Delberry Ltd, Re

THE DEPUTY JUDGE: This is an application by Mrs Susan Stockley, the liquidator of Delberry Limited (which I shall refer to as Delberry) against the administrative receivers of Delberry and their firm, RSM Robson Rhodes LLP, for an order pursuant to the Insolvency Act 1986 section 236(2)(c) and (3) for the production to the court of eight specified categories of documents in their possession or under their control and, in the case of the non-production of documents, for an order that Mr Whitfield, the second joint receiver, who continues to be a partner of Robson Rhodes, do swear an affidavit explaining why such documents have not been produced and, if they existed in the past but are no longer in existence or available, explaining what has become of them.

The applicant contends that the categories of documents sought both pre- and post-receivership are relevant to the receivers' remuneration and/or their conduct of the administrative receivership and/or the affairs or property of Delberry and hence fall within the categories of information concerning the business dealings, affairs or property of the company in the Insolvency Act 1986 section 236(2)(c). An administrative receiver is among the classes of person obliged to co-operate with the liquidator by virtue of the Insolvency Act 1986 section 235(2) and subsections (3)(e) and is under an equitable duty to account and provide information to the company over which he has been appointed administrative receiver.

I shall summarise the background to the application briefly. The respondents were appointed administrative receivers by Lloyds TSB Commercial Finance Limited on Thursday 29 July 2004. Lloyds had a debenture over Delberry's assets. Prior to the appointment of the administrative receivers Robson Rhodes had been engaged by Delberry at the request of Lloyds to carry out a review of Delberry's business and thereafter to monitor it. The lead partner was Mr Oldham. In addition Robson Rhodes were involved in negotiations with an interested party, Research Plc, to inject equity finance into Delberry and to agree on a sale and lease back of some of Delberry's land and buildings.

On Tuesday 3 August 2004 the administrative receivers sold Delberry's assets for £1 million without advertisement to a company associated with the party involved in pre-receivership negotiations. The liquidators were concerned as to the level of charges charged by the administrative receivers. The witness statement of Mr Christopher Branson described the invoices at paragraph 10 of the statement. In effect the administrative receivers claim a total of £97,000 plus solicitors' fees of £60,000 and agent's fees of £20,000 for a business sale effected within less than a week of their appointment.

The liquidator's criticisms are summarised in the liquidator's letter dated 16 May 2006 to the administrative receivers' solicitors. The speed with which the sale of the business was carried out has caused the liquidator to be concerned whether the administrative receivers' fees are excessive. She suspects the sale may be what is called amongst insolvency practitioners a prepack, ie one which was virtually agreed prior to the appointment of the administrative receivers. There may be no difficulties with a prepack sale, but much of the work leading to the sale may be attributable to work done prior to the administrative receivers' appointment. It will be noted that the two invoices for the period 28 July 2004 to 15 April 2005 and 26 August 2004 to 30 August 2006 total nearly £100,000. In addition the administrative receivers had been paid some £25,000 for pre-appointment work and had written off time costs of some £9,500.

Mr Oldham is no longer with Robson Rhodes but his colleague, Mr Whitfield, has estimated that he, Mr Oldham, spent some 38 and a half hours in dealing with the sale of the business. There is some evidence that Mr Oldham was first seen at Delberry's premises following his appointment on 3 August after the weekend following his appointment, having returned from holiday that morning. That would have been the Monday, the sale taking place on the Tuesday. There are other matters which the liquidator considers give rise to concerns. Mr Oldham had charged 79 hours to the receivership but that time was misallocated under investigation or filing. His use of Smith Hodgkinson as valuers, instructed by the administrative receivers on 14 July 2004 to value the assets in the business. The Smith Hodgkinson valuation was lower than a valuation carried out on 30 April 2004 by Alder King. The liquidator was also aware that Mr Oldham had used Smith Hodgkinson on two previous occasions when assets were sold to entities associated with Mr Jamie Constable, who was behind the purchase of Delberry's business.

Other concerns of the liquidator relate to a side letter dated 3 August 2004 relating to the sale of the business which appears to have the effect of forgiving part of the deferred consideration of £150,000 for the sale of the business and may not have been given for good consideration. Furthermore, the liquidator considers that part of the deferred consideration which remained outstanding appears to have been forgiven for no good reason. What all this comes to is that the liquidator considers there are matters which require investigation relating to the conduct of Delberry's affairs whilst in receivership and the manner in which the administrative receivers charged for their services. It may well be the case that the administrative receivers have explanations which will show that the liquidators' concerns are groundless, but on an application of this nature the court cannot attempt to investigate whether the liquidator's concerns are finally made out.

In the course of the hearing it became apparent that there was no real issue as to certain categories of documents. These are category 3, which relate to the office diary of Mr Oldham. That is not available as Mr Oldham did not keep a diary and whatever details were entered into on the electronic diary have been disclosed. Category 5, as the category is drafted the administrative receivers say all such documents in the list have been disclosed. The liquidator makes an application to amend the application to include any memorandum notes of meetings or telephone calls. The liquidators' counsel, Mr Smith, on instructions informs me that no such documents exist but the liquidator seeks an order that the respondents verify the answer by affidavit.

Category 6, documentation relating to the variation of the side letter. The respondents contend that they have supplied whatever documentation exists and that these documents are contained in three boxes of documents which were supplied to the liquidator including a letter dated 26 April 2005. This is disputed by the liquidator, who points to three entries in a schedule recording work done, dated 8 April 2005 and 18 and 25 April, recording that work was done in relation to the preparation of letters to Mr Jamie Constable, who controls the company which acquired Delberry's assets from the administrative receivers. The liquidator does not admit that she received a copy of the letter dated 25 April. There is no dispute that if the letters exist that the liquidator is entitled to a copy of them. Accordingly the respondents should produce a copy of the letters if they have them. If they do not exist Mr Whitfield should make and swear an affidavit confirming that he has looked for them and cannot find them.

The production of other categories of documents is strongly resisted by the respondents. These are: category 1, which relate to all time records in respect of pre-receivership work in relation to Delberry for which Robson Rhodes was paid £25,000 by Lloyds TSB on about 3 August; category 2, all times in respect of pre-receivership work in relation to Delberry for which the time costs of £9,680 have been incurred but not charged; category 4, all correspondence, notes and memoranda with the debenture holders relating to the receivers' remuneration and disbursements and the pre-appointment remuneration of Robson Rhodes; category 7, all documentation relating to the receivers' strategy and planning, particularly in relation to justify the decision not to trade; and category 8, various miscellaneous documents, that is internal review forms, fee notes, correspondence with Lloyds and Company Directors Disqualification Act reports. The liquidator no longer seeks production of the Company Directors Disqualification Act reports.

Production of the documents is resisted on a number of grounds. Firstly, it is said that the liquidator does not reasonably require to see the documents on the grounds that the documents do not relate to Delberry's business or that the liquidator is acting unreasonably in seeking to obtain copies of them and, secondly, that an order for production would be oppressive on the grounds that the application for them is an abuse of process.

So far as categories 1 and 2 are concerned, the administrative receivers contend that pre-receivership work carried out at the request of Lloyds and paid for by Lloyds does not relate to Delberry or to its business dealings, affairs or property within the meaning of section 236(2)(c) of the Insolvency Act. I do not consider that the fact that the work was carried out pursuant to instructions from Lloyds or paid for by Lloyds results in the subject of the work not relating to the affairs of Delberry. Plainly the subject matter of the work falling within categories 1 and 2 related to Delberry. Its business and affairs were the subject matter of the administrative receivers' concerns. I note that in Re Trading Partners [2002] BCLC 655 Patten J ordered production of documents from receivers which were plainly their own property and which had been assembled at the cost of the debenture holder (see page 66 of the judgment).

In many cases documentation prepared on the instructions of a debenture holder and paid for by it in the first instance will at the end of the day be paid for by the chargor company as a term of the debenture. But in any event the identity of the person which bears the costs of preparing the documents cannot affect the jurisdiction to make the order. In a case where a liquidator is concerned to assess the work done during the course of a sale of a business effected by administrative receivers shortly after their appointment, it is clear that the nature of the work carried out before their appointment may have an impact in assessing the extent of the work required to be carried out after their appointment and which can properly be regarded as a receivership expense. Accordingly, I reject the contention that categories 1 and 2 do not fall within section 236(2)(c) on the grounds that they do not relate to the business affairs of Delberry.

It is also contended that the liquidator does not reasonably require these documents. That submission was on the basis that the liquidator requires these documents in order to bolster her application to fix the administrative receivers' costs pursuant to section 36 of the Insolvency Act and that it is not necessary for the liquidator to have these documents for that purpose as the section 36 procedure applies in two stages. First, there is an application to fix the fees of the administrative receivers. Second, if that is granted there is an assessment of the administrative receivers' fees. In the course of that assessment the burden is on the administrative receivers to justify their fees. If they fail to adduce relevant documentation that would give rise to inferences against them. Accordingly, the administrative receivers submitted that the liquidator was abusing the process of the court in making an application which might have the effect of assisting her in a section 36 application. Furthermore, the application under section 236 was made at a time when the section 36 application was ready to be heard. It was also submitted by the administrative receivers that there was no procedure for disclosure in the course of a section 36 assessment. As the section 36 application played an important part in the submission of the administrative receivers I shall deal in some detail with the history of the application.

The application was issued on 24 October 2005, supported by a witness statement by the liquidator dated 18 October 2005. The administrative receivers responded to that witness statement on 23 January 2006 with a statement from Mr Whitfield, to which the liquidator in turn responded on 22 February. By a letter dated 16 March 2006 the liquidator, reiterating a point she had made earlier, emphasised that she considered that as liquidator she was entitled to investigate the activities of the administrative receivers in the context of a section 36 application. Her solicitors, Boyes Turner, wrote that what had started as a challenge to the administrative receivers' costs had as a result of further investigation disclosed many alleged failures on the part of the administrative receivers. The investigations had allegedly revealed that the administrative receivers might have overcharged in respect of the time allocated to each category of work, the charging rate applied to the work and also underperformed in terms of the realisations achieved and failed to control fees paid to other professionals and had not kept proper time records.

The letter went on to describe various other failings said to arise out of various breaches of duties. Certain of the alleged failures by the administrative receivers might more properly be categorised as allegations of substantive breaches of duty rather than matters going simply to the question of quantum of fees, for example, issues arising out of the side letter and forgiveness of part of the deferred consideration. Also on 16 March Boyes Turner wrote to the administrative receivers' solicitors, Messrs Piper Rudnick Gray Carey (whom I shall refer to as Piper), that they believed that the court had sufficient evidence to decide whether or not to order an assessment under section 36 as they contended that there was sufficient evidence to show that the remuneration charged was excessive and they intended to proceed with a section 36 application on 17 March. On that day the court did not have the files and so the application was adjourned until 2 May 2006 with a time estimate of two and a half hours.

On 27 April Piper wrote to Boyes Turner suggesting that advantage of the adjournment should be taken and that the issues between the parties should be mediated and put forward two potential mediators. On 3 May Boyes Turner replied. They noted that the liquidator was not opposed to mediation in principle but considered a mediator would not have sufficient information to assess the issues and assist the parties. The letter went on to refer to the alleged deficiencies in the documentation provided by the administrative receivers in relation to proper time records, notes and records of involvement. The letter also suggested that it would be more appropriate to have the mediation after the hearing on 23 May in the light of the fact that the registrar would be asked to rule on a point of law and whether the matter was an appropriate one for an assessment.

On 12 May Piper replied to Boyes Turner's letter, reciting their view of the history of the correspondence and proposing that the hearing on 23 May be confined to directions relating to any issues which were relevant to the issue of the assessment of remuneration in the terms in which they saw the application, ie whether the costs incurred dealing with matters such as retention of title were properly chargeable. Their letter went on to say that following such findings they suggested that the matter be adjourned for a one-day mediation on the basis set out in the letter. If the mediation was tried, and presumably failed, the administrative receivers would agree directions for the assessment of their remuneration.

By letter dated 16 May Boyes Turner replied to the letter dated 12 May. In the letter they contended that the liquidator suspected that the administrative receivers had acted in breach of fiduciary or other duties to Delberry. Accordingly she wished to complete her investigations into Delberry so that she could satisfy herself as to whether there was misfeasance or other claim against the administrative receivers or alternatively whether there was a claim simply of excessive remuneration. The letter proposed that the 23 May hearing be adjourned as that would give the administrative receivers an opportunity to explain their conduct and the liquidator an opportunity to complete her investigations. The investigations would be relevant to both remuneration and breach of duty. The letter then went on to summarise the liquidator's complaints about the information supplied by the administrative receivers to date. The letter ended up stating that even if the request to adjourn was accepted the liquidator might make an application under section 236 of the Insolvency Act. On 18 May Piper agreed to the adjournment with liberty to restore in order to prevent further waste of costs.

On 1 June Boyes Turner wrote seeking further information and documentation. The issues raised in the letter related to breach of duty. The letter also sought disclosure of what Piper called the administrative receivers' personal records. By letter dated 1 June Piper replied, drawing the distinction between remuneration issues and breach of duty issues and suggesting a possible meeting. By letter dated 13 July Boyes Turner stated that the liquidator was agreeable to a meeting but only when she had had satisfactory information and documentation from the administrative receivers.

From the above it can be seen that the liquidator saw the issue of fixing remuneration and an assessment as involving issues relating not just to the remuneration issues properly so called, relating to hours spent and rates charged for specific items of work, but also raising issues concerning the quality of work done. The administrative receivers, on the other hand, contended that section 36 was a wholly inappropriate vehicle to consider issues of substantive breach of duty relating to the work done or relating to misfeasance. Accordingly, on the administrative receivers' case, any application to produce documentation to bolster the section 36 application, if that application is properly confined to issues of remuneration in the strict sense (as they contend it should be) as opposed to substantive failures, is an abuse of process as it is wholly inappropriate to that application. The liquidator states that the document which is the subject matter of the application is relevant but in any event she is entitled to investigate Delberry's affairs. She contends that she can raise issues as to the quality of work done, breach of duty in the context of section 36 but in any event could raise them separately and therefore she is entitled to pursue the documents under section 236.

In considering whether to grant a section 236 order the court has to carry out a balancing exercise between the reasonable requirements of the liquidator to carry out her functions and the need to avoid making an order which is oppressive to the person to whom it is addressed. See the short summary by Patten J in Re Trading Partners [2002] BCLC at page 665, paragraph 13, where he said, after referring to British and Commonwealth:

The administrative receivers refer to the well-known passages in Re British and Commonwealth [1993] AC 426 and the oral judgment Lord Slynn at 438, C to F, and also the passages at 439, D to E, and 439 G to 440 A.

It should also be noted that in the House of Lords decision in Re Pantmaenog Timber Company Limited [2004] 1 AC 158 Lord Millett at page 178 said that:

Amongst the factors which the court will take into account in hearing an application under section 236(3) are that it (i) should be necessary for the liquidator to obtain the documents in the interests of the winding up; (ii) that production should not be oppressive or unfair to the respondent; (iii) the onus of establishing the need for the documents is on the office holder (albeit a great deal of weight is to be given to the office holder's views that production is required) and the status of the person to whom the order is addressed; (iv) if the person is a stranger to the company the court may be slower to make an order but where the person owed fiduciary duties to the company, and was an ex-officer of the company, the court may be more ready to make the order; (v) section 236 is not intended to give the office holder special advantages in ordinary litigation and in general the court is disinclined to make an order where the office holder has commenced litigation against the respondent to the section 236 application. However, there is no hard and fast rule in relation to that issue and (vi) the volume of documentation requested and the effort required to produce it; (vii) section 236 is not limited to documents belonging to the company in liquidation. The wording in section 236(3) is wide, as Patten J pointed out in Re Trading Partners Limited at pages 663, B to H. The fact that the documents are the administrative receivers' own documents is a factor which the court might take into account in exercising its discretion but it does not go to the jurisdiction.

Section 236(2) is, as I have said, expressed in the widest terms. In Pantmaenog Timber the House of Lords held that the section could be used to obtain an order for disclosure of documents from third parties where the application was directed to bolster an application to disqualify directors from acting as directors pursuant to the Company Directors Disqualification Act 1986 and not to recover assets of the company. The applications for disqualifications had already been commenced against the directors. As Lord Hope said at page 163, letter F, the jurisdiction which the court is given is expressed in the widest terms. The administrative receivers relied upon a decision of the Court of Appeal in that case, but that decision was in fact reversed by the House of Lords.

I cannot see any reason why section 236 cannot be used by a liquidator in order to ascertain whether he should bring an application under section 236 to have the administrative receivers' remuneration fixed. In this case the more difficult question is whether, were the issues confined to narrow remuneration questions, the liquidator should be permitted to rely on the section 236 procedure late in the day when the application to fix was ready to be heard before the adjournment by agreement on about 18 May. In this case the correspondence which I have endeavoured to summarise above, and some of which is difficult to follow, shows that when Boyes Turner suggested an adjournment in their letter dated 16 May they indicated that if the administrative receivers did not comply with the liquidator's request for additional information, the liquidator would apply under section 236 for the production of documentation. The administrative receivers agreed to an adjournment. It was open to them to insist that the application to fix remuneration should proceed or to apply to strike it out. I also consider that in the context of an assessment following an order that the remuneration be fixed it would be open to a court to order disclosure of documentation under section 236.

In this case the order is addressed to persons who were administrative receivers of the company and who might be expected to have certain documents to hand and who are expressly referred to in section 235(3)(e) of the Insolvency Act as being under a duty to co-operate with the company. Furthermore, as the administrative receivers owed fiduciary duties to Delberry in relation to their claim for remuneration they must have been aware that one of the incidents of their appointment was that they might be called upon to justify their remuneration.

In the light of delay which has already occurred in this matter, the fact that the volume of documentation required to be produced under categories 1 and 2 is admittedly not voluminous, I consider there is nothing oppressive in ordering production of the documents falling within categories 1 and 2 in the light of the history of the correspondence. I note that a breakdown of work done before and post-receivership was requested as long ago as 7 July 2005. The information is relevant to what work had been carried out after the appointment of the administrative receivers in order to consider the strict remuneration matters that may assist the liquidator in considering whether the administrative receivers discharged their substantive duties.

For example, if a lot of work was done pre- the appointment of the receivers in relation to the sale of the business, that may militate against the contention that they made insufficient efforts after their appointment to obtain better terms on a sale of the business and enable the liquidator to satisfy herself that sufficient information was available to the administrative receivers to justify the sale they entered into. Accordingly, there would be two distinct rounds in favour of ordering disclosure, one relating to the remuneration and the second issue relating to breach of duty. I say nothing as to whether the registrar will allow the liquidator to adduce any additional evidence in the application to fix remuneration under section 36 if that application is effected. It is important that the liquidator should have a comprehensive understanding of the company's affairs.

Whether or not section 36 is an appropriate vehicle for making allegations of breach of duty is not something I am required to rule on as it remains open to the liquidator to issue separate proceedings, which I think would be the more usual course, should it appear appropriate to do so in the light of the contents of the documentation revealed.

Accordingly, I do not consider there is a substantial risk that an order for disclosure of documents in categories 1 and 2 would be a waste of time on the grounds that even if they reveal material helpful to the liquidator they will not be admissible in any proceedings. Furthermore, in the light of the professed wish of the parties to mediate their differences, I consider that it is likely that production may assist a mediation. It is difficult to see how the liquidator can sensibly enter into a mediation without the documents in categories 1 and 2, given her professed concerns as to the division of work pre- and post-receivership. Accordingly, I order production of documents falling within these two categories.

I now turn to the documents in the remaining categories which are disputed. The documents in category 4 relate to correspondence and notes of discussions with debenture holders. For the reasons set out above in relation to categories 1 and 2 I consider that these documents should be produced. Disclosure of the documents in category 7, relating to the administrative receivers' strategy and planning, are resisted on the grounds of a statement by Patten J in Re Trading Partners [2002] 1 BCLC 655 at paragraph 19 on page 669 that a liquidator should not use the section 236 procedure to obtain an insight into the strategic considerations for receivership. But that was said in the context of an ongoing receivership where there was a possibility that the liquidator might cause the company to bring claims competing with the debenture holders and described by Patten J at paragraph 20. The information which Patten J declined to order production of was information of the receivers which the receivers obtained as to the strengths of competing claims. However, Patten J was unpersuaded that the fact that material had been prepared at the expense of debenture holders, which might have speeded up a claim by the joint liquidators to the same assets as were being chased by the receivers, was alone sufficient to prevent an order under section 236.

In this case I do not consider that the same considerations apply as the receivership is to all intents and purposes at an end and the liquidator is concerned to find out about the circumstances of the sale of the business. I can see no reason why she should not see the documents in this category, which appear to be relevant to the manner in which the administrative receivers discharge their duties.

Finally, disclosure is sought of the documents in category 8, which consist of internal review forms, fee notes and correspondence with lawyers. Insofar as the latter do not fall within category 4, they should be produced as they will relate to the affairs of Delberry. As I understand it, internal review forms are documents which might also record Robson Rhodes' previous involvement with Delberry at the behest of Lloyds or Delberry and cast light on the state of knowledge of the administrative receivers as to Delberry's affairs at the commencement of the receivership. I shall order disclosure on the grounds that the liquidator's request to see this document is reasonable as it may cast light on the extent to which the administrative receivers have discharged their duties. I also understand that the administrative receivers have agreed to produce any fee notes of third parties.

Accordingly, in relation to the categories above, for the reasons given, I make the orders sought in the application. However, to the extent that no documents exist or can be found, Mr Whitfield can swear an affidavit stating that no such documents exist or, if they existed and cannot be found, explaining what he thinks might have happened to them or what efforts have been made to find them.

I shall hear any submissions on the form of order and costs.