Simpson v Bowker

Mr George Simpson, the appellant, and his wife Mary were directors of Veveos Consulting Limited (the Company), which was incorporated on 12 June 1991 and began trading in 1994. It provided project management services to the oil and gas industry.

The Company got into financial difficulties and ceased trading on 31 July 2003. The Inland Revenue took legal action to recover unpaid taxes (estimated to exceed £250,000) and threatened to wind up the Company. A Company Voluntary Arrangement (the CVA) was proposed on 3 November 2003 and approved (with modifications) by the creditors on 20 November 2003. Mr Simpson is one of the creditors of the Company in the sum of about £115,000. The respondent, Mr Matthew Bowker, was appointed Supervisor of the CVA. He is a licensed Insolvency Practitioner and senior partner in the firm of Jackson Jolliffe Cork.

On 25 January 2006 Mr Bowker applied by Originating Summons to the court under section 7(4) (a) of the Insolvency Act 1986 (the 1986 Act) for directions on which Patten J gave judgment on 2 May 2006. The directions sought were on claims by Mr Simpson under the provisions of the CVA in connection with his funding of successful litigation against the most substantial debtor of the Company, Anadarko Algeria Corporation (Anadarko) for payment of a debt of £800,000.

Most of the items claimed by Mr Simpson were listed in his “Cost and Expense Account” submitted by him (with attached Notes) to Mr Bowker on 13 June 2005. The total sum was £474,893.27. Mr Bowker’s reaction was that he was disappointed that Mr Simpson did not discuss “the purported costs” with him following the settlement of the claim against Anadarko, so that agreement could be reached in a sensible manner and without recourse to the court. He asked for a full explanation and documentation in respect of various items.

Mr Bowker questioned the recoverability of non-legal costs over and above legal costs, such as solicitors’ and counsels’ fees. If all the non-legal costs were allowed, there would be a substantial reduction in the dividend payable to creditors of the Company.

Mr Bowker is, of course, non-partisan in the proceedings, which are brought by him in his capacity as Supervisor of the CVA.

With the permission of the judge Mr Simpson appeals against the detailed directions in the order sealed on 22 December 2006. The delay was caused by several abortive attempts by Mr Simpson, who appeared in person in this court and below, to persuade the judge to revise the rulings in his judgment disallowing claims totalling £208, 543.80.

The material portion of the order subdivided the costs and expenses into 3 parts.

The first part identified those costs which Mr Simpson was entitled to recover, such as itemised legal costs, management and personnel cost and facilities and furniture costs (paragraph 1). No issue arises on them in the appeal.

The second part identified those costs and expenses that he was not entitled to recover (paragraph 2). Most of the argument has been on these items which Mr Simpson says he should be entitled to recover. They are-

The third part identified those management and personnel costs and costs of facilities and services that were capable of constituting recoverable costs on Mr Simpson providing satisfactory evidence to Mr Bowker (paragraph 3). No further evidence has been produced to Mr Bowker by Mr Simpson, who says that no further evidence is required to entitle him to recovery.

The judge ordered that the quantification of the items was a matter for the Supervisor upon the submission to him of supporting evidence in so far as such evidence had not been previously submitted.

Mr Simpson was ordered to pay costs of the application to the court which were summarily assessed at £30,000 plus VAT.

In his appeal Mr Simpson challenges the judge’s construction of the relevant clauses in the CVA and its application to the claims. In support of his submissions Mr Simpson produced a typed summary on the day of the hearing. It provided a useful basis for discussion of his points with him.

The Company’s principal debtor was Anadarko. In May 2002 Anadarko terminated a contract made in November 2000 for the Company to carry out a review of the supply chain and procurement procedures of one of its joint venture companies. The project manager was a Mr Frank Pye. In the ensuing dispute about payment due to the Company Anadarko retained £800,000. Legal proceedings funded by Mr Simpson to recover this sum were issued in December 2003. They were ultimately settled on 22 April 2005 for £675,000, inclusive of £252,000 costs. Out of the settlement sum the Company accounted to Mr Bowker in June 2005 for about £200,000, but Mr Simpson claims that the balance is owed to him for the costs of funding the litigation and the subsequent mediation which achieved the settlement. Mr Bowker’s concern was that the sum remitted to him was substantially less than he had expected and well below what Mr Simpson had been asked to lodge on account.

The details of the underlying dispute between the Company and Anadarko are irrelevant to the issues between Mr Simpson and Mr Bowker about the funding of the Company’s litigation against Anadarko. The Company received a favourable opinion from Leading Counsel on its claim, but it could not afford to fund legal proceedings or to carry on business. It was facing substantial claims for unpaid corporation tax and PAYE. The Company’s only real asset was the claim against Anadarko. Legal proceedings were issued. In due course a date was fixed for the trial to begin on 12 January 2005, but the action was never tried, as a settlement was achieved by mediation.

The governing document in the dispute is the CVA. Mr Bowker’s firm had been instructed to prepare a proposal under which the Company should continue to trade for the purpose of recovering the money owed by Anadarko. The Claim, as I shall call it, would be funded by Mr Simpson. He would be entitled to recover the costs of pursuing the Claim out of the sum recovered in priority to any distributions to creditors.

The present dispute about the extent of Mr Simpson’s right to be paid costs and expenses turns on the construction of clauses in the amended CVA proposal agreed by the Company’s creditors. The following clauses were referred to in the judgment and/or by the parties in their submissions on the appeal:-

The judge’s construction of the CVA provisions, in particular clauses 3.1 and 6.4, can be summarised as follows:

Applying the test derived from his construction of the CVA the judge dealt individually with the various items in Mr Simpson’s statement of account. His conclusions are reflected in the Minute of Order summarised in paragraphs 9-11 above.

Mr Simpson took the court item by item through the cost and expenses disallowed, as listed in paragraph 2 of the Order. Before considering his detailed contentions, however, I should deal with his criticisms of the judge’s construction of the clauses in the CVA relating to costs and funding of the Claim.

Mr Simpson challenged the judge’s test that the sum in question was expended on the pursuit of the Claim or was reasonably and necessarily incurred as part of the cost of funding the pursuit of the Claim. He said that the test is too narrow and is incomplete. It does not identify who might have the right to apply such a test, or specify when the test should be applied. He argued that it was no part of the CVA that Mr Bowker should determine which costs of funding the Claim were acceptable and which were not. Mr Bowker was not liable for the costs; nor was he engaged in the management of the business of the Company or the conduct and pursuit of the Claim. He was not entitled to determine what was necessary or unnecessary, those being matters which the officers of the Company were alone competent to decide.

As to who should apply the test, Mr Simpson submitted that the officers of the Company were the persons entitled and empowered to determine what was required for the pursuit of the Claim. The CVA entitled the Company to conduct its business in the normal fashion under the day-to-day control of its officers, who were to exercise their commercial and professional judgment as to what was necessary to fulfil the purpose of the CVA, namely to pursue the Claim and to obtain judgment against Anadarko, or a settlement by negotiation or mediation. The officers of the Company were empowered to enter into agreements for goods and services required for the purposes of the trading permitted under the CVA, that is to pursue the Claim and to avoid the liquidation of the Company.

As to when the test should be applied, Mr Simpson said that the Company’s officers had to apply it at the time when the goods and services were actually needed, not after the Claim had been settled. Unless this was the case, the Claim could not have been pursued and settled and the Company would have had to go into liquidation.

As Laws LJ pointed out in argument, Mr Simpson was proposing a form of “but for” test for recovery of expenditure: “but for” the expenditure of the sum in question, the need for which was a matter for the judgment of those involved in managing the Company at the time, it would not have been possible to pursue the Claim. The Company would have been wound up.

On this approach to the recoverability of funding costs and expenses, Mr Simpson challenged the judge’s decision on the various items in paragraph 2 of the order, contending that they were all properly incurred and are reimbursable to him in full.

The judge disallowed the claim of £8,000 for the costs of the CVA. He held that the provisions of the CVA only covered the cost of funding the Claim, not the costs of the CVA itself.

Mr Simpson’s contention was that, but for the CVA, the Claim could not have been pursued by the Company at all. It was a necessary expense.

This is by far the biggest item and was described by the judge as “the overriding question.” The judge held that Mr Simpson was not entitled to payment for his own time and efforts, as opposed to expenditure by him on funding the case (paragraph 27). The CVA provided that he would fund the Claim, not that he would manage it or be paid for doing so. Mr Simpson did not seek the agreement of the creditors of the Company to him substituting himself for the legal team or to a variation in the CVA to permit him to be paid for his time and effort, as distinct from payment of lawyers’ fees.

Mr Simpson disagreed with the judge’s ruling. He contended that the pursuit of the Claim was the only business left for the Company to carry on. He was obliged and entitled to manage the Company in order to pursue the Claim and to be paid for doing so. If he had not done so, the Claim would not have been settled for the benefit of the creditors of the Company and the Company would have gone into liquidation.

He reinforced this argument by referring to his lack of funds to continue paying the solicitors and counsel who were instructed in the litigation. When they ceased to act, he had had to step in and manage the Claim. He was thereafter conducting the case in person. If he had not done so, there would have been no mediation or ultimate settlement for the benefit of the creditors.

The judge identified those items which he held had no obvious connection with the pursuit of the Claim in the absence of an explanation as to why they were necessary or how they related to the litigation. Mr Simpson disagreed with the rulings of the judge and took the court through particular items in the list explaining why the judge should have held that they were recoverable.

As for the accounting and corporation tax advice, the Company was legally obliged to obtain specialist advice as a pre-condition of getting the CVA under the modifications proposed on behalf of the Revenue authorities. Without the advice there would have been no CVA, without which there would have been no action to enforce the Claim or successful settlement.

The item for sundry expenses included expenses incurred for the Company car in the same manner as it did before the CVA. It was necessary for the pursuit of the Claim. The same applied to the motor vehicle hire purchase and repair costs.

The external audit fee was a necessary item of expenditure. Failure to pay it would have resulted in loss of accreditation on the Company’s web site. This would have signalled to Anadarko that the Company was in difficulties and would have been detrimental to the Company and the Claim.

The Company was obliged to insure its premises and personnel. It was therefore a necessary cost of pursuing the Claim.

Bank charges were incurred in order to fund the pursuit of the Claim in the same way as such costs had been incurred prior to the CVA. There was no material change in the operation of the Company after the CVA. Without access to a bank account and funds the Claim could not have been pursued and the Company would have been liquidated.

Mr Simpson claimed the costs relating to the sale of the family home in York in 2005. He sold his house in order to meet fees of £31,000 due to the Company’s solicitors (Denison Till) and fund the litigation. He then incurred costs in buying a new home in Edinburgh later in 2005. All the costs, such as agents and legal costs, an early redemption fee, storage and re-location costs and the cost of renting temporary accommodation, were incurred by him so that he could continue to fund the Claim. He had no option in the matter. He said that, if they had not been incurred, the Claim would have been withdrawn, no settlement would have been reached and the Company would have gone into liquidation.

The judge held that Mr Simpson was only entitled to recover funding costs up to a sum equal to the cost of borrowing the £31,000 at the relevant time. He was not entitled to recover, as the costs of funding the litigation, the total of £35,650.34 claimed in order to release the sum of £31,000 to meet the solicitors’ fees.

The relevant provisions of the CVA must be construed in a common sense and practical fashion in the light of its underlying purpose, which was to facilitate the pursuit of the Claim for £800,000 by the Company. It was anticipated that, if the Claim succeeded, the creditors of the Company (totalling £335,989.75 in the Estimated Statement of Affairs) would receive a dividend of 100p in the £.

The references in the CVA to the “costs”, “legal costs” and “funding” the legal action and the Claim indicate that there were agreed limits to what Mr Simpson was entitled to recover under the CVA. On the one hand, identifiable legal costs are clearly covered. On the other hand, there is no provision in the CVA which entitles Mr Simpson to recover money simply on the ground that he spent it on running the Company in order to pursue the Claim. The crucial question is the extent to which he is entitled under the CVA to recover non-legal costs and expenses.

The general thinking underlying the stance taken by Mr Simpson is understandable: but for his financial support for the Claim, his personal efforts in the litigation and the successful outcome of the mediation, there would have been no recovery from Anadarko. He took risks with his money. The creditors benefit from this risk-taking. Neither Mr Bowker nor the creditors of the Company contributed to the cost and effort of pursuing the Claim or securing the settlement.

Mr Simpson’s difficulty is that the legal basis of his entitlement to recovery of expenditure is governed by the terms of the CVA, as construed by the court, not by any general principle of reward for risk and effort or by application of a “but for” test. His rights remained subject to the terms of the CVA even when he could no longer afford to fund the solicitors and counsel to conduct the litigation. He was unable to point to any agreed variation in the terms of the CVA to cover the changed situation.

The proposistion that Mr Simpson’s right to be re-imbursed for funding the Claim is not limited to what are strictly termed “legal costs” such as solicitors and counsel’s fees, is not in issue on this appeal. As for non-legal costs and expenses I entirely agree with the approach of the judge. In the absence of an agreed variation to cover particular items beyond legal costs, it is necessary to find a link between Mr Simpson’s costs and expenses and the funding of the Claim. The application of the objective considerations of necessity and reasonableness, which feature in the question posed by the judge, are unavoidable .

I agree with the rulings of the judge on the disputed items. He posed the correct question for determining what was recoverable under the terms of the CVA. Neither Mr Simpson’s “but for” test nor his contention that it was solely a matter for those running the Company to decide what should be spent as at the time the expenditure was incurred, are justified by the express provisions of the CVA. Mr Simpson has not persuaded me that either the judge’s construction of the CVA or his application of it to the particular circumstances of the disputed items was wrong.

I would dismiss the appeal.

I agree.

I also agree.