Clydesdale Financial Services Ltd & Ors v Smailes & Ors

The principal issues arising on the applications now before the court are whether the third claimant Focus Insurance Company Limited (Focus) has a real prospect of success in its claims to be, first, a creditor of the fifth defendant Alexander Samuel LLP (LLP) and secondly, a “victim” of a transaction comprising the sale of LLP’s business effected at substantially the same time as it went into administration.

Focus must be a creditor of LLP in order to maintain its claim against the former administrators under paragraph 75 of Schedule B1 to the Insolvency Act 1986. It accepts that its currently pleaded claim to be a creditor is not sustainable and it applies for permission to amend the particulars of claim to plead two new and different bases. As it did not issue its application to amend by the time specified in an order I made on 18 June 2009, the relevant claim presently stands struck out and Focus applies for relief against that sanction.

Focus must be able to establish that it is a “victim” of the sale of LLP’s business in order to maintain its claim under ss.423-425 of the Insolvency Act 1986 against the third defendant Jiva Solicitors LLP (Jiva) which purchased the business. Jiva applies for an order that the claim be struck out, or alternatively that summary judgment be entered against Focus on the claim, on the grounds that it has no reasonable prospect of establishing that it was a “victim” of the sale.

LLP’s business was that of a solicitors’ practice. It had been taken over by LLP in about mid-2008 from the fourth defendant Alexander Samuel & Co (the Firm). The prime mover behind both the Firm and LLP was Joseph Danenza, a US citizen and foreign-registered lawyer. By March 2009, LLP was in serious financial difficulties. The background to the present proceedings can be taken from the summary in paragraphs 2 to 5 of a judgment which I gave on 18 June 2009, [2009] EWHC 1745 (Ch):

“2.

The practice comprised making and pursuing claims for damages for personal injuries arising out of road traffic accidents, which accounted for some 80% of its cases, and employers’ liabilities claims accounting for the balance. It was high volume low value work with all or virtually all clients being referred by claims handling companies. Cases were undertaken on a conditional fee basis and the practice was funded by lenders including the first claimant, Clydesdale Financial Services Limited (CFS), a subsidiary of Barclays Plc, and the second claimant, Justice Capital Limited (JCL). It is not in dispute that on the 2^nd April 2009 when LLP went into administration substantial amounts were due to CFS and to JCL from LLP and/or the firm. CFS claims to be owed some £3.6 million by LLP and some £4.7 million by the firm and JCL claims to be owed approximately £3 million by the firm.

3.

On the 2^nd April 2009 a sale agreement was made or purportedly made under which LLP sold its work in progress and retainers, its rights in respect of disbursements and other assets for a total price of £1.9 million payable as to £150,000 on completion and as to the balance by 30 equal monthly instalments of £58,330 each starting on the 30^th April 2009. The bulk of the price was attributed by the contract to the work in progress and retainers (£1.2 million) and disbursements (£645,993). The purchaser was a newly-formed entity, Jiva Solicitors LLP (Jiva) established to purchase these assets and carry on the practice in succession to LLP.

4.

Jiva was formed and is owned by Mohammed Hussain Jiva, a solicitor admitted in 1999. He has carried on a practice in Bolton since 1999, specialising in personal injury claims. He resigned from this practice on the 30^th March 2009 in order to pursue the proposed acquisition of cases from LLP. Since the 2^nd April 2009 Jiva has been carrying on the practice acquired from LLP from the same premises in London and with largely the same staff.

5.

The sale agreement was signed by the parties immediately before LLP went into administration. The members of LLP appointed joint administrators under Schedule B1 to the Insolvency Act 1986, as applied to limited liability partnerships by the Limited Liability Partnership Regulations 2001 (as amended in 2005). The agreement provided for completion to occur immediately after the appointment of the administrators and provided also that the agreement would be null and void if the administrators were not appointed. The terms of the sale agreement had been negotiated in the preceding weeks with the active participation of the administrators.”

This judgment was given on applications made by the three claimants for injunctive relief in aid of their claims in respect of the sale and also for the removal of the first and second defendants as administrators. I made an order for the administrators’ removal, on the grounds that an independent investigation of the sale was required. On the application for interim relief, Jiva offered undertakings which ultimately were accepted by the claimants.

For the purposes of the present applications, it is necessary to look at the basis on which the practice of the Firm and LLP was financed. As I mentioned in my earlier judgment, all cases were taken on a conditional fee basis. Funding was provided by a number of lenders, including the first claimant Clydesdale Financial Services Limited (CFS). Insurance cover was provided by a number of insurers, including Focus, a specialist provider of legal expenses insurance. The insurance cover took two forms. First, after the event or legal expenses insurance (ATE) was provided through the agency of LLP to its clients, covering their liability for any costs awarded if the claim failed. Secondly, financial guarantee insurance (FGI), which I describe below, was provided.

The claim of Focus to be a creditor of LLP was originally based on unpaid premiums for ATE policies. Focus now accepts that the premiums were due from the clients, not LLP. Instead, it claims to be a creditor in respect of (i) unpaid premiums on FGI policies and (ii) charges for audits which it carried out on the files of the Firm and LLP. The former administrators, supported by Jiva, submit that both claims are untenable and, additionally, submit that Focus is indebted to LLP in respect of commissions which would provide a defence by way of set off to any sustainable claim by Focus.

Each FGI policy covered the Firm, and later LLP, in respect of a loan taken out to pay irrecoverable costs, such as office overheads, in the event that a claim failed. In that event LLP would have to repay the loan from its own resources, as there would be no order for costs against the defendant and the client would have no liability for fees under the conditional fee arrangements. If the claim succeeded, LLP would cover those costs out of its profit costs recoverable from the unsuccessful defendant. For obvious cash flow reasons, LLP needed funding for these costs pending the outcome of a case. This was provided by lenders such as CFS.

The making of loans by CFS and the issue of FGI policies by Focus were not separately negotiated by the Firm or LLP but were part of a single arrangement offered by CFS and Focus to firms of solicitors. CFS and Focus established this arrangement by an agreement in writing made between them on 6 June 2007. The background and purpose of the agreement was set out in the recitals:

“(A)

The Funder has agreed (subject to the Funder’s underwriting criteria) to make available Loans to Legal Representatives for the purpose of funding:

a.

the Client’s Recoverable Disbursements in connection with a PI Claim, which includes the Premiums to be paid by the Legal Representative on behalf of the Client, to the Insurer for the purchase, where applicable, of an ATE Policy; and

b.

Irrecoverable Costs in connection with a PI Claim, which includes the Premiums to be paid by the Legal Representative to the Insurer for the purchase of an FGI Policy.

(B)

The Insurer has agreed (subject to the Insurer’s underwriting criteria) to provide the FGI Policy to the Legal Representative and, where there is no BTE Policy, the ATE Policy to the Client;

(C)

This Agreement sets out the terms that the Funder and the Insurer have agreed shall govern the relationship between them in respect of the provision of these products.”

The agreement defined “scheme” as:

“The arrangements under which

(i)

the Funder makes Loans to a Legal Representative

(ii)

the Insurer insures the Legal Representative under an FGI Policy

(iii)

the Legal Representative represents the Client in the PI Claim; and

(iv)

the Client is insured under a BTE or an ATE policy”

Clause 2.1 of the agreement provided under the heading Obligations:

“The Funder agrees (subject to the Funder’s lending criteria) to provide the Loans and the Insurer agrees (subject to the Insurer’s underwriting criteria) to provide the Policies in accordance with the terms and subject to the conditions set out in this Agreement.”

Clause 2.7 provided that “the Insurer shall procure that the Policies are assignable to the Funder”, and under clause 2.8 CFS had rights against Focus even in circumstances where Focus could refuse to pay under the policies or where it could avoid or repudiate the policies. Clause 5.3 provided that “the Funder shall procure that the Premiums are paid to the Insurer without any set off or deduction”. Clause 6.2 provided that where policies were cancelled, “any Premiums received in respect of such Policies will be repaid to the Funder in accordance with the terms of the Policies”.

Standard form ATE and FGI Policies were annexed to the agreement. The policies issued to the Firm and LLP were in these forms.

There were discussions between CFS/Focus and the Firm which led to a formal offer to the Firm contained in a letter dated 18 February 2008 (the offer letter). The letter started as follows:

“At a recent meeting of the Focus and CFS Credit Committee, your application for a Personal Injury litigation funding facility was reviewed. We are pleased to be able to confirm that the application has been accepted subject to the following conditions, recommendations and practice undertakings:

The Facility for New Business

1)

The funding facility agreed to be provided over the next three years is £16m as per the attached Funding profile.

2)

Funding will be available on a per case/claimant basis in two distinct, separate draw downs as follows:

a)

Irrecoverable Costs – to cover those payments that would not be recoverable from a defendant in a case.

b)

Recoverable Disbursements – to cover those claimant disbursements that would be recoverable from a defendant in a successful claimant case. This will be £2000 per RTA case and £3000 per EL or PL.

Both advances are maximum drawdown allowances per case unless otherwise agreed by us in writing.

3)

Subject to the individual policy provisions Focus Insurance will provide an insurance indemnity for each drawdown. The Irrecoverable costs will be covered by a Financial Guarantee Insurance (FGI). The recoverable disbursements will be covered by a Legal Expense Insurance After The Event, (ATE) policy.

The premiums will be 3.5% of the available drawdown (£35 + IPT), for the FGI…”

The letter comprises five closely-typed pages, containing detailed provisions including 13 “terms and conditions”. Towards the end of the letter, it states:

“To show your acceptance of the matters raised in this letter please sign below where indicated and return to the Manchester address above as soon as possible.”

Mr Danenza as sole practitioner and principal of the Firm countersigned the letter under the following which formed part of the text of the letter sent by Focus:

“The terms, conditions and undertakings detailed in this offer letter from Focus Insurance are accepted by the undersigned on behalf of Alexander Samuel Solicitors.”

The provision of funding and insurance to the Firm appears from the evidence to have been conducted in accordance with the terms of the offer letter, and this continued after the transfer of the practice to LLP.

The FGI policy terms and conditions were set out in an umbrella policy in the terms annexed to the CSF/Focus agreement. The policyholder was the Firm or, later, LLP. CFS was referred to as the Funder. “Irrecoverable Costs” were defined to mean:

“..in relation to the Proceedings the capital costs incurred by You (and not the Client) which are funded by way of a Loan provided to You by the Funder under the Litigation Funding Scheme.”

The “Litigation Funding Scheme” was defined as “the scheme for funding and incurring the pursuit of personal injury claims under which the Client is pursuing the Client’s Claim”. It seems clear that this is the same scheme as that defined in the CFS/Focus agreement. “Loan” was defined as “the funds advanced to You by the Funder to finance the Irrecoverable Costs and the interest that accrues upon those advances”. “Limit of Cover” was defined as the lower of (i) “the amount outstanding balance [sic] of the Loan”, (ii) £1,000 if the claim was allocated to the fast track and (iii) £1,500 if the claim was allocated to the multi-track.

Condition 1.1 provided that “You are covered up to the Limit of Cover in respect of the Irrecoverable Costs incurred by You”. Condition 1.2 provided that in providing the cover referred to in condition 1.1, Focus was relying (in particular) on a number of matters including “the Premium having been paid”. The circumstances in which Irrecoverable Costs (as defined) were not covered by the policy were set out in Condition 2.1.3. They included not only cases in which the client’s claim was successful but also:

“(B)

where Your Loan agreement with the Funder is unenforceable; or…

(G)

where the terms and conditions of the Loan have not been strictly adhered to, including but not limited to any agreement entered into by You and the Funder to repay a Loan.”

Condition 8.2 provided:

“Any payments made under the terms of this Policy will be made so as to satisfy any Loan indebtedness that You have incurred that has been notified to Us by the Funder.”

Condition 9.2 provided:

“We shall be entitled to enforce any rights remedies or obtain relief or indemnity from You by virtue of Our rights of subrogation upon paying, or becoming liable to pay, any amount to the Funder in respect of the Loan which is not covered under this Policy.”

Conditions 10 and 11 provided:

“10.

THIRD PARTIES

Subject to Condition 11 and save to the extent that We so agree (which shall be confirmed by the issuance of an endorsement to this Policy), no person other than You, Us and the Funder shall have any right, entitlement or interest in this Policy or to any benefit or payment hereunder.

11.

ASSIGNMENT

Subject to Clause 10, You will not be entitled to assign the benefit of this Policy to any third party other than the Funder. You have assigned the benefit of your rights under this Policy to the Funder.”

Rights of termination of the policy under Condition 12 could be exercised by Focus by notice to the policyholder and the Funder.

The most significant feature of the policy terms and conditions for present purposes is that the cover provided by Focus did not extend to capital costs generally but only to capital costs funded by a loan from CFS. That the FGI policies are a means of providing security for those loans is made clear by Condition 8.2 and the assignment under Condition 11 and by the provisions of Condition 2.1.3 set out above, as well as by the terms of the CFS/Focus agreement and the offer letter.

There was an on-line procedure for applying for, and being granted, insurance and loans for individual cases, using standard form documents, so as to minimise costs and maximise speed and efficiency. The procedure as it appears from the evidence was as follows. The solicitors would send a letter in standard form in respect of a case taken on for a client named in the letter, stating that certain conditions, such as being satisfied that the claim had a greater than 51 per cent chance of success, were met. The letter continued:

“As the legal representative advising our client we will be incurring capital costs in pursuing our client’s case that are not recoverable from a third party in any event. We will be borrowing funds to support these costs and repaying such borrowings from our profit costs when our client’s case is concluded. You have indicated that you will consider insuring us in respect of these capital costs in the event that our client’s action is unsuccessful. To that end, we enclose a policy proposal/quotation for your consideration.

We have produced the enclosed proposal/quotation by way of the Focus Financial Guarantee Insurance (FGI) administration system and confirm that we accept the premium quoted (inclusive of Insurance Premium Tax and the Policy Administration fee)

We can also confirm that we understand and accept the obligations under the terms and conditions of the FGI Policy and this application is submitted for your consideration on this basis.

We understand that if you choose to accept our request for insurance then you will issue the policy to us. When the policy schedule is made available to us we will arrange payment of the premium within 28 days of the policy commencement date.”

A proposal summary and a proposal summary sheet were attached to the letter. The limit of cover varied between £1,000 and £1500 and the premium was £36.75, inclusive of insurance premium tax, for cover of £1000, as provided in the offer letter.

In response, Focus would issue three documents, normally on the same day or the next business day: an FGI policy, an invoice and a policy summary sheet. The policy gave only brief details, including a policy number, a commencement date, an expiry date (generally, 30 days after the conclusion of the case), and the amount of the premium. The invoice was addressed to the Firm or LLP, set out the total payable and stated:

“At the agreed and accepted premium as per our quotation. We can confirm that the policy has been issued and payment for the premium is now due within 30 days of Invoice date to avoid cancellation.”

Although the cover provided by an FGI policy was limited to costs funded by a loan from CFS, the policy was taken out before application was made for the loan. The on-line application form for a loan contained a mandatory field for the number of the related policy.

The payment of premiums on FGI policies was made directly by CFS to Focus, and debited by CFS to the Firm or LLP. It was treated as being funded by the loan to the Firm or LLP, so that the amount paid to the Firm or LLP by way of the loan was net of the premium. Interest was charged to the Firm or LLP on the full amount of the loan.

Focus’ original case was that it was a creditor in respect of unpaid premiums on ATE policies. In a witness statement dated 4 June 2009, it was stated for the first time that it was also a creditor for unpaid premiums on FGI policies. It was said that there were 1,114 cases in which the Firm or LLP had applied for FGI cover but not paid the premium, resulting in a claim for £40,792.50.

At the hearing in June 2009, Focus effectively accepted that it had no claim in respect of premiums on ATE policies. A claim based on unpaid FGI premiums had not been pleaded and I ordered that unless an application to amend were made by Focus by 4 p.m. on 9 July 2009 its claim under paragraph 75 of Schedule B1 be struck out. An application to amend, together with the proposed amendment and supporting evidence, was prepared but was not issued until 4.20 p.m. on that day.

The reasons for the delay are fully set out in a witness statement of a solicitor employed by the firm acting for Focus. I am satisfied, taking account of the factors set out in CPR 3.9, that this is a proper case in which to relieve Focus from the sanction of striking out its claim contained in my order. Little or no argument was addressed by the former administrators against this course, and rightly they concentrated on the substance of the new case which Focus seeks to make.

In its proposed amendments, Focus claims to be a creditor of LLP for (i) unpaid FGI premiums on 839 policies issued to LLP between 9 June 2008 and 5 March 2009, totalling £30,833.25 and (ii) unpaid fees for audits carried out by Focus on client files on 2 July and 28 August 2008 and 9 March 2009. It makes similar claims as regards the Firm: unpaid FGI premiums on 65 policies issued between 29 March and 29 May 2008, and unpaid fees of £5,075 for audits carried out on 24 April and 29 May 2008. To give Focus standing for a claim against the former administrators under paragraph 75 of Schedule B1, it must be a creditor of LLP. In order to make that link in respect of these claims against the Firm, the draft amendment pleads that Focus will claim to be a creditor “if and to the extent that AS LLP has acquired the liabilities of AS & Co.”

The application to amend is opposed both by the former administrators, who are directly affected by it, and by Jiva. They do not quarrel with Focus’ formulation of the appropriate test to be applied by the court to the application that, as a general rule, a party wishing to amend should be allowed to do so, provided that the amendments have a real prospect of success, any prejudice caused by the amendments can be compensated in costs and the public interest in the administration of justice is not significantly harmed.

Focus’ claim based on unpaid FGI premiums is straightforward. It says that 839 policies were issued to LLP on which no premium was paid. LLP was the policyholder and liable to Focus in respect of the premium, as was made clear by LLP’s representation letter (“When the policy schedule is made available to us we will arrange payment of the premium within 28 days of the policy commencement date”) and by the policy invoice issued to LLP.

Evidence filed on the application shows that in the case of only 9 of the 839 policies on which Focus relies was a loan made by CFS to LLP. The former administrators submit that in the 830 cases in which a policy was issued, but no loan was made, there is no liability to pay the premium. I have set out the provisions of the policy documentation which make clear that the cover extends only to irrecoverable costs paid out of loans by CFS to LLP. I have also set out the provisions of other documentation which make clear that the “scheme” involved the grant of loans linked to FGI policies. The purpose of the FGI policies was to provide security for the loans. Against this background, the former administrators submit that, where no loan was made, Focus was never on risk and, therefore in accordance with principles established in the 18th Century and remaining good law today, the insurer would have to return the premium if it had been paid or, conversely, is not entitled to payment of the premium if it has not been paid.

In Stevenson v Snow (1761) 3 Burr 1237, Lord Mansfield who had not “the least doubt about this question” said:

“Equity implies a condition “that the insurer shall not receive the price of running a risque, if he runs none…If the risque is not run, though it is by the neglect or even the fault of the party insuring, yet the insurer shall not retain the premium.”

The claim was for money had and received in respect of that part of a premium paid for a voyage from Portsmouth to Halifax, Nova Scotia. The court held that the cover for that voyage was separable from the cover for the first leg of the voyage from London to Portsmouth and that the relevant part of the premium was recoverable because the voyage from Portsmouth was not undertaken and the insurer was therefore never on risk for it. There was no consideration given for the premium.

Lord Mansfield returned to the point in Tyrie v Fletcher (1777) 2 Cowp 666 where he said:

“…There is no case or practice in point; and, therefore, we must argue from the general principles applicable to all policies of insurance. And I take it, there are two general rules established, applicable to this question : the first is, that where the risk has not been run, whether its not having been run was owing to the fault, pleasure, or will of the insured, or to any other cause, the premium shall be returned : because a policy of insurance is a contract of indemnity. The under-writer receives a premium for running the risk of indemnifying the insured, and whatever cause it be owing to, if he does not run the risk, the consideration, for which the premium or money was put into his hands, fails and therefore he ought to return it. 2. Another rule is, that if that risk of the contract of indemnity has once commenced, there shall be no apportionment or return of premium afterwards.”

The principle set out by Lord Mansfield remains good law : see MacGillivray on Insurance Law (11^th ed) para 8 – 001 and Colinvaux’s Law of Insurance (8^th ed) para 8 – 20. See also Re Drake Insurance PLC [2001] Lloyd’s LR 643 and Swiss Reinsurance Co v United India Insurance Co Ltd [2005] Lloyd’s LR 341.

The former administrators submit that without the making of a loan by CFS out of which irrecoverable costs were paid, Focus was never on risk and the premium is therefore not recoverable.

In response, Focus submits as follows. First, there is nothing in the policy documentation which made the grant of a loan on its drawdown a condition precedent. Secondly, the policy and the invoice provide unconditionally for payment of the premium within 28 days, failing which Focus could exercise a right to cancel the policy. Thirdly, the policy was issued with a fixed commencement date which was not dependent on the grant of a loan. Focus was therefore on risk from that date. The fact that there could be no claim under the policy unless a loan was made by CFS does not detract from the proposition that Focus was on risk from the commencement date. It was submitted that the position was no different from the position where a loan was made but fully repaid.

In my judgment, the former administrators’ submissions are well-founded. There can be no doubt that the making of the loans and the issue of the FGI policies were elements in a single scheme for litigation funding put in place by CFS and Focus and that the purpose of the policies was to secure the loans. The terms of the policies are entirely consistent with this, particularly by limiting cover to costs paid out of loans made by CFS. Without such loans, there was no risk to cover. This was underlined by paragraph (3) of the offer letter which stated that Focus “will provide an insurance indemnity for each drawdown.” The significance of the commencement date was that if a loan were made on or after that date, cover would be available under the policy. Focus was not, without the making of a loan by CFS, on risk under the policy from the commencement date. At most, it was at risk of going on risk.

I conclude that Focus does not have a real prospect of success in its claim to be a creditor of LLP, or the Firm, in respect of unpaid premiums on the FGI policies where no loan was made by CFS.

I turn therefore to the 9 FGI policies where relevant loans were made by CFS to LLP. Clearly in those cases, Focus was on risk.

The evidence shows that in each of the 9 cases, the amount of the premium was deducted by CFS from the loan made to LLP and treated as part of the total amount of the loan which LLP was liable to repay and on which it was charged interest. This was in accordance with the standard procedures established and operated by CFS and Focus and in accordance with CFS’s obligation under cl.5.3 of its agreement with Focus to “procure that the Premiums are paid to the Insurer without any set off or deduction.” It was consistent too with cl.6.2 of the agreement which provided that in the event of cancellation of a policy, the premium would be repaid to CFS.

Focus submits that whatever the arrangements between it and CFS, it remained LLP’s liability to pay the premium and it was Focus’ right to enforce the liability if the premium was not received from CFS.

The former administrators submit that looking at the arrangements as a whole, the liability for the premium lay with CFS, not LLP, and this overrode the express terms of the policy documentation.

It is at least, in my judgment, clear that Focus has a claim against CFS under cl.5.3 of the agreement between them for payment of the premiums. I can see considerable force in the argument that the arrangements taken as a whole were such as to substitute that liability for the liability of LLP under the policies to pay the premiums, at least where CFS had deducted them from loans made to LLP. I do not, however, think that the position is so clear as to conclude that Focus has no real prospect of success in its contrary argument. The express terms of the policy documentation are clear, that LLP is liable to pay the premiums. It is a strong thing to say that express terms are overridden by what is to be inferred from the arrangements as a whole. In this case it is a conclusion which in my view the court would be entitled to reach only after a review of all the relevant facts at a trial.

The matter does not, however, end there. The amount involved is £330.75. Focus has a clear entitlement to demand payment from CFS. If demanded, CFS would be well able to pay the amount due. As CFS has deducted that sum from the loans made to LLP and charged LLP interest on it, the claim lies obviously against CFS. The only reason that Focus is not making the claim against CFS is to preserve its claim to be a creditor of LLP. I am inclined to the view that to maintain a claim under paragraph 75 of schedule B1 in these circumstances amounts to an abuse of the process of the court. The reason a creditor is given standing under para 75 is because as an unpaid creditor he has an interest in obtaining an order which will increase the available assets of the company. In circumstances where Focus can obtain payment in full of the small debt which it claims, it has no substantial interest in pursuing a claim under para 75. This point was not however relied on by the former administrators and it would not be right to refuse the amendment on this ground without further argument. That course is unnecessary given my overall conclusion on the application to amend.

The alternative basis on which Focus claims to be a creditor is in respect of unpaid audit fees. Focus carried out audits of LLP’s client files on three occasions in July and August 2008 and in March 2009. No fees were paid by LLP for these audits, nor were any fees demanded. Nor had any fees previously been demanded from the Firm for audits carried out in March and May 2008.

The first claim to payment of fees for these audits was made by Mr Sayer in his sixth witness statement, dated 9 July 2009. He exhibited five invoices but accepted that they had never been sent to the Firm or LLP. Although bearing dates shortly after the audits in 2008 and 2009, and requiring payment within 28 days, it seems highly improbable that they were created then.

Focus relies on the terms of the offer letter dated 18 February 2008 as the basis for its claim to be entitled to charge fees for these audits. Paragraph 13 stated “The costs of ongoing audits to be covered by Alexander Samuel”. That bald statement requires two qualifications to give it business efficacy. First, the amount claimed must be reasonable and, secondly, the claim must be made within a reasonable time. No issue can arise at this stage on the quantum of the fees now charged, but I would regard the time elapsed since all the audits except the audit in March 2009 as too long to be reasonable. Mr Sayer in his sixth witness statement stated that “Focus can, at its sole discretion, decide not to charge audit fees”. The delay in the production of invoices was objectively consistent only with a decision not to charge audit fees. The delay in the case of the audit in March 2009 is arguably not so great as to be unreasonable.

For the purposes of this part of the case, Focus argues that part of the offer letter, including the provision for the payment of audit fees, created enforceable contractual rights and obligations. For reasons given in the next section of this judgment, I consider that the acceptance of the offer letter did create a contract.

In order to make good a claim for audit fees against LLP, Focus must establish at trial that the relevant terms of the offer letter became binding on LLP. The former administrators submit they did not do so, pointing out that there is no document by which LLP agreed to be bound by the terms of the offer letter, even though Focus was aware of the change from the Firm to LLP. In my view, it is nonetheless reasonably arguable that the course of dealing between the parties was such that the terms of the offer letter applied as between LLP and CFS/Focus, as it had between the Firm and CFS/Focus. The fact that the scheme continued to be operated in the same way, and the absence of any new express agreement with LLP, gives force to Focus’ case on this.

The former administrators claim that LLP is owed £65,412 by Focus in unpaid commissions and that, if and to the extent that Focus has a sustainable claim against LLP, LLP has a good defence by way of set-off. Focus accepts that it owes £65,412 in unpaid commissions but says that it is due not to LLP, but to an associated company called Injury Investigations Limited (IIL).

The offer letter made provision for the payment of commissions by Focus. Paragraph 4 of the Terms and Conditions provided:

“An Agency Fee will be paid on all cases where a Focus ATE has been issued and paid. The Agency Fee on the HBOS repayment cases will be used to part pay HBOS directly, (see 5 above). Future Agency Fees will be paid to an account nominated by AS subject to acceptable, regulatory payment procedures being met.

The Agency Fee will be 25% of each ATE premium paid net of IPT. It will be paid at the end of the month following the month in which the policy premium is paid. It is in recognition of carrying out delegated authority requirements on behalf of Focus Insurance including but not limited to completion of a claimant risk analysis and policy proposal and an assessment of case eligibility and client suitability to become a policyholder of Focus Insurance.”

It is clear, and Focus does not dispute, that the wording of this paragraph gave the Firm the right to the payment of commission to itself or to its order. The paragraph uses the term “agency fee” but in argument on this application, all parties were content to refer to “commissions”. On the basis advanced by Focus that the terms of the offer letter governed the relationship between Focus and LLP after the transfer of the Firm’s practice to the extent that they were binding as between Focus and the Firm (as to which see para 47 above), paragraph 4 would also give LLP a right to commissions. The submissions proceeded on the basis that the outstanding commissions, if not payable to IIL, are payable to LLP.

Focus claims, however, that paragraph 4 was never agreed and that it was subsequently agreed that the commissions were payable to IIL.

The approach of Focus to the offer letter has been inconsistent. It relies on the letter in support of its claim for audit fees. It was exhibited by Mr Sayer to his second witness statement as an offer which had been accepted and without any suggestion that it was not binding in all its terms on Focus and the Firm and later LLP. However, in his fifth witness statement made on 17 June 2009 he said:

“The facility offer letter of the 18 February 2008, exhibited as CGSEX 2, resulted from the discussions with Mr Danenza. It is an offer, and is not the final agreement and is not indicative of how the agreement worked in practice. At the time, the letter was an offer with discussion points only.

The matter of the Agency Fees, (Terms and Conditions 4 of the facility offer letter), had not been finally agreed and did not indicate how any payment would be made, or to whom. The offer also made clear that any payment was subject to compliance with regulatory requirements. It was an offer to be discussed and agreed and would need to be supported by an agreement with the fee recipient.”

In his sixth witness statement made on 9 July 2009, in support of Focus’s claim for audit fees, he said:

“By letter dated 18 February 2008 (“the Facility Offer Letter”) [p43-48] Focus set out the terms and conditions upon which it was prepared to deal with AS & Co. That letter is signed by Mr Danenza on behalf of AS & Co. I have explained in my fifth witness statement that there were some terms set out in the Facility Offer Letter were not ultimately agreed but one of those which was appears at cl.13 of the terms and conditions

“The costs of on-going audits to be covered by Alexander Samuel”.”

Thus, Focus’ ultimate position is that the offer letter was binding for some purposes but not for others, coinciding with the extent to which it wishes to rely on it.

In my judgment, this is an impossible position for Focus to adopt. The offer letter was in terms a formal and detailed offer. It invited Mr Danenza to sign it on behalf of the Firm “to show your acceptance of the matters raised in this offer letter” and Mr Danenza signed it as the Firm’s acceptance of “the terms, conditions and undertakings detailed in this offer letter”. It is a textbook case of a contract made by the acceptance of an offer. The business between CFS/Focus and the Firm, and later LLP, was carried on in accordance with its terms. There is nothing in the terms or circumstances of the offer letter and its acceptance, or in the later conduct of the parties, to suggest that it was not intended to create a contract.

That is not to say that there could not have been a subsequent variation of paragraph 4, so as to substitute IIL for the Firm as the person entitled to receive and enforce payment of the commissions.

The evidence on which Focus relies for its case that IIL enjoyed the right to the payment of commission is as follows. First, Mr Sayer’s evidence in his fifth witness statement, in addition to the passage quoted above, is that in discussions with Mr Danenza in late 2007 or early 2008 “it was undecided who the recipient of any fees would be but we were told that it was likely to be IIL who we understood were retained to carry out work for Alexander Samuel. We were to be notified of who would be the recipient of payments in due course”. Mr Sayer says that Focus had noted in previous visits whilst reviewing files that IIL was often used by the Firm as agents to sign up a client, discuss the insurance proposal form and obtain client authorities, as evidenced by invoices on the disbursement section of claimant files. He says that after the offer letter Focus was told by the Firm that any Agency agreement should be forwarded to IIL.

Secondly, Mr Sayer exhibited to the same witness statement an unsigned draft agreement between Focus and IIL. It provided in cl.2.1 that IIL may introduce via a solicitor (who would in practice be the Firm) suitable clients who are eligible for and request legal expense insurance policies. Clause 2.2 provided:

“With the agreement of the Legal Representative You will be entitled to receive an Agency Fee from Us in respect of each Client introduced to Us by You via the Legal Representative and to whom We issue a Policy of Insurance and for which We have received the payment of the premium. We will arrange the prompt, regular payment of Agency Fee to You as and when it falls due in accordance with the terms of this Agreement.”

Clause 3 provided that Focus would arrange to credit agency fee payments to an account set up in IIL’s name for each client or case introduced by IIL. Clause 4 sets out obligations imposed on IIL, including that it must be registered with the Ministry of Justice as a competent company or organisation within the Claims Management Regulations 2007. There is no evidence that it was so registered. In passing it may be noted that it used the term “Barclays/Focus Scheme” defined as follows:

“The Barclays/Focus litigation funding and legal expense insurance scheme operated by Clydesdale Financial Services a subsidiary of Barclays Bank Plc and underwritten by Focus Insurance Company Limited.”

In his fifth witness statement Mr Sayer explained that in the short time available it had not been possible to locate the signed agreement but it “will be in the Focus office in Gibraltar”. This witness statement was made on 17 June 2009, but by the time of the hearing at the end of October 2009, it had not been produced. Mr Sayer said that the unsigned draft was “a true representation of the terms agreed”. He continued that the understanding of his staff and himself “has always been that an agreement has always been in place with IIL”. No payment had ever been made to the Firm or LLP and neither had demanded payment.

Thirdly, Focus relies on a witness statement of Paul Cole, who is employed by a licensed insurance manager in Gibraltar. Mr Cole has responsibility in respect of some accounting functions for Focus, including the administration of payments to its suppliers and creditors. He says that he was aware of the offer letter and the provision for the payment of agency fees to the Firm. He confirms that the Firm never received any such payments from Focus. He continues:

“I understand that an agreement has been discussed between Focus and Injury Investigations but I have not had sight of a contractual arrangement between the two companies. I note that this was raised by the Focus auditors Grant Thornton as a matter outstanding in the Focus August 2008 financial year end audit.

Injury Investigations Limited were entered on to the Focus computer systems at 12.44 on the 12^th March 2008 as an “Agent” associated with business conducted by Alexander Samuel and as such were entitled to receive, or had accrued to a nominal account in their name, 25% of each ATE paid premium net of Insurance Premium Tax submitted to and accepted by Focus Insurance. It has been set up on the Focus systems as an Agency Fee.

It is my understanding and belief that it is Injury Investigations who are the agreed beneficiary of the Agency payments detailed in the facility letter of the 18^th February and it is this commercial arrangement that is managed by me and my team at Quest since the 12^th March 2008.

In February 2009 I was requested by the Focus management team to commute an Agency payment due to Injury Investigations to Barclays to offset monies owed by Alexander Samuel to Barclays. The amount was for £99,923.43 and was supported by a schedule of case repayments. I discussed the matter with the Focus management team and advised that they obtain a written authority from Injury Investigations to agree such a transfer in the event that a dispute later arose regarding payments due and received. The written authority obtained was dated the 24^th February 2009, (Exhibit PC1), and the payment requested by Focus was made to Barclays as instructed and authorised.”

The written authority to which Mr Cole refers came about in the following circumstances. In a letter dated 10 February 2009 to LLP, Barclays (CFS’ parent company) referred to commission owed by Focus to LLP and suggested that some of it should be used to settle amounts due to CFS. This was followed up by LLP, which contacted Focus. In an email sent on 23 February 2009 by Mr Sayer to Belinder Kahai, LLP’s accounts manager, and headed “Re: Alexander Samuel/Injury Investigations Commissions transfer”, Mr Sayer wrote that “an authority is required from you, or an authorised officer of Injury Investigations” to allow the transfer to CFS’ agent. A letter was provided on IIL headed paper which confirmed that IIL had no objection to the payment. It was signed by Duncan McLaren as a director of IIL but Mr Cole noticed that Duncan McLaren was not registered as a director of IIL. In the event, just under £100,000 was paid to RLA which was “debited to the Injury Investigations commission account as agreed” : email dated 4 March 2009 from Mr Sayer to LLP.

It is clear from these emails that Focus had opened in its book an account in the name of IIL to which commissions were credited. Having done so, it would obviously require the consent of IIL to debit the payment agreed with CFS. The crediting of commissions to an account in the name of IIL is consistent with either paragraph 4 of the offer letter (“Agency Fees will be paid to an account nominated by AS”) or an agreement between Focus and IIL. If the former, then LLP is entitled to require payment of the commissions to them. The issue on the present application is whether Focus had a real prospect of establishing the existence of an agreement with IIL.

On analysis, the only substantial evidence in support of Focus’ case is Mr Sayer’s evidence of the understanding of his staff and himself that there was an agreement with IIL and that the draft agreement is a true representation of the terms agreed with IIL.

Mr Cole’s evidence is of little assistance to Focus. He says only that he understands that an agreement had been “discussed” between Focus and IIL and that IIL was entered as an agent in Focus’ computer systems and as such was “entitled to receive, or had accrued to a nominal account in their name,” the commissions. It was his understanding and belief that IIL was “the agreed beneficiary of the Agency payments detailed in the facility letter of the 18^th February”. This is consistent with the position as set out in the offer letter and his evidence does not support the existence of a contract between Focus and IIP.

The failure to produce a signed agreement with IIL tells against Focus. The existence of the draft agreement shows that it was intended that there should be a written agreement. Mr Sayer was clear in his fifth witness statement that the signed agreement would be in Focus’ offices in Gibraltar, but it was never produced and no explanation for not doing so has been provided. The only reasonable inference is that it does not, and never has, existed. I note Mr Cole’s evidence that the absence of an agreement was raised by Focus’ auditors as a matter outstanding in the audit of the 2008 accounts.

In the offer letter, the commissions were stated to be payable in recognition of carrying out delegated authority requirements on behalf of Focus including completion of a claimant risk analysis and policy proposal and an assessment of case eligibility and client suitability to become a policyholder of Focus. Not only did the offer letter envisage that the Firm would undertake this work, but the evidence establishes that the Firm, and LLP, in fact did so. There is no evidence of IIL performing any functions.

IIL was not independent of the Firm or LLP. The individuals stated by Mr Sayer to be involved in the management of IIL, Lisa Wilson and Robert McLaren, were respectively LLP’s practice manager and Mr Danenza’s personal assistant. Robert McLaren was replaced as Mr Danenza’s personal assistant by his brother Duncan who also became a director of IIL. In May 2009 IIL filed with the registrar of companies an application, signed by Lisa Wilson and Duncan McLaren as directors, for the company to be struck off the register. This would be an extraordinary step if the directors believed that it had an enforceable claim for £65,000 against Focus.

There is no evidence from anyone connected with IIL to support Focus’ case. Given IIL’s close connection to the Firm and LLP, there is a ready explanation as to why it should have been nominated by the Firm or LLP as the recipient of commissions, even though it was not in fact doing anything to earn them.

In the light of the evidence, I am satisfied that there is no substantial basis for Focus’ case that the remaining commission of £65,000 was payable to IIL, not LLP. While IIL was at some time nominated as the account to which commissions should be credited, LLP remained entitled to require payment to it, in place of IIL as its nominee.

It follows that Focus is indebted to LLP in the amount of £65,412 which exceeds, and by way of set-off extinguishes, any claim which Focus advances to be a creditor of LLP.

Focus does not therefore have a real prospect of establishing its status as a creditor of LLP and accordingly I refuse its application to amend the particulars of claim. It follows that its claim against the former administrators under paragraph 75 must be struck out.

Jiva applies to strike out the claim by Focus under ss.423-425 of the Insolvency Act 1986, alternatively applies for summary judgment on the claim against Focus, on the grounds that Focus cannot establish that it is a “victim” of the sale of LLP’s practice and assets to Jiva.

It follows from my decision on Focus’ application to amend that it cannot rely on being a creditor of LLP in order to establish that it is a “victim”. In its particulars of claim as they presently stand, this is the only basis on which it claims to be a victim. However, it submits that it is entitled to rely on the effect of its obligations under the FGI policies, as assigned to CFS as security for the loans made by CFS to LLP and it puts forward an amendment to reflect this. It submits that although CFS is the creditor in respect of the loans, the loss will in fact be borne by Focus, which will then be subrogated to CFS’ claims. To the extent of any undervalue at which the practice and assets of LLP were sold, that loss will be the result of the sale.

Mr Dutton for Jiva points out that, so far as the evidence shows, CFS has made no claim on the assigned FGI policies and Focus has yet to make any payments under the policies. Any loss which it may suffer is therefore at present contingent and is, in any event, the same loss as that suffered by CFS. While CFS is making or can make a claim under s.423, Focus should not be permitted to do so, either because it lacks status as a victim or because the right course would be to stay Focus’ claim while CFS pursues its claim.

Mr Dutton submits further that any loss suffered by Focus stems not from the terms of the sale to Jiva but from the insolvency of LLP which existed irrespective of the sale. In any event, in meeting any claim under the assigned policies, Focus will be doing no more than meeting the risk it undertook, that is the risk of default under the loans.

Section 423(5) defines a victim of a transaction as a person “who is, or is capable of being, prejudiced by it”. In choosing the term “victim” and this definition, it is I think clear that it was intended to be a wider category than simply creditors. The words used are ordinary English words with no technical meaning and the correct approach in any given case is to ask whether, on the facts of the case, the claimant is a person who is, or is capable of being, prejudiced by the transaction. The fact therefore that Focus is not a creditor does not decide the case against it.

If the sale was at an undervalue, the amount directly recoverable by CFS, or by Focus on a subrogated claim, will be reduced and the amount payable by Focus on a claim by CFS under the policies will be increased. It is irrelevant that because of LLP’s pre-existing insolvency, there would in any event be a shortfall on CFS’ recovery from LLP and a liability of Focus on the policies. The prejudice lies in the increase in the shortfall. It is also irrelevant if CFS has yet to make a claim on the FGI policies. As CFS has the right to make such claims, Focus is a person “capable of being prejudiced” by a sale at an undervalue.

I conclude therefore that Focus has a real prospect of establishing that it is a victim of the sale. I therefore dismiss Jiva’s application.

A case management hearing took place immediately after the hearing of these applications. There are significant case management issues. In particular, there are real risks of unhelpful and uneconomic duplications of claims in respect of the sale to Jiva. Put broadly, CFS as an undisputed creditor is bringing a claim under paragraph 75 of schedule B1. CFS and Focus are bringing claims under ss.423 – 425. Until now they have been separately represented, but I made clear at the case management hearing that it was undesirable, to put it mildly, that two claimants should separately make the same claim. CFS and Focus made clear that they would consider the best way forward in that respect. The liquidator of LLP was represented and stated that he would shortly be issuing proceedings for relief under s.238 of the Insolvency Act 1986 on the basis that the sale had been a transaction at an undervalue.

While claims under ss.238 and 423-425 will both need to establish that the sale was at an undervalue, the claim under ss.423-425 will additionally need to establish the mental elements set out in s.423 (3). It is hard to see what would be achieved by the latter claim which would not also be achieved by the former, but at less cost in time and money. It is possible for a court to give relief directly in favour of individual victims under ss.423-425, but in a case where the relevant company, LLP, is in insolvent liquidation, this is an unlikely outcome if the liquidator’s alternative claim under s.238 succeeds. In other words, if compensation is to be paid, it is likely that it will be payable to the liquidator in order to increase the assets available for all creditors.

In these circumstances, all parties should give urgent consideration as to which proceedings should continue at this stage. This needs to be sorted out as soon as possible. I gave directions for a further case management conference. If possible, I consider that this should occur in December 2009.