Mischon De Reya (A Firm) v Barrett

There are two matters before the court. The first is an appeal by the claimant (“MDR”) from such part of the order of Master Fontaine dated 21 July 2005 as allowed the defendant (“Mr Barrett”) to serve a draft re-amended defence and counterclaim by 15 September 2005, thus implicitly dismissing MDR’s applications to strike out the defence and counterclaim and for summary judgment.

The second is Mr Barrett’s application for permission to appeal against the refusal by Master Fontaine to allow Mr Barrett to re-amend the defence and counterclaim substantially in the form of a draft submitted to the court on 16 July 2005.

On 11 January 2002, Mr Barrett retained MDR to act for him and a group of companies which he owned and of which he was the sole director. Mr Barrett instructed MDR because, on that day, he was served with orders made on 10 January 2002 (“the Orders”) upon applications made without notice by the Secretary of State for Trade and Industry. The Orders appointed provisional liquidators over the assets of a number of companies, including the companies in the group which Mr Barrett owned. In this action MDR claim the sum of £21,064.02 in respect of legal fees incurred for work carried out pursuant to that retainer.

Mr Barrett defends the claim and seeks to counterclaim in his personal and corporate capacity for damages arising from the loss of opportunity caused by MDR’s alleged negligence and breach of contract in failing between Friday 11 and Tuesday 29 January 2002 to make an application to the court to discharge the Orders.

Master Fontaine held that Mr Barrett had an arguable defence that MDR were negligent and acted in breach of the terms of their retainer in failing, by about Monday 28 January 2002, to place Mr Barrett and his companies in a position of being able to apply to discharge the Orders.

However, Master Fontaine also decided that Mr Barrett had no real prospect of succeeding in his defence and counterclaim in so far as it alleged such negligence and breach of contract during the period of seven days after service of the Orders, that is to say from 11 to 18 January 2002.

Both parties conducted the appeal before me largely on the basis of the draft re-amended defence and counterclaim dated July 2005, with further amendments submitted shortly before the hearing of the appeal.

On 10 January 2005, the Secretary of State applied without notice for the appointment of provisional liquidators over the assets of the following companies (together called “the Companies”) pursuant to s.135 of the Insolvency Act 1986 :

At the same time the Secretary of State presented petitions for the Companies to be wound up pursuant to s.124A of the Insolvency Act 1986.

In the light of certain submissions advanced on behalf of Mr Barrett which I address later in this judgment, I must set out, at least in outline, the allegations and submissions made in support of the application. I have taken the matters set forth in paragraphs [11]–[34] below from the skeleton argument submitted on behalf of the Secretary of State. They are not my own findings.

Dagonal was a holding company which, since its incorporation on 11 September 1988, had acquired four companies connected with the food sector.

Its first acquisition was of Simpsons. In December 1998 Dagonal bought Simpsons’ issued shares for a consideration of £185,000. The purchase was funded by Simpsons itself.

Simpsons carried on a long established business as a wholesaler of fish, game and poultry. In the year to 30 June 1998, the company had a turnover in excess of £900,000 and achieved a net profit in excess of £20,000. On 4 August 2000, Simpsons went into administrative receivership with an estimated deficiency as regards creditors of in excess of £300,000.

By the time Simpsons went into receivership Dagonal had sold it to Miller Till. Miller Till had an issued capital of £1 and appeared to have been acquired off the shelf for the purpose of the acquisition. In consideration for Simpsons’ shares, Miller Till agreed to pay a nominal price of £1 and to assume Simpsons’ liabilities to Dagonal. The sale was purportedly effected on 29 December 1999, but there was good reason to believe that it was backdated.

According to the Companies House records, Miller Till had been without a director since the formation agent resigned. A document obtained by the DTI under a search warrant appeared to record the appointment of a Mr McLeish as Miller Till’s director, but Mr McLeish denied any involvement with the company. Miller Till’s secretary was said to be a “Mr Davies”, but Mr Davies appeared to be an alias.

Immediately after Simpsons went into receivership, its business was sold on to Premier Select. Premier Select had been incorporated on 27 June 2000 with an issued share capital of £1. Mr McLeish was recorded at Companies House as Premier Select’s director, but he claimed never to have heard of the company and his signature on a variety of documents was forged. The secretary of Premier Select was again said to be Mr Davies. On 17 October 2000, Premier Select followed Simpsons into administrative receivership.

Dagonal made its second acquisition, of AFD, on 20 July 1999. The purchase price was again substantial and it was funded by AFD.

AFD supplied and installed catering equipment. It was trading profitably until 31 July 1999. By the end of 2000, however, the company was no longer able to pay its debts as and when they fell due and was probably insolvent on a balance sheet basis.

The third company to be acquired by Dagonal was DWL. Dagonal purchased the company on 20 September 2000 in consideration of payments totalling in excess of £1,000,000. DWL provided a substantial part of the consideration.

DWL was engaged in the wholesale supply of catering products. It was trading profitably until 31 May 1999 and had substantial net assets. By the end of 2000, however, DWL was unable to pay its debts when due.

Dagonal made its fourth acquisition when, on 16 February 2001, it purchased Wignall which carried on business as a wholesale supplier of meat and meat products. Accounts for the year ending 31 March 2000 disclosed a turnover in excess of £10,000,000, a profit in excess of £200,000, and net assets in excess of £1.5 million. Dagonal bought the company for an aggregate sum in excess of £2,300,000 and the purchase was financed by Wignall itself.

It was alleged that Mr Barrett and a Mr David Jones had played key roles in the affairs of the Companies. Mr Barrett was the sole shareholder of Dagonal and was the only recorded director of Dagonal, AFD, DWL and Wignall. Until 30 June 2000, Mr Barrett was the sole director of Simpsons too. At that point he was ostensibly replaced as Simpsons’ director by Mr McLeish, but Mr McLeish’s signature on the relevant form was forged.

So far as Mr Jones is concerned, he was secretary of Dagonal and Simpsons in late 1998 and was subsequently involved with all the Companies. He was involved with Mr McLeish and prepared documents on which the signatures of Mr McLeish and/or Mr Davies were forged.

Mr Barrett and Mr Jones were made bankrupt on 10 April 1992 and were together convicted of obtaining a service by deception on 12 June 1999. Mr Barrett was sentenced to eight months imprisonment while Mr Jones’ sentence was reduced from eighteen months to twelve by the Court of Appeal. Mr Jones had previously, on 21 October 1991, been convicted of offences under the Theft Act 1968 concerning false accounting for which he had received a sentence of three months imprisonment, suspended for twelve months.

In 1998 Mr Jones had a twelve year order imposed on him under the Company Directors Disqualification Act 1986. In his judgment the District Judge found Mr Jones to be “untruthful” and “unscrupulous”.

The skeleton argument also suggested that Mr Jones’ involvement with the Companies was such that he had breached the disqualification order to which he was subject, that he had at least been “concerned or taken part in the promotion, formation or management of a company” within the meaning of s.1(1)(b) of the Company Directors Disqualification Act 1986 and that he might well, in reality, have been a de facto or shadow director of one or more of the Companies.

The skeleton then proceeded to explain the grounds relied upon in support of the petitions. They were numerous but included the following:

As to the need for provisional liquidation, it was submitted that it was desirable that the Official Receiver be appointed as provisional liquidator of the Companies:

The need to protect assets and records was said to be evident from, amongst other things, the dishonesty of Mr Barrett and Mr Jones, the forgery of documents, the disappearance of records of Simpsons, Miller Till and Premier Select, the misappropriation of moneys belonging to Premier Select and the propensity of Mr Barrett and Mr Jones to transfer funds between companies without regard to whether such transfers were in the interests of the transferors.

That Mr Wignall and the other members of Wignall’s management team might have resigned or be on the point of doing so made it especially important that the company should be brought under the control of an independent officer of the court urgently.

Two further important points were made. The first was that the present case differed from many others in which the Secretary of State sought the appointment of a provisional liquidator in that AFD, DWL and Wignall had legitimate and potentially viable businesses. The Secretary of State recognised that it was a serious step to appoint a provisional liquidator in relation to such a company, but concluded that, on balance, the Official Receiver should nevertheless be appointed as provisional liquidator of AFD, DWL and Wignall. Given the evidence of impropriety and dishonesty on the part of Mr Barrett and Mr Jones, the companies’ affairs should not be left in their hands.

Consideration had been given as to whether the Official Receiver could exercise sufficient control over AFD, DWL and Wignall if appointed as provisional liquidator of Dagonal but not of AFD, DWL or Wignall. As provisional liquidator of Dagonal, the Official Receiver could in principle appoint new directors AFD, DWL and Wignall. In practice, however, the Official Receiver would be unlikely to obtain adequate control in this way. It would be hard (if not impossible) to find any suitable person willing to accept an appointment as a director of AFD, DWL or Wignall. The problems would be compounded by the difficulties that the Official Receiver could encounter in attempting to obtain information about the companies and their viability when he was not yet represented on their boards. Moreover it would appear that the Official Receiver could not at once remove Mr Barrett as a director of the companies.

As to the application without notice, there was a real risk that, were the Companies to be given notice of the applications, assets would be removed or dissipated and records tampered with. Accordingly, it would defeat the purpose of the applications for notice to be given.

It was also said that article 6 of the European Convention on Human Rights did not apply to applications for interim relief. In any event, the appointment of the Official Receiver was a proportionate response in the circumstances.

Lawrence Collins J made the Orders applied for. These gave permission for an application to be made to vary or discharge upon written notice. No cross undertaking in damages was given on behalf of the Secretary of State.

I should also mention that a file note exists of the hearing before the judge, to which I will make reference later in this judgment, so far as necessary.

It seems that Mr Barrett found out about the Orders in the late morning of Friday 11 January 2002 and was served with them at about 1 pm at the premises of Wignall at Haydock, Lancashire. Mr Barrett was not, however, served with any evidence, the skeleton argument, the note of the hearing or the winding up petitions.

On the same day and in consequence of the Orders, administrative receivers (Tenons Recovery) were appointed by Halifax Bank of Scotland (“the Bank”) over the assets of the Group pursuant to the terms of a debenture. It seems that thereupon AFD ceased trading.

Late in the afternoon on that same Friday, Mr Barrett telephoned MDR and spoke to Mr Davis, a partner in the firm. Mr Barrett maintains that he informed Mr Davis, amongst other matters, of the appointment of the provisional liquidators over the Group and of the appointment of the administrative receivers. He referred Mr Davis to Mr Malcolm Friend, Mr Barrett’s accountant, and a partner in the firm of Friend & Co.

The same evening, Mr. Barrett maintains that he spoke to Mr Julian Alexander at the Bank who, according to Mr Barrett, informed him that it was prepared to remove the administrative receivers if the Orders appointing the provisional liquidators were discharged.

On Saturday 12 January 2002, Mr Barrett says that, during the course of a further conversation, he told Mr Davis the Bank would remove the administrative receivers if the provisional liquidators were removed. That evening Mr Davis telephoned Mr Friend who gave Mr Davis a large amount of information as to the financial status of the Group.

On Sunday 13 January 2002, Mr Davis went into the office and sent a letter to the Treasury Solicitor by fax and by post seeking copies of all winding up petitions, all applications made for the appointment of provisional liquidators and all evidence in support of such applications. The letter did not ask for a copy of any skeleton argument or note of the hearing.

On Monday 14 January 2002, Mr Davis received a fax from the Treasury Solicitor setting out brief details of the Orders, stating that the materials requested were being copied and that the Treasury Solicitor would advise him when they were available for collection. In the event, only the petitions were made available on that date.

The evidence was finally provided on Wednesday 16 January. It was extremely bulky and contained in some seven lever arch files. Mr Davis and an assistant solicitor in the firm, Mr Armstrong, met Mr Barrett in conference on that day, and Mr Davis had a telephone conference with Ms Lexa Hilliard of counsel. Ms Hilliard was, at that time, a junior counsel of some 15 years call and a specialist insolvency practitioner. She advised Mr Davis that he should ask for a copy of the skeleton argument relied upon by the Secretary of State and of any note of the hearing. This advice was reiterated during the course of a further telephone conference on the following day, Thursday 17 January. A request was thereupon made by fax to the Treasury Solicitor that they be supplied by return fax, and that same evening a copy of the skeleton argument was supplied as requested. It was said that the note of the hearing would follow.

On Friday 18 January, Mr Davis and Mr Armstrong attended a conference with Ms Hilliard. She advised:

On Monday 21 January, Mr Armstrong wrote to Mr Barrett setting out, in broad terms, the grounds upon which the Secretary of State had obtained the Orders, namely:

Consistent with that advice, MDR wrote to the administrative receivers on the same day. MDR asked them to assist in protecting the Group and informed them, amongst other matters, that:

On Tuesday 22 January, Mr Armstrong spoke to Mr Thomas of the administrative receivers and was informed that administration was not an option that the Bank would consider. Notwithstanding this information, Mr Armstrong telephoned Mr Alexander of the Bank. Mr Alexander informed Mr Armstrong that he would rely on the advice given by the administrative receivers but that, should he wish to discus the matter further, he should contact the Head of Risk for the Bank, a Mr Scourfield. Mr Armstrong then telephoned Mr Scourfield who advised him that the Bank would not be interested in administration.

On the same day Mr Armstrong had a further telephone conference with Ms Hilliard. He has given evidence that amongst matters that were discussed were:

On Wednesday 23 January, MDR sent to Mr Barrett a letter of advice highlighting the fact that the Bank had appointed receivers immediately following the presentation of the winding up petitions by the DTI. The letter pointed out that, on the basis the receivers remained in place, and that the businesses were sold, Mr Barrett must consider the options available to him. It recorded that one of Mr Barrett’s aims was to ensure that the petitions were dismissed and the appointment of the provisional liquidators revoked. However, it continued, careful consideration must be given before making such applications if the businesses had ceased trading and/or been sold. The letter suggested there were two main reasons why Mr Barrett might wish to seek to have the petitions dismissed and the appointment of the provisional liquidators revoked, namely to assist in any possible further proceedings that might be brought against him personally and to enable him to make a claim for damages against the DTI.

As far as any claim against the DTI was concerned, MDR pointed out the position was not straightforward. They reiterated their advice that there was no requirement for the DTI to give an undertaking in damages when it made ex parte applications to appoint provisional liquidators. The letter concluded that if Mr Barrett wished to oppose the petitions and remove the provisional liquidators and, therefore, claim damages they must take the following steps:

It is evident from this letter that MDR and Mr Barrett were aware that, as a result of the receivership, there was now a strong risk that the companies in the Group would cease trading and/or be sold. As Mr Armstrong explains in his evidence, AFD had ceased trading and it was becoming clear that the receivers of Wignall were looking to sell the business. Further, at about this time, MDR became aware that Mr Wignall was thinking of buying Wignall from the administrative receivers. At that point he remained in charge of production at Wignall’s factory.

During the course of the following few days Mr Armstrong had a number of telephone conversations with Mr Barrett in the course of which he tried to extract as much information as possible regarding the factual issues raised by the evidence relied upon by the DTI.

On Friday 25 January, Mr Armstrong had a further discussion with Mr Thomas, in the course of which it became clear that Mr Wignall and the existing management team had put in an offer to buy Wignall from the administrative receivers and, moreover, that the administrative receivers and Mr Wignall were not interested in dealing with Mr Barrett.

On Monday 28 January, Mr Armstrong had a further telephone conference with Ms Hilliard. He advised her of the current situation and she apparently advised that, having considered the matter further, the most sensible way forward was to apply to set aside the appointments of the provisional liquidators and to oppose the winding up petitions, currently fixed to be heard on 20 February 2002.

On Tuesday 29 January, MDR wrote to the Treasury Solicitors setting out their position and requesting an adjournment of the hearings fixed to take place on 20 February to enable them to serve substantive evidence.

On or about 6 February 2002, the businesses of DWL and Wignall were sold. Thereafter each company in the Group was wound up by compulsory order.

The hearing of MDR’s application for summary judgment on the claim and to strike out the defence and counterclaim was heard over three days on 20 October and 12 November 2004 and 1 February 2005. The Master gave judgment on 16 May 2005. She made her order on the application on 21 July 2005.

The Master noted that Mr Barrett’s claim was essentially that, because of MDR’s alleged negligence, he lost the chance to set aside the Orders. She identified two issues for her consideration:

The matter was complicated before the Master because, just as now before me, the allegations raised on behalf of Mr Barrett developed over time. The original pleaded defence and counterclaim was that MDR were negligent in failing to take action to apply (і) for a stay of the Orders within 48 hours of their service on the grounds of non-compliance with what has been described as the “Etherton Protocol”, and, (іі) permission to use the Companies’ assets to resist the underlying petitions. Further allegations of negligence were set out in Mr Barrett’s witness statement dated 23 August 2004 but not included in the pleaded case. Yet further allegations were made in the course of submissions advanced on behalf of Mr Barrett on the first day of the hearing on 20 October 2004. It seems that the second ground that I have referred to was abandoned, as was sole reliance on the allegation that action ought to have been taken in 48 hours. The Master therefore directed that Mr Barrett should serve a draft amended defence and counterclaim, which he did on 8 November 2004. It was 56 pages long and served with a document described as a “summary”. Many of the allegations set out in that document and dealt with by the Master do not appear in the draft re-amended defence and counterclaim upon which Mr Barrett now relies.

It was submitted by MDR, and the Master accepted, that there were essentially three courses of action open to Mr Barrett:

As to the first course, the Master concluded that Mr Barrett did not have a real prospect of establishing at trial that MDR ought to have advised the Group and Mr Barrett to apply to set aside the appointment of the provisional liquidators in the week ending 18 January 2002.

As to the second course, the Master concluded that Mr Barrett did have a real prospect of establishing at trial that MDR ought to have advised the Group and Mr Barrett to apply to set aside the appointment of the provisional liquidators in the further period ending 28 January 2002 and instructed counsel to make that application. She also found that while Mr Barrett’s chances of succeeding in such an application were slim, they were not so negligible as to justify the claim being struck out.

MDR contended that, even if negligence was assumed, Mr Barrett’s position on causation was hopeless given the Bank’s refusal to terminate the appointment of the administrative receivers. On this point the Master concluded that the issue of causation was complex and that MDR had not demonstrated that Mr Barrett had no real prospect of success. It was a matter that needed more thorough investigation than was possible at a summary determination.

As I have indicated, a draft re-amended defence and counterclaim was submitted in July 2005, that is to say some time after the decision of the Master. Yet further amendments were introduced shortly before the hearing of the appeal. Once again, it is contended that by reason of the breaches by MDR of their retainer and/or duty of care the Group, and each company within the Group lost the opportunity to:

Although the counterclaim remains the same, the basis for it has rather shifted away from that considered by the Master in her judgment. Further, and as I have indicated, a number of the allegations considered by the Master appear to have fallen away. I must therefore set out the essential allegations now sought to be made.

First, it is said (paragraph 11) that MDR, on receiving instructions in the circumstances which they did on Friday 11 January, and as a firm specialising in insolvency matters, ought to have advised and acted on the following bases:

Thereafter it is alleged (paragraphs 12 and 13) that MDR failed promptly to ask for copies of the skeleton argument and for a note of the hearing and that these documents, together with the evidence in support, ought to have been provided by the 11 or, at the latest, 14 January.

It is contended (paragraph 18) that by 21 January (and earlier had MDR acted diligently in obtaining the evidence, skeleton argument and note) MDR should have appreciated, in particular from the information provided by Mr Barrett, the evidence, skeleton argument and note and have advised that:

I have referred already in the chronology of this matter to the letters that MDR wrote to Mr Barrett and to the administrative receivers on 21 January. In the light of all these matters it is contended (paragraph 21) that during the week beginning 21 January MDR ought to have:

It is said that in breach of an implied term of the retainer (to act and advise with due skill, care and diligence) and/or its duty of care MDR failed to perform any of these matters during the week beginning 21 January or indeed thereafter.

Had MDR acted in accordance with the implied term of the retainer and/duty of care, it is said (paragraph 23) that:

Further, MDR would have drafted the necessary witness statements and applications. Instead, it is said, MDR spent inadequate time working on the case, sought advice from counsel with regard to successfully resisting the petitions rather than with regard to the steps to be taken to discharge the Orders and failed to finalise an application to discharge the Orders or prepare evidence in support thereof.

Reference is made to the advice given by counsel on 28 January 2002 but, it is said, (paragraph 26) MDR had not carried out the work necessary to enable that advice to be fulfilled. Further and in breach of the implied term of the retainer and/or duty of care, MDR never did complete the preparation required for such applications.

Finally, it is said (paragraph 27) that the chance to make an application to discharge the Orders was lost by reason of the breaches of the implied term and/or duty of care. On or about 6 February 2002 the businesses of DWL and Wignall were sold. Each company in the Group was wound up by compulsory order. By this time, as counsel advised it would be, it was too late to oppose the petitions and it was not possible to claim damages from the Secretary of State.

I have referred in this judgment to what has been described as the “Etherton Protocol”. This expression is derived from an unreported decision of Etherton J, In The Matter of the City Vintners Limited, dated 10 December 2001. In that case Etherton J was concerned with applications to discharge orders for the appointment of the Official Receiver as provisional liquidator of City Vintners Limited and Goldman Williams Limited. The orders were made on the application of the Secretary of State for Trade and Industry without notice to the companies pursuant to s.135 of the Insolvency Act 1986. The Secretary of State sought the appointment of the provisional liquidator pending the hearing of winding up petitions presented against each of the companies pursuant to s.124A of the Insolvency Act 1986, on the ground that it was expedient in the public interest that the companies should be wound up.

So far as material to the present case, the following important points emerge from this decision. First, full disclosure of all matters relevant to the application (and whether of fact or law) is of particular and critical importance in relation to applications for the appointment of a provisional liquidator and of overriding importance in applications by the Secretary of State if a cross undertaking in damages is not offered. The reason is the potentially devastating consequences of such an order.

Second, the normal practice on such a without notice application is not to require a cross undertaking in damages from the Secretary of State.

Third, in some cases, in order to avoid the extreme course of, in effect, closing down a company’s business pending the hearing of a winding up petition presented by the Secretary of State, the courts have accepted undertakings from, or imposed injunctions against, the company and individuals associated with it as to the conduct of the company’s business and dealings with its assets, rather than appoint a provisional liquidator. In the particular case before him, Etherton J declined to accept undertakings because they did not address the fundamental issue of the companies continuing to carry on business practices which, according to the Secretary of State, were dishonest and intentionally deceptive.

Finally, I must refer to a section of the judgment referred to as “Good Practice” which has given rise to the expression “the Etherton Protocol”. Etherton J explained at [73] –[76]:

“73.

The making of an order for the appointment of a provisional liquidator on a without notice application by the Secretary of State, acting in a law enforcement capacity, is, as the present case demonstrates, a most extreme exercise of the court's powers. It has the potential and indeed, as in the present case, may be intended to bring an immediate end to the business of a company, without any opportunity for the company to be heard or put evidence before the court, and without any compensation in damages should the court ultimately dismiss the winding up petition or determine, having heard the company and received its evidence, that the appointment of a provisional liquidator should not have been made.

74.

As I have observed earlier in this judgment, in some cases Judges have considered it appropriate to avoid the potentially severe consequences of the appointment of a provisional liquidator, obtained on an application by the Secretary of State without any cross-undertaking in damages, by granting interim injunctions against, or accepting undertakings from, the company and persons associated with it.

75.

If the Secretary of State seeks an application for the appointment of a provisional liquidator on a without notice application, he deprives the company of any opportunity, not merely to explain its conduct and place before the court such evidence as it is able and considers appropriate in the time available, but also to offer undertakings which the court might consider will be suitable until the hearing of the winding up petition or an earlier full inter partes hearing.

76.

It seems to me, in these circumstances, that good practice requires those acting for the Secretary of State, on a without notice application for the appointment of a provisional liquidator, to draw expressly to the Judge's attention that, if it be the case, a cross-undertaking in damages is not being offered, and that it has been the practice of some Judges in appropriate cases to impose injunctions or take undertakings rather than appoint a provisional liquidator. It should be explained to the Judge why such an alternative course is not considered appropriate in the case before him. In particular, it should be explained why it is not considered appropriate to give any notice to the company prior to the making of any order for the appointment of a provisional liquidator and, in this context, why it is considered that it is not appropriate to grant the company an opportunity to be heard, however short the period of notice may be, protecting the public's position in the meantime by ex parte interim injunctive relief restraining, for example, dealings with the assets of the company or with its books and records or particular activities of the company.”

As I have indicated, the case is complicated by the fact that Mr Barrett has attempted to rely on a number of different draft pleadings. In the circumstances, it seems to me that it is convenient to begin by addressing the issues raised by the latest draft re-amended defence and counterclaim. Some of these issues were addressed by the Master and some were not. I will then consider any issues arising from the appeals from her decision which remain outstanding.

In contrast to the position which I understand to have been taken before the Master, the re-amended defence and counterclaim does not contain any assertion to the effect that there was one obvious ground on which to apply or set aside the Orders, namely that no cross undertaking in damages had been offered by the Secretary of State and that counsel for the Secretary of State had not, apparently, complied with the Etherton Protocol.

Instead, a rather different case is advanced, as set out in paragraphs [67] - [68] above. These allegations fall into three categories. First, that a firm specialising in insolvency matters ought to have advised and acted on the bases there set out; secondly that MDR ought immediately to have asked for the skeleton argument and note of the hearing together with the evidence; third, that the failure by MDR to request the immediate supply of these documents and to insist on the same constituted a breach of the implied term of the retainer and/or of the duty of care.

In my judgment Mr Barrett has a real prospect of establishing at trial that these were steps that MDR ought to have taken for the following reasons. First, it was apparent at the outset that this was a case of extreme urgency. It was clear that unless the Orders were set aside in a relatively short period of time it would become increasingly difficult for the companies in the Group to continue trading, to persuade the Bank to withdraw the administrative receivers and to dissuade other creditors from coming forward.

Secondly, in the light of the information from the Bank, there was some reason to hope that a successful application to discharge the Orders might result in the Bank agreeing to withdraw the administrative receivers.

Thirdly, it was realistic to suppose that it would be difficult, at least in the short term, to challenge successfully the existence of an arguable case to support the petitions. Accordingly, it was reasonable to consider alternative avenues and, in particular, whether or not it might be possible to satisfy the court in some other way that the appointment of provisional liquidators was unnecessary pending the determination of the petitions on their merits. To carry out any such assessment it would be necessary to consider all of the materials relied upon by the Secretary of State and the way the case was presented. For these purposes the evidence, skeleton argument and note of the hearing were required as a matter of urgency.

Moreover, it seems to me that Mr Barrett has a real prospect of establishing at trial that, had MDR insisted upon the immediate supply of the evidence, the skeleton argument and the note of the hearing that there is a real chance they would have been supplied rather sooner than they were and this would have allowed a few extra days to be gained for the purpose of preparing any application.

This is, to my mind, the heart of the draft re-amended pleading. The substance of it is set out in paragraphs [69] – [75] above. It is said that during the week beginning 21 January 2002, MDR should have advised Mr Barrett to prepare an application to have the Orders discharged and should have drafted and prepared such an application and should have entered into a dialogue with the Treasury Solicitor with a view to discharging the Orders. It is said that the application could and should have been based upon six grounds:

I do not understand it to be said that the first three grounds would be sufficient, of themselves, to give any real prospect of having the Orders discharged. Nevertheless, they provide background against which the remaining grounds must be considered. The first and most important of these is the contention that there is a real possibility that undertakings could have been given or other conditions met which would have allayed the concerns expressed by the Secretary of State pending the hearing of the petitions. Allied to this point is the further contention that an alternative application should have been made requiring the Secretary of State to give a cross undertaking in damages. The second ground is that there is a real prospect that the Orders would have been set aside on the basis of a failure to disclose material facts and that the court was misled. The third ground is that the Etherton Protocol had not been complied with. Non disclosure is a self contained issue and I will take it last.

The undertakings which it is suggested might have been offered are set out in paragraph [72] above. In addition, and during the course of submissions before me, it was suggested that further undertakings could and should have been offered not to remove or destroy documents, not to dispose of assets or pay money out of any account to or for the benefit of any director and not to make any inter-group transfers.

It was forcibly contended on behalf of MDR that any such proposed regime of undertakings would not have been acceptable to the Secretary of State or to the court and it was not negligent to fail to put it forward. A number of arguments were advanced in support of this contention.

First, it was said that the law is generally unsupportive of undertakings in this situation. In particular, and as Etherton J pointed out in City Vintners, there are always dangers and difficulties in the use of undertakings or injunctions to control continuing business activities. These difficulties include the inevitable practical problem as to how such undertakings or injunctions can be monitored effectively.

In this regard my attention was also drawn to the decision of Sir Andrew Morritt V-C in InRe Supporting Link Ltd [2004] EWHC 523 (Ch). The case concerned a petition presented by the Secretary of State for Trade and Industry to wind up a company on the ground that it was expedient to do so in the public interest. Sir Andrew Morritt V-C declined to accept undertakings and observed that unless the Secretary of State is content that the petition is disposed of on undertakings the court should be very slow indeed to accept them in preference to making a winding up order. It would potentially place upon the court and upon the Secretary of State an intolerable burden. Nevertheless, I note that an earlier application for the appointment of a provisional liquidator was disposed of on the basis of undertakings given to the court by the company and its principal director.

Secondly, it was emphasised on behalf of MDR that the Secretary of State made out a very strong case of impropriety and dishonesty by Mr Jones and Mr Barrett such that, in the submission of the Secretary of State, “the companies’ affairs should not be left in their hands”. I have set out in some detail earlier in this judgment the various allegations made against Mr Barrett and Mr Jones. They include allegations of dishonesty, illegal asset stripping, forgery and breach of the financial assistance provisions of the Companies Act 1985. In these circumstances, it was submitted, no undertakings would have been acceptable either to the court or to the Secretary of State and that is so even if Mr Barrett had been excluded from the business.

Against these submissions, I must, however, consider the following. First, it is a fundamental aspect of the “Etherton Protocol” that good practice requires counsel acting for the Secretary of State on a without notice application for the appointment of a provisional liquidator to draw expressly to the attention of the judge that, if it be the case, a cross undertaking in damages is not being offered, and that it has been the practice of some judges in appropriate cases to impose injunctions or take undertakings rather than appoint a provisional liquidator. Two important points emerge from this statement of good practice. First, some judges do impose injunctions or take undertakings rather than appoint a provisional liquidator in an appropriate case. Secondly, the need to consider taking such a course is particularly acute where no cross undertaking in damages is offered by the Secretary of State.

Secondly, the case was in some respects an unusual one. As the skeleton argument submitted on behalf of the Secretary of State made clear, the case differed from many others in which the Secretary of State has sought the appointment of a provisional liquidator in that AFD, DWL and Wignall had legitimate and potentially viable businesses. Wignall was the ‘jewel in the crown’ and it was being run by a management team headed by Mr Wignall and which did not include Mr Barrett. The business was apparently prosperous and successful. This was recognised by Mr Alexander of the Bank and Mr Friend.

Thirdly, the Secretary of State clearly considered the possibility that sufficient control over AFD, DWL and Wignall might be obtained by the appointment of a provisional liquidator of Dagonal but not of AFD, DWL and Wignall and that on his appointment the provisional liquidator could appoint new directors of AFD, DWL and Wignall. Nevertheless, it was submitted by the Secretary of Sate that the Official Receiver would be unlikely to obtain adequate control in this way. In particular it would be hard to find any suitable person willing to accept appointment as director.

It does, however, seem to me that it is inherent in these submissions that if a new director had been found and if undertakings had been offered which adequately protected the assets and businesses of the companies in the Group by ‘ring fencing’ them from interference by Mr Barrett and Mr Jones then there was a real possibility the Secretary of State would have entered into a dialogue which might have led to the discharge of the Orders.

In these circumstances it does seem to be at least arguable that MDR ought to have considered with Mr Barrett an application to have the Orders discharged on the basis that suitable undertakings could be given or conditions met. In the event that the Secretary of State did not agree to the discharge of the Orders then, I have to say, I entertain considerable doubt as to whether or not a court would have been prepared to set the Orders aside and accept undertakings in lieu. Nevertheless, in the particular circumstances of this case, I feel unable to say at this summary stage of the proceedings that such an application would have had no real prospect of success. In my judgment Mr Barrett has a real prospect of establishing that he has lost an opportunity of real value. In all the circumstances I have reached the conclusion that this is a matter which must be allowed to proceed to trial.

It was contended on behalf of Mr Barrett that it was obvious that no attempt had been made to comply with the Etherton Protocol. Accordingly, it was submitted, an application to discharge would have been successful and the result of such an application would have been, at the least, that the Secretary of State would have had to give a cross undertaking.

In my judgment there is nothing in these submissions and the allegation is a hopeless one. I am prepared to assume for this purpose that the attention of Lawrence Collins J was not expressly drawn to the Etherton Protocol on the without notice application. Nevertheless, I do not believe there was any prospect of having the Orders set aside on such a basis for all the following reasons.

First, the Etherton Protocol is simply a matter of good practice.

Secondly, and as the judgment of Etherton J in City Vintners makes clear, there is no requirement, absent special circumstances, for the Secretary of State to offer a cross undertaking.

Thirdly, the application was, on the face of it, made on strong grounds. I have set them out above and do not repeat them here.

Fourthly, the applications were made by the Secretary of State in the public interest. In my judgment there were no special circumstances which could conceivably have resulted in the Secretary of State offering a cross undertaking in damages.

Fifthly, MDR took advice from counsel experienced in insolvency matters on 18 January and were advised, correctly in my judgment, that an undertaking in damages was not required of the Secretary of State and an application for a stay or discharge of the Orders on the ground that an undertaking should have been provided would have been likely to fail. I consider that MDR acted entirely reasonably in taking that advice and acting upon it.

Finally, and again on the assumption that the attention of Lawrence Collins J was not drawn to the Etherton Protocol and further assuming that an application was made to discharge the Orders on that basis, I have no doubt that on the hearing of that application the judge would have affirmed the orders appointing the provisional liquidators. The mere fact that the attention of a judge upon a without notice application was not drawn to the Etherton Protocol would not be a ground for declining to make an order appointing provisional liquidators at a further contested hearing were it otherwise right to do so.

Shortly before the hearing of this appeal a further skeleton argument was served on behalf of Mr Barrett setting out additional reasons why an application to set aside the Orders had some prospect of success. There are nine in all and I will deal with them in turn.

First, it was submitted there were insufficient grounds for a without notice application at all. In support of this submission it was said that investigators acting for the DTI had been looking into the business of the Group for some six months and had asked for and been provided with copies of documents. Moreover, the assets of Wignall were under the control of independent management and Mr Barrett could not strip those assets without Mr Wignall knowing about it.

I do not accept there is anything in these points. The application was made without notice because the Secretary of State feared there was a real risk that, were the Companies to be given notice of the application, assets would be removed or dissipated and records tampered with. That fear was based upon the past conduct of Mr Barrett and Mr Jones. It is of course true that investigators had been looking into the affairs of the Companies for a period of months but that is no answer to the submission that there was a real risk that Mr Barrett and Mr Jones might take steps to remove or dissipate assets and to cover the tracks of any such activities if given notice of the application.

Further, and while it is true that Mr Wignall was, at the time of the application, running the business of Wignall, he was not a director and the Secretary of State feared that he was on the point of resigning. Mr Wignall was evidently not satisfied with the way the businesses were being controlled by Dagonal and had offered to buy back the company from Dagonal. The offer had not received a formal response, although Mr Barrett had suggested that a sum in excess of the original purchase price would be required. The offer made by Mr Wignall remained on the table until 6 January but Mr Wignall had expressed a fear that, in the event the offer was not accepted, the entire management team might resign. The fact that Mr Wignall and the other members of the management team might have resigned or be on the point of resigning was an important reason for making the without notice application.

I consider that Lawrence Collins J did have material before him which was sufficient to justify making a without notice application and, in the light of that material, he duly exercised his discretion to make the Orders as requested.

Second, it was submitted that the Etherton Protocol was not followed in any respect. I have addressed this contention earlier in this judgment. It does not provide a justification for setting aside the Orders.

Third, it was submitted that the Human Rights Act position was seriously misrepresented. In particular it was submitted that the skeleton argument was incorrect and misleading in suggesting that the European Convention on Human Rights was not relevant to the applications being made. I accept that the skeleton argument does not fully set out the position. Indeed the particular paragraph of Lester & Pannick, Human Rights Law Practice, to which the judge was referred relates to criminal proceedings. Nevertheless, I do not think there is anything in this point. It is evident from the note of the hearing that counsel acting for the Secretary of State made clear that the Secretary of State was concerned that the issue of article 6 should be addressed. In response, Lawrence Collins J indicated that this was not an issue. As recorded in the note, Lawrence Collins J observed: “There was no determination of rights. All legal systems had, from time immemorial, granted interim remedies for the protection of people’s rights. There was no difference in the present case”. It is of course right that an application for the appointment of provisional liquidators is not simply an application for interim relief and it may have immediate and devastating consequences. But this is a matter which Lawrence Collins J had well in mind. He exercised his discretion to make the Orders. He had ample material before him on which to do so.

Fourth, it was submitted that the skeleton argument stated the Secretary of State’s case throughout as fact, and made no attempt to suggest possible defences. In my judgment this is far too generalised and unspecific an allegation to carry any weight. The skeleton argument contains frequent references to the evidence and to the petitions. Moreover, and as I have indicated, it draws the attention of the court to the difference between the present case and many others in which such orders have been sought.

Fifth, it was submitted that the note of the hearing shows that counsel for the Secretary of State continued to state his case as fact. This argument is bound to fail for the same reasons set out above in relation to the fourth argument.

Sixth, it was submitted that when Lawrence Collins J asked the extremely pertinent question as to what evidence there was of dishonesty in relation to the companies other than Simpsons he was told by counsel for the Secretary of State that there was some but he did not refer to any. In this regard particular reference is made to the note of the hearing and the fact that it records a question from Lawrence Collins J that he wanted to see evidence of dishonesty in relation to Dagonal, AFD, Debono and Wignall. In response, counsel observed that there was some, but that if the Simpsons example was instructive it was to be inferred that the serious dishonesty so far identified would not be apparent until the latter stages of the companies’ lives. That stage had not yet been reached and the application was being made in order to prevent it happening. In my judgment this was a fair representation of the position. As the skeleton argument makes clear, and as Lawrence Collins J himself observed at the end of the hearing, the Secretary of State was concerned that the companies in the Group were viable but being run by persons who were dishonest and guilty of forgery. The Secretary of State was concerned that Wignall, DWL and AFD would suffer the same fate as Simpsons.

Seventh, it was submitted that there were serious misrepresentations of the evidence and non-disclosures. In this respect it was submitted, and I accept, that it is not enough to bury a fact in an affidavit particularly where, as here, there are a number of affidavits, at least some of which have over 150 paragraphs. A number of the alleged misrepresentations and non disclosures have already been dealt with above, and I can take them all quite shortly. I first set out the alleged misrepresentation or non disclosure and then my conclusion in relation to it:

Eighth, it was submitted that contrary to good practice the Companies were not served with the evidence, skeleton argument or the note of the hearing. This adds nothing to the points that I have dealt with already.

Finally, it was submitted that this was a case in which an injunction should have been considered at the without notice stage and in which undertakings should have been considered inter partes. Once again this adds nothing to the points that I have already considered.

In summary, there is nothing in any of the alleged non disclosures or misrepresentations.

MDR contend that unless the administrative receivers were removed there was no point in attempting to remove the provisional liquidators, and Mr Barrett cannot succeed on causation as there was no prospect of doing so. The Master dealt with this issue in paragraphs [55]-[61] of her judgment and concluded that the issue of causation was complex and that MDR had not demonstrated that there was no real prospect of success.

The allegations remain in the re-amended defence and counterclaim. It is asserted that on Friday 11 January, the Bank, by Mr Alexander, informed Mr Barrett that it was prepared to remove the administrative receivers if the Orders were discharged. It is also asserted that this information from the Bank meant that a successful application to discharge the Orders would or could result in the removal of the administrative receivers.

MDR contend that the Master here fell into error. In particular, it is said that Mr Barrett’s case is hopeless in the light of the communications that took place between MDR and the administrative receivers and Mr Scourfield. The upshot of all of these communications was, as I have set out earlier in this judgment, that the Bank would not be interested in administration.

In my judgment the Master was right to come to the conclusion that she did. As MDR recognise, the high point in Mr Barrett’s case is a letter of 9 September 2004 from Mr Alexander stating that he had said on Friday 11 January 2002, that:

“Subject to the Bank’s understanding and satisfaction with the circumstances that led the DTI to take their action we would consider recommending to our Risk Department that we should immediately review the appointment of the Administrative Receiver.”

In my judgment it is not surprising that neither Mr Thomas, of the administrative receivers, nor Mr Scourfield, the Head of Risk for the Bank, would contemplate administration while the Orders remained effective. But the position might have been different if those Orders had been set aside. In that event, and as explained by Mr Alexander, it was possible that the Bank would reconsider the removal of the administrative receivers. Ultimately the decision could only be that of the Bank. This is an issue which cannot be determined on a summary judgment application.

As I have indicated, I do not detect in the draft re-amended defence and counterclaim any express allegation that MDR were negligent in failing to prepare and advise Mr Barrett to make an application before 18 January 2002. Nevertheless, that is one of the issues decided by the Master against Mr Barrett and against which Mr Barrett seeks leave to appeal.

It was submitted on behalf of Mr Barrett that the prospects of success on such an application were excellent because it was obvious that no attempt had been made to comply with the Etherton Protocol, that no attempt had been made to inform Lawrence Collins J of possible defences and further, the case was not an appropriate one for a without notice application at all in view of the lack of hard (or any) evidence that Mr Barrett was likely to misappropriate company assets or destroy documents.

For the reasons which I have given I consider that MDR ought to have pushed the Treasury Solicitor for the immediate supply of the evidence, the skeleton argument and the note of the hearing. Nevertheless, again for the reasons which I have given, I do not consider that an application based upon failure to comply with the Etherton Protocol, failure to inform the judge of possible defences and a submission that the case was not an appropriate one to make without notice, would have had any real prospect of success.

In my judgment the only course which had any real prospect of success was an application to discharge the Orders coupled with a dialogue with the Treasury Solicitor, supported by evidence sufficient to place matters in issue and concentrating upon undertakings and conditions to safeguard the assets and records of the Group pending the hearing of the petitions. It seems to me that it was wholly unrealistic to suppose that all of this could have been achieved during the course of the first week following the service of the Orders even if the Treasury Solicitor had supplied the evidence, the skeleton argument and the note of the hearing promptly. The appeal against this aspect of the Master’s judgment therefore fails.

On the second issue rising from the Master’s judgment, that is to say whether Mr Barrett has a real prospect of establishing that he ought to have been advised to apply to set aside the appointment of the provisional liquidators in the further period ending 28 January 2002 and instructed counsel to make that application, the Master was, in my judgment, correct albeit that I reach this conclusion on the basis of the allegations as further developed in the re-amended defence and counterclaim.

Finally, MDR have identified a series of points dealt with by the Master under the heading “loss of a chance”. They do not expressly appear in the re-amended defence and counterclaim but nevertheless Mr Barrett does rely upon them. I will deal with them in turn.

Friend & co apparently prepared a report to the Bank dated 29 October 2001 that showed Mr Barrett and his companies in a favourable light. Mr Barrett gave evidence that the Friend & Co report was not seen by the DTI and this would have formed another piece of the evidence in support of an application made by him to have the Orders set aside.

The Master noted that the application by the Secretary of State recognised that the businesses of Wignall and DWL were legitimate and potentially viable. In these circumstances I accept the submission advanced on behalf of MDR that any evidence from Friend & Co would be a piece of evidence which the court would no doubt have considered on the application. It does not, however, affect the conclusions which I have reached.

This is addressed by the Master in paragraph [67] of her judgment. As she explains, it is either a letter dated 21 November 2000 from Mr Tomlinson, the administrative receiver of Simpsons, or a letter dated 29 March 2001 from Mr Tomlinson to Mr Barrett. The earlier letter states with regard to Mr Barrett, “I note that my report does not specifically mention that Paul Barrett has any personal involvement with either company” (that is to say, PSL or Dagonal). The latter letter states: “I can advise that neither you nor your son Stuart have been named as a director on the report who I consider to have had unfit conduct in their dealing with the company.” (that is to say, Simpsons). The Master indicated that she could reach no conclusion as to the weight the judge would place on this particular weight of evidence, but it would have formed one piece of the total evidence to be considered. I agree.

This matter is addressed by the Master in paragraphs [68]-[70] of her judgment. For the reasons which I have earlier set out, I have reached the conclusion that this is material to the issue of causation.

This is addressed by the Master in paragraph [74] of her judgment. It was an issue which could only be resolved on the hearing of the petition.

There is little in this point. It is addressed by the Master in paragraph [76] of her judgment. Mr Barrett has given evidence that there were 140 employees but it appears that the Lawrence Collins J was told that “the staff were relatively few”. He was apparently handed a note relating to the number of employees but there is no evidence as to what that note contained and whether or not it was accurate. It seems to me that this point does not advance Mr Barrett’s case in any way.

This is a contention advanced on behalf of Mr Barrett. It is addressed by the Master in paragraph [78] of her judgment. I have dealt with it earlier in this judgment. I consider that all relevant materials were put before Lawrence Collins J and that he was properly informed that the Secretary of State was concerned that Mr Wignall and his management team might already have departed or were on the point of doing so.

For the reasons set out in this judgment I have reach the conclusion that Mr Barrett has established, just, that he has a real prospect of succeeding in his defence to this claim and upon his counterclaim on the basis of some but not all of the contentions advanced in the draft re-amended defence and counterclaim presented at the hearing. Accordingly, I decline to strike out Mr Barrett’s defence and counterclaim but will consider an application by Mr Barrett to serve an amended defence and counterclaim in the light of this judgment. I will hear argument as to any outstanding matters, including costs, in the event the parties are unable to reach agreement.