Managa Properties Ltd. v Brittain

There are before the court the following applications:

The Company was in the business of promoting and managing boxers. In proceedings in New York, the well-known boxer Lennox Lewis obtained judgment against the Company for $7m in February 2002. The jury made a finding of fraud and awarded punitive damages in favour of Mr Lewis. After various appeals, the Company was wound up and the Respondent, an insolvency practitioner who is a partner of Baker Tilly, appointed liquidator by the Secretary of State on 10 March 2006.

The Applicant is a company incorporated in Cyprus by Mr Christos Eliades (whom I shall refer to as “Christos” without intending disrespect, to distinguish him from his brother Panos).Christos says he is the beneficial owner of the Applicant. His wife Stella Katchik-Ogly is the sole director.

The circumstances which are said to have led to the Alleged Debt are as follows. Panos purchased 6 Bloomsbury Square WC1 (“the Property”) in 1984. He says that in 1995 he told Christos he needed to sell the Property. The Applicant bought the Property for £1.6m and arranged a leaseback. Panos then used the property for his insolvency practice. The property was sold in November 2001 for £1.95m to a Jewish charity.

In 2001 Panos told his brother he needed £2m to finance the litigation against Mr Lewis and to clear the Company’s liability to him. A facility letter was entered into between the Applicant and the Company dated 24 October 2001 and incorporates a personal guarantee from Panos. To cover the period until sale of the Property, Barclays provided an overdraft facility of £720,000. The further loan funding of £722,103 was paid into the Barclays account. Interest was at 2.5%. The loan was repayable on 31 December 2002. None of the principal or interest has been paid by the Company. A proof has been lodged in the sum of £2,271,265 in the liquidation. .

Christos says he has provided all the documentation available to the Respondent to enable her to investigate the claim that the Applicant is entitled to prove in respect of the Alleged Debt.

The Applicant was dissatisfied with the fact that the Respondent had not accepted (nor rejected) the proof of the Alleged Debt and on 6 July 2007 the Applicant’s solicitors served on the Respondent notice on form 4.21 requiring her to summon a creditors’ meeting for the purpose of removing her as liquidator, at the same time tendering a cheque in the sum of £3,525 as a deposit by way of security for the expenses of summoning and holding such a meeting. On 25 July the request was rejected and the cheque returned. An application to the court was issued on 20 December 2007 and heard before Registrar Derrett on 16 July 2008.

At the time of the hearing before Registrar Derrett, the respondent had not reached a decision on whether to admit the proof in relation to the Alleged Debt.

Registrar Derrett provided the parties with a copy of her judgment in draft in advance. This led to an application that the Registrar reconsider her judgment immediately before judgment was given. The Registrar declined to reconsider her judgment and gave judgment in accordance with the draft provided, giving additional reasons for rejecting the reconsideration application. Nothing now turns on the reconsideration application.

The Registrar gave judgment on 16 September 2008. She was not, however, made aware prior to giving judgment that there had by now been an important change of circumstance. By letter dated 11 August 2008 (“the Rejection Letter”) the Respondent wrote to inform the Applicant that it rejected the proof of debt. This has itself led to further applications. The Applicant says that the Rejection Letter (if sent) was never received and that it did not see the letter until 25 November 2008. This is important, because, if the Rejection Letter is valid as a rejection, and was received by the Applicant before then, the Applicant is out of time for an application to challenge the rejection of its proof, which is required to be made within 21 days. The Applicant further contends that the Rejection Letter does not comply with the Insolvency Rules and is thus ineffective in that it fails to give reasons for rejecting the Alleged Debt.

The Registrar therefore gave judgment on the basis of a premise that was correct at the time of the July hearing but not correct at the time of the judgment. It is a matter of surprise that the important fact that the proof had now been rejected was not brought to the attention of the Registrar before she gave judgment. It is said that the solicitor who was concerned in the matter was on holiday at the time of the judgment and the trainee who attended and dealt with the judgment was not aware of the rejection, and thus counsel was not told either. However, it is accepted that the solicitor who had conduct of the matter was aware of the Rejection Letter shortly before it was intended to be sent.

That means that the factual position now is rather different from that which pertained at the time of the hearing before the Registrar.

s172 of The Insolvency Act 1986 provides as follows:

“172

Removal, etc (winding up by the court)

(1)

This section applies with respect to the removal from office and vacation of office of the liquidator of a company which is being wound up by the court, or of a provisional liquidator.

(2)

Subject as follows, the liquidator may be removed from office only by an order of the court or by a general meeting of the company’s creditors summoned specially for that purpose in accordance with the rules; and a provisional liquidator may be removed from office only by an order of the court.

(3)

Where –

(a)

The official receiver is liquidator otherwise than in succession under section 136(3) to a person who held office as a result of a nomination by a meeting of the company’s creditors or contributories, or

(b)

The liquidator was appointed by the court otherwise than under section 139(4)(a) or 140(1), or was appointed by the Secretary of State

A general meeting of the company’s creditors shall be summoned for the purpose of replacing him only if he thinks fit, or the court so directs, or the meeting is requested, in accordance with the rules, by not less than one-quarter, in value, of the creditors.”

I was told by counsel that there was no authority on the exercise of the power of the court to direct that the liquidator call a creditors’ meeting for the purpose of seeking to replace the liquidator.

There are three limbs to the last three lines of s172 (3). The first covers the situation where the liquidator thinks fit to call a meeting of creditors for the purpose of considering removal of the liquidator. That has no application here. The second limb gives the court power to direct the liquidator to call such a meeting. The third limb arises where the creditor’s debt represents more than 25% of the value of creditors (“a 25% plus creditor”), in which case the creditor may require the liquidator to call such a creditors’ meeting.

If the liquidator refuses to call such a meeting, the creditor may apply to the court. Even if the creditor is established as a 25% plus creditor, the creditor may have to ask the court to direct a meeting, because the liquidator refuses to convene one.

If the creditor is established as a 25% plus creditor, then he may be on relatively strong ground in making an application to court if the liquidator refuses to convene the meeting. But even here the court is not obliged to direct the liquidator to call a meeting. The court may take the view that it would not be in the interests of the liquidation for such a meeting to be held. It might serve no purpose other than to waste costs. In Donaldson v O’Sullivan 2008 EWCA Civ 879 Lloyd LJ at para [39]-[41] drew attention to the supremacy of the court’s powers to control bankruptcy, and compulsory winding-up, the two being treated as analogous. He referred to authorities where the court’s power to control a bankruptcy or compulsory winding-up had been exercised notwithstanding an apparent conflict with express provisions of the relevant act. In Re Burn [1932] 1 Ch 247 was one such case. At [41] he said:

“All of those cases seem to me to support the thesis that bankruptcy is a court-controlled process in relation to which the court has wide powers, exercisable for the purpose of the insolvency process as a whole, which are not limited to those conferred expressly by the relevant legislation.”

If that is the position where the creditor is an established 25% plus creditor, then it must follow that where the creditor is not established as a 25% plus creditor, the exercise of judgment by of the court becomes all the wider. It is necessary to consider the reality of the position if an order is made in such a situation. Where the real complaint against the liquidator is that the liquidator has not yet accepted the proof (as opposed to free-standing complaints), there may be no useful purpose in exercising the power under the second limb. If the matter goes to a creditors’ meeting, the Liquidator will inevitably be chairman, and is likely to refuse to allow the Applicant to vote. True it is that the Liquidator may permit the vote on a provisional basis under r4.70 (3), but that will simply lead to a further dispute as contemplated by r4.70(3) as to the validity of the vote.

The crucial paragraph of the Registrar’s judgment is 35:

“35.

However, a proof has been lodged and the fact that the proof has not as yet been rejected does in my judgment mean that the Applicant is still a creditor who has a potential debt of greater than 25 per cent in value of the total debts of the Company. Accordingly, I am satisfied that the Applicant is able to summon a meeting pursuant to s.172(3) IA 1986. It must be right that in the circumstances of a compulsory liquidation, where the secretary of state has imposed a liquidator on creditors, a credit who has a qualifying debt may challenge that appointment. I do not accept that they should have to wait until their proof has actually been accepted by the liquidator for dividend purposes before they should be so entitled, that would be unjust. There is no point in a liquidator incurring the costs of adjudicating proofs for the purpose of paying a dividend until there is any prospect of a dividend being paid and as we all know it can take many years before that point arises. Of course, at any meeting held in such circumstances the chairman would be entitled to attribute a value to that proof for voting purposes, pursuant to IR 4.70 and his decision would be capable of challenge in the usual way.”

Ms Giret emphasises that the Registrar said in para 35 of her judgment that the Applicant was a creditor, and thus entitled to call a meeting of creditors. She cited Re a Company No 004539 of 1993 [1995] BCC 116. There Blackburne J considered whether a creditor whose proof of debt was in dispute had standing to object to the official receiver’s decision to admit another creditor’s proof for voting purposes. He held that such a creditor had standing until his proof was rejected, and to that extent was a creditor for the purpose of r4.70(2) . That seems a rather different point from the present.

In the present case, the issue whether the Applicant was a valid creditor was the very question which the Liquidator (not the court) was required to decide and which had not yet been decided. This is not a case where the creditor was an acknowledged creditor, far from it. The court was being asked to require the Liquidator to call a creditors’ meeting in order to use a disputed proof of the debt as the basis of a vote to replace the liquidator, the grounds on which replacement was desired substantially being that the Liquidator had not adjudicated yet on that very proof. That seems to me an application that the court would be unlikely to accede to.

The Registrar recognised that the application to call a creditors’ meeting was being made solely in order to remove the Liquidator and held that no sufficient cause was shown for such a course. It seems to me that where the real reason for the application is that the Liquidator has failed to determine the validity of a disputed debt, that matter must be relevant to the decision whether to direct a creditors’ meeting. There were other complaints made before the Registrar about the liquidator’s conduct referred to, but no real reliance was placed on them before me. The Liquidator is a well-known and experienced Liquidator and, as the Registrar concluded, I do not consider that justifiable criticism can be made as to her general conduct of the liquidation. The Registrar was satisfied that there were no justifiable grounds for criticising the Liquidator. Also relevant was the Registrar’s concern (see para 38 of the judgment) based on the evidence that the application to her might have been made for less than proper reasons. She also had in mind that appointment of a new Liquidator would add to the costs of the liquidation.

Nor does it seem to me that the Liquidator’s conduct can be said to have been unreasonable in relation to the Applicant’s proof. I do not intend to prejudge the application to reverse the Liquidator’s decision. But it is obvious that there must be real questions about a £2m loan by a company controlled by one brother to a company controlled by the other brother, where the loan has never been called in despite being repayable in 2002, no payments have ever been made, and there has been no effort to call in the guarantee, in circumstances where one at least of the brothers has had judges seriously question his integrity in other litigation.

Ms Giret says that para 35 of the judgment of the Registrar determines that the Applicant “is a creditor”. The Registrar was well aware that the proof was in issue. But it seems to me that the question was not whether the Applicant was a creditor, but whether the court should exercise its power to order a meeting. If anything, the Registrar may be said to have approached the matter on a basis too favourable to the Applicant but still reached a decision not to direct a meeting.

It is then said that the Registrar treated the appropriate test as whether the Applicant had “shown cause” for the court directing a meeting (see judgment para 36). Ms Giret complains that the reference to “show cause” confuses the jurisdiction under s108 (applicable to voluntary winding up) with the different jurisdiction under s172. In my judgment it is necessary for the Applicant to justify the application to the court to exercise its power to direct a meeting, and whilst I would not use the words “show cause”, the Applicant must satisfy the court that in all the circumstances it is in the best interests of the liquidation for such an order to be made. I doubt whether the test is actually much different.

Ms Giret says there is no Respondents’ Notice and the Liquidator is taking a different position to that before the Registrar. It would be a surprising decision to disallow legal argument on the section of the Insolvency Act which is central to the appeal merely on the grounds that a Respondent’s Notice had not been served, particularly on an appeal to the judge rather than the Court of Appeal, but a review of Mr Davenport’s skeleton argument before the Registrar indicates that the point argued before me is not significantly different from that argued below (see skeleton paras 2, 12 and 15-24).

Thus it seems to me that the Liquidator’s decision was correct on the material before her, although I have construed s172 in a manner different to the way she construed it.

However, it appears that on 11 August 2008, the Liquidator wrote to the Applicant rejecting the proof. It follows that if the Liquidator had known this prior to giving judgment this would have removed the one plank of her decision on which (incorrectly in my view) she found for the Applicant, and would inevitably have led to her rejecting the application before her.

I therefore dismiss this appeal.

The Insolvency Rules provide:

“4.82

Admission and rejection of proofs for dividend

(1)

A proof may be admitted for dividend either for the whole amount claimed by the creditor, or for part of that amount.

(2)

If the liquidator rejects a proof in whole or in part, he shall prepare a written statement of his reasons for doing so, and send it forthwith to the creditor.

4.83

Appeal against decision on proof

(1)

If a creditor is dissatisfied with the liquidator’s decision with respect to his proof (including any decision on the question of preference), he may apply to the court for the decision to be reversed or varied

(2)

A contributory or any other creditor may, if dissatisfied with the liquidator’s decision admitting or rejecting the whole or any part of a proof, make such an application within 21 days of becoming aware of the liquidator’s decision.

...

4.70

Admission and rejection of proof (creditor’s meeting)

(1)

At any creditor’s meeting the chairman has power to admit or reject a creditor’s proof for the purpose of his entitlement to vote; and the power is exercisable with respect to the whole or any part of the proof.

(2)

The chairman’s decision under this Rule, or in respect of any matter arising under Rule 4.67, is subject to appeal to the Court by any creditor or contributory.

(3)

If the chairman is in doubt whether a proof should be admitted or rejected, he shall mark it as objected to and allow the creditor to vote, subject to his vote being subsequently declared invalid if the objection to the proof is sustained.”

That leads to the application relating to the rejection of the proof. Ms Giret suggested that this was done under r4.70 but it seems to me clear that it was a rejection under r4.82. The standard form document under which the proof is made refers to r4.73, which is part of Chapter 9, of which r4.82 is a part, whereas r4.70, which relates to creditors’ meetings, is part of Chapter 8 of the Insolvency Rules. The Rejection Letter refers to r4.82 expressly.

Ms Giret did not seek positively to suggest that the letter of 11 August 2008 was not sent in the light of evidence to the contrary, although she expressed some scepticism as to whether the evidence to that effect could in the circumstances be relied on. Based on the witness statement of Ms Coulson (para 23) I find the letter was sent. Although it was terse and merely stated that the rejection was because “you have failed to provide satisfactory evidence to substantiate that the claim is valid”, that seems to me to amount to “reasons” so as to bring the letter within r4.82. In any event, the right to challenge under r4.83 requires a “decision” to be made, and that was certainly done. I do not think r4.82 and r4.83 are concerned with the adequacy of reasons given.

Time for applying to court to reverse the rejection decision runs from 21 days after receipt of the letter under r4.83(1). The Applicant says the letter was received on 27 November 2008 when faxed between solicitors so the application is in time. The Applicant says it was never received in Cyprus where allegedly originally sent. There are witness statements from the Company Secretary and Director of the Applicant to the effect that it was not received. Nor, says the Applicant, were certain letters apparently sent to its London solicitors from the Liquidator’s solicitors referring to the rejection received. These letters sent to the Applicant’s solicitors would not however have complied with r4.82, as they did not include a copy of the Rejection Letter itself.

Whilst Mr Davenport, for the Liquidator, said there were too many documents not received for this to be credible, and there are certainly a lot of documents not received, I do not think he can add together the alleged non-receipt of the rejection letter in Cyprus by the Applicant with the alleged non-receipt of certain solicitors’ correspondence by the Applicant’s London solicitors: these are very different issues.

The Liquidator’s lawyers made no reference to the Rejection Letter to the Registrar on or before 16 September. They should have done so (although neither counsel nor the trainee attending were personally aware of the Rejection Letter). Moreover the letter of 19 September 2008 from the Liquidator’s solicitors is hard to reconcile with a previous rejection of the proof, although as the letter does not seem to have been received, this hardly matters. Had reference to the Rejection Letter been made to the Registrar prior to the judgment hearing, the Applicant would have been without doubt been aware of the Rejection Letter, and this application to court would have been most unlikely to have been necessary.

Unless I am able to reject the evidence of the two witnesses of the Applicant, I cannot conclude that the Rejection Letter was received by the Applicant, or that the Applicant was out of time for the application to court. Even if I could so conclude, I think that it does not lie in the mouth of the Liquidator to complain about the delayed application given (a) no reference to the Rejection Letter was made to the Registrar prior to her judgment (b) the Rejection Letter was not faxed or emailed prior to 27 November 2008 to the Applicant’s solicitors.

It was suggested by Mr Davenport that I should adjourn the issue as to whether the Rejection Letter was received in Cyprus by the Applicant, and the permission application, to the hearing of the substantive reversal application, as it was said there are reasons to question the evidence of non-receipt. That seems to me to provide unnecessary encouragement of satellite litigation and expenditure of further costs and I decline to do so. The idea of oral evidence and cross-examination to decide whether it is necessary to grant an extension of time does not sit easily with the overriding objective.

In relation to the application under r4.83 for an extension of time, the question arises whether it is necessary for such an application to be made. On balance, I am inclined to accept the Applicant’s evidence of non-receipt, so that no such application is necessary. If it is necessary to grant an extension, then having considered CPR 3.8 (incorporated by r12.9), I grant it. The delay has not prejudiced the Liquidator, and even if I had rejected the evidence of non-receipt, the only explanation could be some form of administrative error in Cyprus: it would be a disproportionate consequence to refuse an extension in such circumstances.

This has the virtue of enabling the real issue between the parties to come before the court without further interlocutory disputes.

Accordingly:

The reversal of proof issue will be determined by a Registrar at a hearing with oral evidence and I will hear counsel on directions to be given.