted improperly. Nourse LJ noted that no formal defence had been raised that in taking the assignment the assignee had been a bona fide purchaser for value and without notice.

As to notice, Mr Hochhauser submits that this is only relevant to a defence by the assignee that he did not have notice and was a bona fide purchaser for value. If this is the assignee's case, then, Mr Hochhauser submits, it is for the assignee to raise that point. Mr Hochhauser further submits that on the facts of this case it would not in fact be open to Mr Fielding to prove that he was a bona fide purchaser for value and without notice.

That submission clearly puts in issue as a question of fact what notice and knowledge Mr Fielding had at the time of the assignments. The witness statement in support of the originating application does not make the position clear. Indeed, it does not state, as was the case, that Ultraframe learned of the first and second assignments in the first half of 2001, when the second and third respondents relied on them in their defence in the action brought against them by Ultraframe. Ultraframe did not take steps to launch that application until August 2004. Mr Hochhauser submits that, without more, delay should not be an absolute bar to the application in this case. In any event, in order to adjudicate on delay evidence needs to be adduced as to when Ultraframe learnt of the assignments and what Ultraframe did or did not do between learning of the assignments and the application.

I interpose that it seems clear that Ultraframe learnt of the first and second assignments when the defences were lodged in the adverse actions. However, it does not follow that Ultraframe knew about the inadequacy of the consideration or of the investigations.

Mr Hochhauser goes on to submit that Ultraframe should have been accorded the opportunity to explain the delay so that the significance of the delay could have been assessed in the light of all the circumstances. Mr Hochhauser further submits that it is no bar to the application that it was not made to increase the distribution to creditors, but as a tactical step on the part of Ultraframe in its litigation with Mr Fielding and TBG.

Mr Hochhauser made detailed submissions with respect to the content of the statement put in by Mr Rigby at the hearing before His Honour Judge Maddocks. I have referred to this statement above. In particular Mr Hochhauser submits that Mr Rigby did not give proper notice of his reappointment by notice to creditors in accordance with section 137(4) of the Insolvency Act 1986. He also submits that Mr Rigby did not write to creditors in connection with the first assignment until 19th December 2000, two months after his appointment, and he did so to inform them that he would be selling "certain rights" of QC in 14 days in the absence of other offers. In effect, creditors were given about four working days over the Christmas holiday period to act on this letter. Ultraframe's position as regards this letter is that, if the letter was sent, it never received it. Mr Hochhauser submits that Mr Rigby did not explain why he felt it necessary to act on the purchaser's indication that the transaction had to be completed within 14 days.

In summary Mr Hochhauser submits that there was no proper explanation as to why creditors were only given the shortest notice just before Christmas in relation to the first and second assignments. Ultraframe were denied the opportunity of putting in evidence to show that they received none of the letters to creditors that Mr Rigby sent.

As regards the third assignment, by now Mr Rigby undoubtedly knew about the litigation. Even if he had made the most preliminary investigation into that litigation, of which he was aware as a result of the letter of 18th July 2001 from Eversheds, he would have discovered that Mr Fielding and TBG were defendants to a multi-million pound claim and that the assignment was wanted as a possible defence statement claim. It would have been obvious to him that the assignment was worth more than £8,000. He should also have realised that Ultraframe would have been willing to pay far more than that sum, if only because the costs of having to deal with the consequences of the assignment would be far in excess of that amount.

As respects Mr Fielding and TBG, Mr Hochhauser submits that there was no evidence in which they claimed to be a bona fide purchasers for value. As regards delay, the important assignment, on Mr Hochhauser's submission, was the third assignment and the application was brought within four months of Ultraframe learning of the assignment. Although Ultraframe attaches most significance to the third assignment, it considers that it was appropriate for it to challenge the first two assignments at the same time. Mr Hochhauser does not submit on this application that the third assignment was bad in law. Mr Hochhauser submits it is voidable and can be set aside.

Mr Rigby appears in person on this appeal, and we are grateful to him, but Mr Snowden QC, for the second and third respondents, made his submissions first. He submits that the judge was correct to strike out the application in effect for the reasons he gave. Ultraframe had known about the first and second assignments since 2001 and had raised no objection and made no offer of its own. As to the third assignment, it had clearly known about this for a number of months, although the exact date when it became aware of it was unknown. The effect of Ultraframe's application was to create a difficult situation for the liquidator because he had convened the final meeting of creditors which was due to be held on 19th August 2004. I should add, with respect to that submission, that there was nothing to prevent an adjournment of that meeting.

Mr Snowden appeared before the judge. He informs us that he asked the judge to strike out the ordinary application because there were no reasonable grounds on which it could succeed; that is the application made under CPR 3.4(a). Mr Snowden does not submit that Ultraframe had no standing under section 167 or section 168. He submits that it is a person aggrieved for the purposes of section 168 and a creditor for the purposes of 167. However, he submits that the court can take into account its delay and the fact that its application was inspired by a desire to assist its position in litigation rather than the position of its subsidiaries. He submits that those factors would inevitably lead the court to dismiss the application. Accordingly, it should be struck out at this stage.

As to delay, Mr Snowden relies on the letter of 18th July 2001, although he accepts that the highest he can put it is that Ultraframe did not think that they had a right to set aside the assignment at the time of that letter, or rather they did not expressly state any matter which would lead Mr Rigby to believe that they had or had not such a right. Mr Snowden stresses that the conduct of Mr Rigby is not to be assessed with hindsight, which is correct. His conduct must be considered on the basis of the facts known to him at the time. He had no background to the litigation. Indeed, on Mr Snowden's submission, he had no knowledge of Ultraframe's interest.

On Mr Snowden's submission a person seeking the Court's intervention under section 167 or 168 has to do so in his capacity as a person interested in the litigation, or to have a grievance about the process of the litigation. He submits that where an application under those sections is made by a creditor to obtain a litigation advantage, relief under those sections may not been given. He points to the fact that Ultraframe is only a creditor for £12,000 in the liquidation. I interpose that, while the total amount owed to creditors is approximately £110,000, the admitted claims (excluding amounts owed to preferential creditors) are only about £20,000 in total, including Ultraframe. So Ultraframe has a significant voice among the creditors of QC. The figures I have given are, of course, exclusive of interest. In support of his submissions on the law Mr Snowden relies particularly on the authorities of Re Edennote Limited and Mahomed v Morris [2000] 2 BCLC 536.

In short, Mr Snowden's case is that no court would intervene in this situation. The conduct of the liquidator was unimpeachable. In 2001 he advertised for creditors and sent notices to them. He relies on Ultraframe's delay following the 2001 assignment in particular. He submits that the assignments could not be set aside unless Mr Fielding was aware of the impropriety. However, I should make the point that that question of law has not been argued on this application, and, indeed, it would not assist if it had been argued, in the light of Mr Hochhauser's submission that Mr Fielding must have had the requisite notice for the reasons he gives.

I would quote paragraphs 40 and 41 of the skeleton argument of the respondents:

I now turn to Mr Rigby's position. Mr Rigby placed before this Court a long statement carefully exhibiting the relevant documents. His statement makes it clear that his case is that he tried to contact Mr Davis about Mr Fielding's offer in 2000, that he had asked a patent agent, and also a colleague in the appropriate department of his own firm, to assist him on the value of the intellectual property rights and, further, that he personally did not know of Ultraframe's letter to the Official Receiver in 1997. He accepts that he was reappointed as liquidator at the instigation of Mr Fielding's agents.

As to the question of seeking further offers, Mr Rigby's case is that by implication his letter to creditors of 19th December 2000, and his public advertisement, represented an offer to creditors which would enable them to come forward with their own offers. I should say that those documents do say that Mr Rigby proposes to accept the offer he has received unless further offers are made to him.

As to the 14 day limit imposed by Mr Fielding, Mr Rigby understood that the urgency was to do with the use Mr Fielding was already making of the applications which he was to buy from Mr Rigby. As it was not necessary on this application to reach any conclusion about Mr Rigby's conduct in relation to the assignments, we did not invite Mr Rigby to elaborate on his evidence, or to make further submissions as to what had taken place.

I now turn to my conclusions which I hope I can state briefly in the light of the long introduction I have given.

Because the question on this appeal is whether the application could properly be struck out as having no real prospect of success, Mr Snowden has to submit that no court would grant relief on the claim in the ordinary application in this case and the witness statement in support. Mr Snowden accepts, as indeed he must, that as Ultraframe is a creditor it has standing: see Re Edennote Limited at 393E to F per Nourse LJ, with whom Millett LJ agreed. However, Mr Snowden submits that the Court would not grant relief, first, because of the dual role of Ultraframe and, second, because of its delay.

To explain my conclusions I need to go into the authorities. In essence they establish the proposition for which Mr Hochhauser contends. The way it was put in ReEdennote Limited by Nourse LJ was this. Counsel in that case had accepted that the authorities propounded the correct test:

Nourse LJ held:

In the recent case of Faryab v Smith the Court of Appeal applied the same test, but there was one further point made. At paragraph 38 of the Court's judgment, the judgment was given by Robert Walker LJ, with whom Judge LJ agreed, Robert Walker LJ said this:

There are two points that I particularly draw from that passage. The first is that when the liquidator is considering whether to assign a cause of action, it is most unsatisfactory if he, not being a lawyer, proceeds on the basis of his own valuation. Secondly, the passage emphasises the desirability of the procedure described by Lord Hoffmann in Stein v Blake at page 260, namely that where an assignment is made by a trustee, and the same must apply to a liquidator, the practical course in the interests of the creditors (and in the case of bankruptcy, the bankrupt) is for the assignment to take place on the basis that the right to a percentage of the proceeds is reserved. I make those points. I appreciate that, as Mr Snowden submits, there are factual differences between the Faryab case and this case, but I do not think those differences affect the points of principle to which I have just referred.

Applying the test laid down by Nourse LJ in Re EdennoteLimited, the question here is, did the claim establish a real prospect of success? In my judgment, while the claim may not succeed at trial, it certainly disclosed a sufficient prospect of success to avoid being struck out. It is not desirable that I go into the claim in any great detail. It is sufficient to state four reasons. First, in the case of the third assignment there was no evidence that the liquidator investigated the potential claim for misappropriation of goodwill and assets of any of the directors of the company, or made an investigation into the other evidence available to him, such as the accounting records of the company, to evaluate the strength of any claim that the goodwill and assets had been misappropriated.

Second, there is no evidence that the liquidator entered into any negotiation with Mr Fielding, or asked him for a share of the proceeds of the claim, or, indeed, a share of the proceeds of using the intellectual property rights or the infringement claims.

Mr Fielding clearly was eager to take the assignments. He had gone back to the liquidator three times for three assignments and he had taken the step of getting Mr Rigby reappointed by the Secretary of State. Moreover, the fact that the second assignment was followed by the assignment to TBG for £25,000 suggests, although Mr Rigby may not have known this, that Mr Fielding would indeed have paid more if he had been pushed.

Third, there was no evidence that Mr Rigby looked for other offers beyond what he said in his circular of 19th December 2000 and in the advertisement of May 2001, that he proposed to accept TBG's offer unless he received other offers.

Fourth, the fact that in December 2000 the circular notice of December 2000 was sent out over the Christmas period with a 14 day deadline, which gave creditors very little time to consider the possibilities, raises the question why that was done.

Accordingly, this case could only be dismissed on a summary basis if Mr Snowden's points on the dual role of Ultraframe, as both a creditor of QC and a party interested in litigation with a third party, and delay are "knock-out" points.

I take first the dual role. In Re Edennote Limited Nourse LJ said this, making reference to the fact that the applicant was a disappointed purchaser:

In my judgment, Nourse LJ is not dealing with a situation where a person has a dual role. He is simply dealing with the situation where the applicant is not a creditor and who is disappointed in some other capacity.

In the Mahomed case Peter Gibson LJ said this:

Mr Snowden submits that Peter Gibson LJ, with whom the other members of the Court agreed, was in this paragraph laying down the principles on which the Court's intervention is based. In my judgment, that is not the true interpretation of this paragraph. As I read it Peter Gibson LJ is again dealing only with standing, see, in particular, the sentence beginning:

In those sentences Peter Gibson LJ is dealing with the question of when a person can bring an application under section 168(5) and the paragraph has to be read in that context.

Accordingly, the mere fact that Ultraframe was not only a creditor of QC, but also wished to use the assignment for its own purposes in other litigation -- indeed, that is probably its primary purpose -- would not preclude it from bringing a claim. Nor, as I see it, is there authority which compels the Court to dismiss the claim because it has those two capacities and that primary motivation.

I now turn to delay. As I see it the judge had no evidence to say that the claim would necessarily fail on the basis of delay. For this purpose there would have to be delay disentitling Ultraframe, without more, from having their claim adjudicated upon out. In my judgment, the claim and witness statement did not satisfy that test. The judge would have to have evidence, for instance, as to when Ultraframe learned of the assignments and their reasons for not taking action at that stage.

I now turn to what I term the important procedural point. Ultraframe issued its application on short notice. As I have explained, it sought leave from the judge to serve short on the respondents. Indeed, the purpose of the application on 16th August was to obtain that permission and further directions as to evidence. Shortly before the hearing there was an exchange of letters between solicitors. On 12th August 2004 Addleshaw Goddard for the second and third respondents wrote to Eversheds:

On 13th August 2004 Eversheds replied to Addleshaw Goddard. I need only quote part of the letter:

When the hearing began Miss Stubbs asked for leave to serve the application short. Mr Snowden asked for the claim to be struck out. Miss Stubbs asked for time to put in evidence, unless the judge took the view that the application must fail as a matter of law. If that submission was correct, that is, if the judge took the view that Ultraframe had no standing, it would be pointless to give directions for evidence. But that is not the basis on which the judge dealt with the matter. He should not, therefore, in my judgment have proceeded to deal with the application, even the strike-out application, without evidence.

The judge appears to have thought that evidence would only be necessary if the application could be saved by further evidence. Counsel, who, as I have explained, was not Mr Hochhauser, did not in fact get a ruling on the question of an adjournment and indeed proceeded to make submissions on the merits of Mr Snowden's application. In other words, counsel was somewhat blown off course.

The judge was also not told what evidence Ultraframe would want to put in. The fact is, however, that he could not determine the question of whether delay disentitled Ultraframe from making the application without giving Ultraframe an opportunity to put in evidence. Nor could the judge properly proceed to hear the substantive application without any evidence from Ultraframe. The judge should therefore, in my judgment, have acceded to the application for an adjournment.

For those reasons, in my judgment, this appeal must be allowed. The application, if my Lord agrees, will be restored and directions will then have to be made for its future conduct.

LORD JUSTICE BROOKE: I agree. The appeal is therefore allowed.