Quicksons (South and West) Ltd. v Katz & Anor

I have before me an application in proceedings by Quicksons (South and West) Ltd ("Quicksons") against Stephen Mark Katz and John Stephen Kelmanson (together "the liquidators") for the removal of the Liquidators pursuant to section 108 (2) of the Insolvency Act 1986. That application is by the Liquidators for security for their costs of the proceedings pursuant to rule 4.120 (3) of the Insolvency Rules 1986. So far as material that rule provides:-

The background facts to this case are these, Buildlead Ltd ("the Company") was the wholly owned subsidiary of Quicksons. On the 2^nd September 1997 the company was placed in creditors voluntary winding up. Its statement of affairs shows a small surplus against preferential creditors but a substantial deficit against unsecured creditors.

During August 1997 the company made a series of transfers totalling approximately £155,000 to the credit of Quicksons’ account at Lloyds bank ("the bank"). There was an arrangement between Quicksons and the bank that there would be a guarantee from Buildlead of Quicksons indebtedness from time to time to the bank. Each group company gave to the bank a debenture securing its indebtedness by a fixed and floating charge over its assets. In so far as the group required overdraft facilities those were made available to Quicksons. It was a term of the provision of those facilities that the bank should be at liberty to require any subsidiary, including the Company, to transfer any credit in a subsidiary account to Quicksons account with the bank so long as that account was in overdraft. It is Quicksons’ contention that the sums transferred by the company to Quicksons in August 1977 were transferred by the company to Quicksons’ account with the bank as a result of demands made by the bank pursuant to this arrangement.

Mr Kelmanson was appointed liquidator of the company consequent on the resolution to wind it up. On the 13^th October 1997 Mr Katz was appointed joint liquidator with him.

In April 1998 Mr Katz commenced correspondence with Quicksons and the bank seeking to obtain particulars of the extent of Quicksons’ overdraft at the time of the August 1997 transfers. Mr Katz’s requests for information were unsuccessful and on the 31^st October 2002 the liquidators applied for an order pursuant to section 236 of the Insolvency Act directed to both the bank and Quicksons requiring them to provide "all such information regarding the affairs of Buildlead Ltd in their possession including, but not limited to, information concerning the balance of the account between [Quicksons] and [the bank] in August 1997 at which time sums were transferred from the account of [the Company] to the account of [Quicksons]".

On the 14^th January 2003 Quicksons commenced proceedings to remove the Liquidators pursuant to section 108 (2) of the Insolvency Act. On the 11^th February the Liquidators’ solicitors wrote to Quicksons’ solicitors seeking security for the Liquidators costs pursuant to Insolvency Rule 4.120 (3) and on the 24^th April application was made for such security in the sum of £59,750.

In the Section 108 proceedings Quicksons have filed points of claim extending to 38 pages and setting out a number of criticisms of the conduct by the Liquidators of the liquidation of the company. Their primary criticism is that the liquidation has been unnecessarily prolonged and used by the Liquidators as a means of generating fees for themselves. The Liquidators reject these criticisms. They say that, apart from the question of whether some or all of the August 1997 transfers can be recovered from Quicksons or the bank for the benefit of the company’s creditors, the winding up is complete. It is the Liquidators’ submission that the application to remove them was triggered by the section 236 application but otherwise it is not suggested that Quicksons’ proceedings do not disclose an arguable case for the removal of the Liquidators. This is denied by Quicksons. Quicksons contention is that, whereas the circumstances of the August 1997 transfers are accepted to be a legitimate area of inquiry for a liquidator of the Company, the section 236 application has been made far too late in the day. Quicksons attitude is that they will make the relevant information about the balance of Quicksons’ overdraft at the time of the transfers available to the new liquidator of the company following on the success of their application to remove the Liquidators whose impartiality they question.

It is not in issue that, whatever may have been the position in August 1997, Quicksons are presently solvent with cash reserves more than sufficient to pay the amount of security sought by the liquidators.

As is apparent from the wording of rule 4.120 (3) that the power conferred by that sub-rule on the court is permissive. The first question, therefore, is what are the criteria by which the court should exercise the consequent discretion. It seems to me that these can be grouped under two possible heads, "security" and "merits". Under security I would place consideration of the sub-rule as a means by which the court might protect liquidators from having to pay personally the costs of defending a claim to remove them. Under the heading merits I would place consideration by the court of using the section as a means to winnow out claims to remove liquidators which stand little chance of success. It does not seem to me that the legislature can be taken to have intended the discretionary power contained in the sub-rule to be used primarily for both purposes, although in some circumstances the fact that an order would protect a liquidator from loss would be an additional reason for ordering money to be brought into court in a doubtful case.

Counsel appearing in the case, both experienced in insolvency practice, were not able to point to any established practice as to how the sub-rule is being used if at all. My own researches have failed to uncover any such practice. Beyond setting out the text of the rule, counsel have told me that there is no description of any established practise as to its use in the authoritative text books.

Proceedings under section 108 of the Insolvency Act are proceedings like any other to which the Civil Procedure Rules apply. Thus in an application to remove a liquidator it would be open to the applicant or the respondent liquidator to invoke the court’s summary judgment powers under part 24 of the CPR. Thus, by means of the part 24 rules the claim to remove a liquidator or his defence of the claim could be subjected to preliminary examination of the merits with a view, either to striking out the claim or giving summary judgment to the claimant.

Equally part 25 applies to proceedings under section 108 so that a respondent liquidator would be able to apply to the court to order the applicant seeking to remove him, to give security for his costs under rule 25.12 provided that the conditions proscribed by rule 25.13 were complied with.

Similar powers of course existed under the old rules of the Supreme Court which preceded the CPR

It is to be observed that rule 4.120 at sub-rule (2) contains an initial filtering provision through which applications for the removal of liquidators must pass.

Similar filtering provisions to those contained in sub-rule (2) and for the provisions of security in sub-rule (3) are found in relation to applications to remove liquidators in compulsory winding up (rule 4.119 (3)) and in members voluntary winding up (rule 4.140 (3)). Unaccountably in rule 6.132 which deals with the removal of trustees in bankruptcy, whereas a filtering power similar to sub-rule (2) is found in sub-rule (2) of that rule, there is no provision for ordering security for costs similar to sub-rule (3). All of these provisions were introduced into the Insolvency Rules in 1986.

I have come to the conclusion, in the absence of any authority or other guidance, that the proper approach to the use of the powers conferred by Insolvency Rule 4.120 (3) is merits based. I do so because if a security based approached were adopted, the wide ambit of the power conferred by sub-rule (3) would be inconsistent with the conditions for ordering the giving of security for costs contained in CPR 25.13. Thus under that rule without more, only an insolvent company claimant can be ordered to give security for costs whereas sub-rule (3) of Insolvency Rule 4.120 would allow an order to be made in respect of an insolvent individual.

I accept Mr Davies’ submission for Quicksons that there is an analogy between the powers conferred by Insolvency Rule 4.120 and those conferred by CPR part 24, in particular, the power of the court to grant conditional permission to defend. I accept his submission that, in the scheme of the rules generally, sub-rule (3) is best read as a power intended to be exercised by the court at the first filter stage dealt with in sub-rule (2). Thus at that stage if the court were to conclude that the case to remove the liquidator though arguable was likely to fail it would order the applicant to bring a sum of money into court or otherwise give security for the liquidators’ costs as an alternative to dismissing the application forthwith.

In the present case it has not been suggested by the Liquidators that Quicksons’ case to remove them, set out in Quicksons’ points of claim in the section 108 proceedings, stands no reasonable chance of success, or, in the words of sub-rule (2), shows "no sufficient cause". It follows, in my judgment, that I should not order security for the Liquidators costs of defending Quicksons’ claim to remove them. I should, perhaps, add that had my conclusion been that the proper approach to the application of the Sub-rule was "security based" the result would have been the same because it is accepted that Quicksons are, and in the foreseeable future will be, well able to pay the amount sought by the Liquidators as security.