Lomax Leisure Ltd v Miller & Anor

This is a renewed application for permission to appeal from the order dated 12 October 2007 of Mr Mark Cawson QC, sitting as a deputy High Court judge of the Chancery Division, whereby he dismissed a claim by Lomax as assignee of cheques issued by the liquidators of a company in members’ voluntary liquidation in payment of a dividend, and stopped by the liquidator following service of an application by a creditor disputing the liquidator’s rejection of a proof of debt. The judge held that the liquidator was fully entitled to cancel the dividend. The creditor in question was not in breach of any rule requiring service and so it cannot be said, in my judgment, that he was in breach of duty or that there was any duty to serve the application more swiftly, because it would have known of the intention to declare a dividend. It is also clear from the dates that the application to the court was made within four months of the notice provided for by Insolvency Rule 11.2. Mr Collings submits that the judge was wrong and that there is a real prospect of success on appeal. His essential point is that the liquidator had, in effect, to go on and pay the dividend because he had given notice of intention to declare the dividend and, indeed, in this case had sent out the cheques; but Mr Collings’ argument would apply equally if he had merely given notice of the intention to declare dividend and then formulated an intention to pay the dividend on a specific date.

The skeleton argument also contains further arguments about breach of statutory duty and whether there was consideration for the cheques and whether there was any restitution reliability if the monies were actually paid. But Mr Collings very properly accepts that those arguments do not arise unless he can show a real prospect of success on the interpretation of the Insolvency Rules. Mr Collings submits that there is a tension between the Rules and that, once the liquidator has given notice of intention to declare a dividend, he must have cause to postpone or cancel it; or rather, once he has formed the intention to declare a dividend, he must have cause to postpone or cancel it. He submits that there was no such cause to postpone or cancel it at the moment in time when the intention was formulated and the cheques drawn. He seeks to revive an argument rejected by the judge, that the application was not pended because it had not been served, but no authorities are cited in support of that proposition and, for my own part, in the absence of authority, that particular point would not seem to me to raise any real prospect of success.

The judge rejected Mr Collings’ arguments. The judge in particular pointed out that the purpose of the Rules was as follows: they were designed not only to achieve finality, but also to protect creditors who had proved their debts. Mr Collings fairly accepts that the creditor had proved its debt even though the debt had been rejected, and that is a point relevant to the interpretation of Insolvency Rule 4.182A(v). It means that that sub-rule is not applicable in this case. So far as creditors who have proved their debts are concerned, in my judgment that would include creditors who had already proved and who had had their proofs rejected, and in this case, of course, the creditor went on successfully to argue that his proof of debt should not have been rejected. The arguments in this case are obviously complex and interrelated, but in my judgment there is no real prospect of success because of Insolvency Rule 11.4:

“11.4

Postponement or cancellation of dividend

If in the period of 4 months referred to in Rule 11.2(3) –

The opening words are satisfied in this case. The period of four months had not expired at the point in time when the proof of debt was rejected and an application was made to the court. Now, the concluding words of the Rule provide that the insolvency practitioner “may postpone or cancel the dividend”. Mr Collings submits that the Rules are to be taken in chronological order: Insolvency Rule 11.2 deals with the notice which the insolvency practitioner must give, calling on creditors to prove if they have not already done so and stating his intention to declare a dividend; and 11.3 deals with the next step he would have to take of finally admitting or rejecting proofs; and then 11.4 deals with postponement or cancellation of a dividend, and 11.5 deals with the decision to declare a dividend. 11.5(1) opens with the words:

“If the responsible insolvency practitioner has not, in the 4-month period referred to in Rule 11.2(3), had cause to postpone or cancel the dividend…”

Mr Collings submits that that confirms that the previous Rule – Insolvency Rule 11.4 -- only operates in the period up to the time between the notice of the intention to declare a dividend and the time when the liquidator proceeds to declare the dividend. It is only in that interim period that he can “postpone or cancel the dividend”. So in this context dividend means the intention to declare the dividend and, on Mr Collings’ submission, the crucial Rule would be sub-rule (2) of Insolvency Rule 11.5, which imposes an obligation not to pay a dividend where there is an application by a creditor to reverse or vary a decision on his proof unless the insolvency practitioner has the leave of the court. He says that is the applicable Rule in the present case. As I see it, 11.4 cannot be simply shoehorned into that point in time to which Mr Collings refers. It is to be noted that in Rule 11.2 there is clear reference to an intention to declare a dividend, and later the Rules speak of declaration of a dividend; but in Rule 11.4 the phraseology is “cancel the dividend” and, in my judgment, had it been intended to limit that Rule to the period in time between the notice and the actual declaration, it would have clearly said “postpone or cancel the intention to pay the dividend” or “postpone or cancel the notice that had been given” or some wording picking up the wording already used.

Mr Collings fairly accepts that the Rules are not drafted with maximum clarity. They are not, of course, primary legislation, and thus he accepts that there can be some infelicities in the drafting. The Rules must be given a commercial construction. There is nothing to limit the power in Rule 11.4 to the period before the declaration of the dividend. Unless Mr Collings can establish that then the stopping of the cheques would clearly be a cancellation of a dividend for the purpose of Insolvency Rule 11.4, in my judgment there is no real prospect of success. I am emboldened to say that the court would, I think, be concerned not to give some protection to creditors in these circumstances. The objective of a liquidation is not, after all, to achieve finality; it is also to achieve a distribution of assets in accordance with the statutory scheme -- that is, on the basis of a pari passu distribution to creditors and we are, after all, dealing with a creditor who had already lodged a proof and which was subsequently shown to have been wrongly rejected. Mr Collings has further arguments on Rule 11.5(1). He submits that there had to be cause to cancel or postpone at the moment in time when the liquidator proceeded to cancel the dividend and that after that moment he lost any power to cancel the dividend. I do not have to deal with that point because it is sufficient, in my view, that the judge’s judgment would be upheld on a Rule 11.4 in any event.

Mr Collings makes general submissions that the result of the case is to create uncertainty; that it will mean that liquidators will have to adopt some new practice, perhaps of inspecting the file to check there have been no applications. I understand that and that point goes to the question of whether there is a real prospect of success. But, as I have said, since it is a matter of the interpretation of the Rules, and in my view on that basis there is no prospect of success, and, therefore, although I have benefitted considerably by Mr Collings’ argument, I would dismiss this application.