Bourne & 101 Ors v The Charit-Email Technology Partnership LLP

This is a Companies Court application under s. 130(2) of the Insolvency Act 1986 for permission to commence proceedings against the respondent, which is a limited liability partnership in liquidation. The application is in effect to join the respondent to proceedings which have already been commenced in the Commercial Court.

The Court's discretion to grant permission to commence proceedings is broad and unfettered. It has "freedom to do what is right and fair in all the circumstances": see Re Aro Limited [1980] Ch 186. The Court is not required to, and indeed should not, investigate the merits of the proposed proceedings, other than to satisfy itself that there is a genuine, arguable claim: see the observations of Jonathan Parker J in Re Bank of Credit and Commerce International SA (no 4) [1994] 1 BCLC 419 at 426.

There are two statements of principle in decided cases which are of particular assistance as to the exercise of the discretion. The first is in Re Exchange Securities & Commodities Limited [1983] BCLC 186, where it was said that permission should be refused if the issues can conveniently be decided in the liquidation because it will ordinarily be quicker and less expensive for matters to be determined in the course of the liquidation. Secondly, there is the unreported decision of Etherton J in NewCap Reinsurance Corp Limited v. HIH Casualty & General Insurance Limited (approved on appeal at [2002] 2 BCLC 228) in which (while giving permission under s. 130(2)) he said that, particularly taking into account the resources available to the liquidator,

“… the court must be very cautious before exposing the … liquidators to the burden of coping with difficult and time-consuming litigation”.

I also accept the submission of Mr Templeman QC for the respondent that in construing the section the Court will start from the premise that proceedings may not be brought against a company in liquidation. It is therefore a question of lifting a stay. It follows that the Court should (subject always to the overriding objective) adopt the primary objective of achieving an orderly resolution of all matters arising in the winding up for the benefit of the creditors as a whole.

The matter before me today arises out of broadly similar investment schemes using limited liability partnerships (of which the respondent was one) as vehicles. All the schemes were promoted by a company called InnovatorOne Plc (“Innovator”). 19 such schemes are the subject of the litigation in the Commercial Court. I shall call the scheme involving the respondent “the Charit Scheme”. There are at present 556 individual claimants in the Commercial Court actions. The applicants, 102 of the 556, were involved in the Charit Scheme. There are several separate claim forms with differently constituted bodies of claimants, but all the claimants will serve a global pleading across the actions which are all to be tried together. Andrew Smith J has made various case management orders in the Commercial Court including directions about service of pleadings.

In brief, the schemes were all supposed to operate as follows. The respondent purchased intellectual property rights in an Information and Communications Technology product from a vendor company (“the technology vendor”). In the case of the Charit Scheme the technology vendor was a BVI company called Vermillion International Investments Limited (“Vermillion”). The purchase price for the technology product was funded as to 20% by the partner members (namely the individual investors) and as to 80% by a bank loan. The accession agreement by which the investors became members of the LLP made each member liable to contribute five times his or her original investment. The technology vendor underwrote the bank borrowing by pledging 80% of the purchase price it received back to the bank. Thus if the LLP failed to repay the loan the bank was fully protected by the pledge; the vendor company would then be subrogated to the bank’s claim against the LLP, and the LLP could call on its members to pay.

The schemes attracted high net worth individuals such as the applicants by offering significant tax advantages. ICT investments by small businesses were accorded generous tax treatment under the Capital Allowances Act 2001. In the event, the schemes did not deliver the tax benefits offered.HMRC opened enquiries into each of the schemes, ultimately settling the claimants’ claims by permitting allowances on only 20% (that is to say the investors’ original investment), rather than the expected 100%, of the acquisition price. There is a dispute between the present parties as to the status of the settlement, and as to whether or not HMRC found the schemes to be shams, as the applicants allege, or, as the respondent alleges, HMRC merely concluded that the technology had been overvalued. At all events there is some evidence in the form of notes of meetings with HMRC suggesting that HMRC was at all times deeply suspicious of the genuineness of the transactions founding the schemes.

In the case of the Charit scheme, the technology acquired was a web-based e-mail product known as Charit-email. Vermillion says that one of the reasons for the failure of the product was that it was unexpectedly taken over by superior technology from a competitor. The product was ostensibly acquired from Vermillion for £34.4 million. The purchase was ostensibly financed by a loan of £28 million to the respondent from a Swiss regulated bank, ostensibly guaranteed and secured by Vermillion. The loan was not repaid so that the bank demanded payment from Vermillion, which by way of subrogation to the bank's rights issued a statutory demand on the respondent requiring it to pay the £28 million. As the respondent did not pay, it was wound up on Vermillion’s petition in March 2009. I have used the word “ostensibly” because it is part of the applicants’ case, and indeed the claimants’ case in respect of all the schemes, that the schemes were fraudulent shams and there were no genuine loan transactions at all.

The claimants, including the appellants, have brought proceedings in the Commercial Court for damages based on dishonest promotion of the schemes by various defendants. Fraud by the LLPs themselves is not alleged, although the LLPs concerned other than the respondent are all parties to the proceedings for the purposes of obtaining declaratory relief against them. Mr Powell QC for the applicants says that the purpose is to bind all relevant persons who may claim through them now or in the future. The actions have 40 defendants, including Innovator, solicitors, auditors and associated individuals. Of those individuals I mention in particular a Mr Stiedl whom the applicants say was behind the alleged frauds, two solicitors and a director of Innovator. Relief is claimed against the two solicitors for alleged dishonest assistance in the alleged frauds, and also vicariously and in negligence against their firm.

Those proceedings are big in every sense and it is self-evident that they will be costly, wide ranging and take some considerable time to be resolved. There has already been a finding that some of the claim forms have not been properly served which will give rise to limitation issues. Despite active case management the timetable is necessarily a slow one because of the number of parties and complexity of the evidence and issues. The liquidator considers that a trial is unlikely to take place until 2012 and that it may last many months.

The applicants attempted to resist the petition to wind up the respondent on the basis that it was not indebted to Vermillion. However, the applicants denied that they were members of the respondent. On a hearing of the petition the Chief Registrar found that the applicants were not entitled to appear and oppose the winding up. On appeal on 13^th February 2009, the Chancellor said,

“One of the more remarkable features of this case is that the appellants consistently maintain that they are not contributories because of some unspecified events occurring at the time they made their investments. They claim, nevertheless, to be entitled to appear and oppose the petition, on the ground that Vermillion alleges that they are contributories and may sue them as contributories to recover the debt. Seemingly, the ability of the appellants to defend those proceedings, on whatever grounds they claim not to be contributories, is not enough.

In no sense can it be said that proceeding by petition for an order to wind up the company is for the purpose of determining who are the contributories…

In my judgment, it would be absurd to recognise a locus standi to appear on a winding up petition as a contributory one who steadfastly denies that he is. I will dismiss this appeal from the Chief Registrar on this short, straightforward ground."

The applicants sought to issue a claim against the respondent on 11 May 2009, notwithstanding the winding up order in March 2009. That claim was withdrawn and the applicants seek permission from me to start a new claim against the respondent in the Commercial Court for declaratory relief.

Those declarations relate to two issues. The first is what has been called the members issue, namely the claim that the applicants never became members of the respondent and thus do not have to contribute under the terms of the agreement. The second is what has been called the loan issue, namely that the respondent is not bound by the sale and purchase agreement concluded with Vermillion, and/or that the agreement was void and/or that there were no genuine loan arrangements in that no loan was made by the Swiss bank to the respondent and no payment was made thereafter.

The evidence served on behalf of the applicants shows that there are discrete issues applying to the Charit Scheme which do not apply to the schemes in general. First, the members issue. The applicants mount an argument based on various changes of name of the respondent and other LLPs. The argument is that the respondent did not exist at the time of the applicants’ deed of accession, or that they subscribed to a different Charit entity altogether. There are further arguments based on the particular timings of the deeds making up the Charit Scheme; it is argued that the conditions upon which the applicants agreed to accede to the Charit Scheme were not satisfied.

Secondly, the loan issue. This also includes an analysis of the identity of the various contracting parties and in particular which Charit entity, if any, was a party to the sale and purchase agreement and other transactional documents. The loan issue also requires an analysis of the terms of the sale and purchase agreement so as to identify the subject matter of the agreement, the conditions for completion and if and when property passed. Further, the loan issue, in common with the issue in the other schemes, involves an analysis of the loan documents and the underlying facts to establish whether on their true construction and in the events which happened a genuine loan was ever drawn down in accordance with the provisions of the various documents.

The applicants' case is that it is necessary to decide all the issues in the commercial court action together. There are complex issues requiring a wide enquiry across the board of all the 19 schemes subject to the litigation. The question whether the applicants are members of the respondent will necessarily arise as will the status of the loan. There is a real risk of inconsistent judgments across the schemes if issues relating to the Charit-Email scheme are separately determined in the liquidation. The issues which exist between the applicants and the respondent (principally the members issue) will be an integral part of the existing proceedings whether or not the respondent is a party to them. If it is not a party it will not be bound by any judgment and the same issues may be determined differently in the liquidation.

It is said that the members issue involves an examination whether the conditions for membership of the respondent were satisfied including terms relating to the establishment, promotion and operation of the scheme provided for by an Information Memorandum and whether the conditions for the use of a power of attorney provided by individuals signing the application form were satisfied. Although there are many matters which are fact specific to the Charit Scheme, the issues of construction and whether, for example, there was a rectifiable mistake, involve examination of the wider factual matrix in the context of all the other schemes.

It is said that the loan issue also requires a wide ranging analysis of the inter-relationship between this scheme and all the other schemes. This is necessary to determine whether the schemes were genuine or, as the applicants contend, shams and vehicles for fraud. It is said that it is also necessary to explore the money flows not only within, but between, schemes. Mr Powell has told the Court that there is some evidence of what is alleged to be cross-firing between the schemes including the Charit scheme.

I therefore turn to the question whether there are issues which are common to all the schemes so that the members issue and the loan issue cannot be conveniently decided as a discrete matter in the liquidation. Mr Powell submitted that any tribunal deciding the members issue and the loan issue would need to have an overview of the nature and purpose of the schemes as a whole in order to decide them in relation to the respondent.

He emphasised a number of matters. First, the question whether Mr Carter, a director of Innovator, had authority under the powers of attorney common to all the schemes to sign up the investors. The facts are different in the case of each scheme, but the purpose and operation of each (allegedly fraudulent) scheme is potentially relevant to the consideration of all the others.

Secondly, the evidence of moneys moving between the schemes requires an overview of whether the schemes involved genuine transactions or were merely vehicles for fraud.

Thirdly, there is the common method in which the technology products were valued for the investors’ purposes. The applicants say the valuation was effected by valuers connected with Innovator on the basis of financial projections provided by Innovator and without applying any due diligence process.

Fourthly, there is the involvement of a company called Chancery Lane Financial Management Limited, connected to other parties involved with promotion of the schemes. That company purported to provide loan finance for subscription moneys to some of the investors. Mr Powell submitted that its involvement assists on the issue whether loan moneys were ever provided and drawn down other than as sham paper transactions.

Fifthly, the question of whether the technology provided was genuine or not ought not to be decided in isolation in relation to any one scheme without a proper appreciation of how all the schemes were intended to operate.

In summary, Mr Powell submitted that in forming a view whether any one of these schemes was genuine any tribunal would wish to analyse what was happening within the other schemes, their common factors and the actions of the personnel involved.

Mr Templeman submitted that the issues affecting the respondent can conveniently be decided in the liquidation and therefore that they ought to be dealt with in that way. The insolvency rules provide specifically for such matters to be determined, for the liquidator to apply to the Court for directions, for disclosure to be ordered and for issues arising to be determined.

Mr Templeman took me through the two main issues (and some subsidiary issues which arose during the course of argument) to persuade me that all relevant facts are specific to the Charit Scheme. He emphasised that the only relief claimed against the respondent in the proposed proceedings is declaratory relief, although there is an allegation of constructive trust in the claim letter sent before action. He said that there are no genuine common issues between the schemes. There are no allegations of dishonesty against the respondent which might give rise to a dishonest assistance claim involving other parties to the actions. There are no claims in damages which, if successful, would make the applicants obvious creditors in the liquidation.

As to the members issue, he submitted that the question for the Court is essentially one of construction of the investment documentation, coupled with fact specific questions relating to the changes of name affecting the respondent. As to the loan issue, he said it is significant that Vermillion is the only technology vendor which has sought to enforce any of the LLPs’ liabilities in respect of the loans. It can therefore be inferred that the claim against the respondent is a response peculiar to Vermillion. Again, he submits, the issue of whether there was a genuine loan and a genuine technology product in the case of the Charit Scheme is specific to that Scheme and ought to be determined in the liquidation. Vermillion asserts that, whatever may be the position in relation to other schemes, the technology product it sold was a genuine one. That is a matter, submitted Mr Templeman, which is not only susceptible of being determined in the liquidation, but ought to be so determined. He said that the current application was an attempt artificially to drag in irrelevant facts about other schemes in the hope (he implied) that some prejudice might rub off on the Charit scheme. Although the applicants have reserved their position on the question, at present they have formulated no claim of wrongdoing against Vermillion.

It is said that both the members issue and the loan issue will be fully ventilated in the liquidation and any relevant evidence will be adduced and considered by the Companies Judge. It seems to me that the liquidator’s case in this regard therefore rests on showing that he could successfully resist the introduction of factors relevant to schemes other than the Charit scheme. If he cannot, proceedings to determine the members issue and the loan issue will to a great extent overlap the proceedings in the Commercial Court action, and will be equally unwieldy.

The problem Mr Templeman faced was that every time Mr Powell raised a matter which needs to be decided in relation to the respondent, and Mr Templeman riposted that it could be dealt with in the liquidation, the potential issues for the liquidation became wider and more complex and involved an increasing amount of disclosure and satellite litigation. Indeed Mr Templeman accepted that there would necessarily be considerable duplication of costs for the applicants in trying to make good their claims in both sets of proceedings. His difficulty was compounded by acceptance that if the applicants were successful in relation to certain issues the liquidator might have to consider bringing proceedings against the respondent’s legal advisers.

I would add in that context that the respondent is wholly without funds, unless and until the applicants are held liable to contribute. The Court has not been told how it would be proposed to fund such litigation.

Mr Templeman submitted that convenience and proportionality clearly favour resolution of the issues in the liquidation because of the costs and delays inherent in the Commercial Court action. He pointed out that there has been no application to stay the liquidation. However, in view of the Chancellor’s decision the applicants may well have taken the view that they do not have standing to bring such an application. Vermillion is obviously unlikely to want to do so. The liquidator has made it plain that he has no present intention of making any such application; his position is that the statutory structure of the winding-up procedures is predicated on the liquidation proceeding as quickly as possible. He is also conscious of the position of 8 other potential contributory members (in addition to the 102 applicants) whose status has to be determined.

Mr Templeman also submitted that joining the respondent to the Commercial Court proceedings will not in itself obviate the risk of inconsistent judgments. The liquidator ought to and will proceed to have matters determined in the liquidation in advance of the decision of the Commercial Court. In any event it would, he submitted, be very unlikely that the Judge in the Commercial Court would come to a different conclusion to the Judge in the Companies Court. On the other hand, giving permission will necessarily impact on the liquidation by drawing the liquidator into protracted and costly proceedings.

The liquidator’s view is that bringing the respondent into the Commercial Court action is an artificial attempt to frustrate the liquidation, similar to that described by the Chancellor as ‘absurd’ when the applicants contested the winding up petition. The claims of the applicants in the action as currently framed would not, if successful, make them creditors. The thrust of s. 130(2) is not therefore directed to them since they make no claim to an interest in the respondent giving them standing in the liquidation.

An important matter on which Mr Powell relied was the risk of inconsistent findings by the Commercial Court and the Companies Court on the members issue and the loan issue. The relevance is that there are parties, such as the individual solicitors (and their firm), whom it is sought to be made liable in damages. Thus if the Companies Court were to find that the applicants were members of the respondent, liable to contribute to its assets, the solicitors in the Commercial Court action would not be bound by that finding. If the contribution were then sought to be visited on the solicitors by way of damages, it would be open to them to re-litigate the members issue, and to argue that the applicants had not adduced all the available arguments in the Companies Court. The Commercial Court, having seen evidence relating to all the schemes, might come to a different conclusion. Further, the effect of that might be that there was an application out of time to appeal the Companies Court decisions.

I would summarise the parties’ respective positions as follows. The Commercial Court action is a big one in every sense and the liquidator resists joinder of the respondent on the grounds of costs and delay. He says that matters specific to the respondent can conveniently and should be hived off and dealt with far more speedily and far less expensively in the liquidation. He submits that the current application is merely an illegitimate attempt to delay resolution of the issues and frustrate the liquidation, of the same kind as the opposition to the petition.

The applicants say that there will be a duplication of issues and costs, and there will also be a real risk of inconsistent judgments if the same issues are tried in both venues without the respondent being a party to the Commercial Court action. There are other defendants in the Commercial Court action who will not be bound by findings in the Companies Court and there could be appeals out of time of orders made in that Court after conclusion of the Commercial Court proceedings.

The liquidator ripostes that the risks are illusory; the Commercial Court Judge is very unlikely to reach a different conclusion from the Companies Court Judge. To my mind that would only be the case if the evidence were fully duplicated, which ex hypothesi it would not be.

Secondly, the liquidator says that the Commercial Court action may settle and, if the liquidation has been stayed, he will then have to start again from scratch. On the other hand, if the liquidation is not stayed, the risk of inconsistent findings would be as great, if not greater, than the situation where the respondent had not been joined to the Commercial Court action.

Thirdly, there is the position of the 8 potential members of the respondent who are not applicants and have not (at any rate yet) agreed to be claimants in the Commercial Court proceedings. Four of these individuals are not already defendants or otherwise closely connected with the scheme’s promoters. The liquidator has to decide on their status in any event.

A crucial question, as I have said, is whether there are wider issues which make it difficult to adjudicate on issues relevant to the Charit scheme in isolation from the other schemes. If there are not, then in the interests of saving expense and time and of proportionality the Charit scheme can and should be dealt with in the liquidation. If there are, then it is a highly relevant factor that the Commercial Court is already seized of those issues.

Mr Templeman argued attractively and persuasively that the Charit scheme can be regarded in isolation, by reference to the details contained in the pre-action letter of claim and to the general endorsement of particulars endorsed on the claim. On balance, however, I accept Mr Powell’s submissions both that the claim is not in final form (particulars have not yet been served and details of the complex facts are still emerging) and also that there are both interlocking issues and issues, detailed above, as to which the Court will wish to take an overview across the schemes.

An important factor in the exercise of the Court’s discretion is that there are not what I would term independent creditors of the respondent on whose behalf the Court should be particularly solicitous in relation to delay. It is probable that all the creditors are parties (such as Vermillion) to the Commercial Court action. Any that are not will be closely connected with the Charit scheme’s promoters and concerned in the outcome of the Commercial Court action. The liquidator can therefore, if appropriate, decide to take no active part in that litigation.

Further it seems to me that the risk, as explained by Mr Templeman, of inconsistent judgments if both sets of proceedings are allowed to proceed can easily be averted if the same Judge has conduct of both the Commercial Court action and the winding up proceedings. That solution would also mean that the same Judge would keep the issue of potential settlement under review and keep a watchful eye on the position of investors who are not and do not become parties to the Commercial Court proceedings.

I am very concerned about the dangers of dragging the liquidator without available assets into a lengthy action containing issues which are not directly concerned with the LLP in liquidation. I am also fully alive to the fact that I should be very cautious in granting permission under s. 130(2) in such circumstances. I observe that in the New Cap case, the readiness for trial of the action to which the company was to be joined was an important factor.

I also take into account the applicant’s lack of standing in the liquidation. I accept that the applicants should not be permitted to use s. 130 to manipulate the liquidation, in which it is neither a creditor nor, as yet, a contributory. However, I do not consider that I am limited to protecting the position of avowed creditors and contributories when exercising my discretion under the section. I have to do what is just in all the circumstances of the case.

Weighing all the above factors, it seems to me that, notwithstanding that the Commercial Court action is as yet at an early stage, the right and fair course in all the circumstances is to grant permission to the applicants as sought.

I propose formally to request the Chancellor to nominate Gloster J (the judge to whom the Commercial Court proceedings have been assigned) to sit as an additional Judge of the Chancery Division to hear the Companies Court matter concurrently with them.

I should make it absolutely clear that my decision today is not intended to constrain that Judge in the case management of either the liquidation or the Commercial Court proceedings. It will be open to her, for example, to stay the claim against the respondent in the Commercial Court proceedings pending determination of questions in the liquidation, if (having considered the pleadings) she decides that is the fairer and more proportionate course. It will be for her to decide whether the two matters should be dealt with in some other, and if so what, way. She will be seized of both cases and as details emerge will be best placed to determine how the two sets of proceedings should be managed and the issues litigated.

Another matter was ventilated in the respondent’s skeleton argument about the propriety of the applicants’ solicitors acting in the proceedings. However it was accepted that this matter should be considered elsewhere and should not affect the exercise of my discretion today. I therefore say no more about it.