Goldfarb v Higgins & Ors

On 25 March 2010, I gave judgment on an application by the liquidator of Overnight Limited (“the Company”) under the “fraudulent trading” provision in section 213 of the Insolvency Act 1986 (“the Act”). I held that the first respondent (Mr Higgins) should contribute to the Company’s assets the full loss caused to HMRC as creditor of the Company and that the second respondent (Mr Charalambous) should, on a joint and several basis, contribute as to 50% of that loss. Mr Higgins did not appear at the trial but Mr Charalambous did take part and was, with the permission of the court, represented by his litigation friend. Since there was some controversy regarding the liquidator’s schedule of loss and Mr Charalambous, and Mr Mohammed who was assisting him, had not had a full opportunity to consider it with the explanation being offered, I directed that there should be written submissions on that matter for me to consider it on the papers. Both sides, with an extension of time, have duly made submissions and this is accordingly my ruling as to the quantification of loss.

At the outset of the written submissions of Mr Charalambous, it is submitted that his contribution to the loss should be reduced from one-half to one-third. I have already given my decision on that matter and no fresh circumstances that were not already before the court at the hearing of the substantive application are now raised. Although the order consequent upon my judgement has not yet been drawn up, I see no basis to reconsider my ruling save only that I here address the question of interest that arises under the head of quantification: see below. As recorded in the judgment, Mr Charalambous was the sole registered director of the Company who therefore had the principal responsibility for its operations. It is only because he had not profited personally from the fraud, whereas others have done, and it appears he may have been the “front man” for the fraud, that I determined that his contribution pursuant to section 213(2) should be only 50%. I should also make clear, in the light of what it said in Mr Charalambous’ written submissions, that in this determination he was not penalised for having appeared to defend the action. On the contrary, his evidence has assisted in leading to that reduction in his contribution. It is only as regards costs that his active opposition to the application has an adverse effect on him, since it led to a fully contested hearing.

The liquidator has produced a revised schedule that removes and adjusts some of the costs included in the schedule presented at the hearing. The revised schedule shows the outstanding principal loss to amount to £190,457.49. Interest accrued to the date of judgment, less interest received on realisations, amounts to £223,282.99. In addition, there are the balance of unrecovered costs (£42,869.61) and the ad valorem charge (£33,527.23). That produces a total claim with interest and costs less realisations in the sum of £490,137.32. (Footnote: ¹)

Mr Charalambous seeks to challenge the amount of interest, on the basis that the liquidator recovered the principal sum of £236,000.41 on 17 October 2002 but then only issued these proceedings on 29 November 2007. He submits that on account of this delay, interest should be applied only from the date when proceedings were issued and not earlier. I am referred to cases concerning the award of interest under section 35A of the Senior Courts Act 1981 (“the SCA”) where the court in its discretion has allowed interest for only a reduced period when there has been unjustifiable delay in prosecuting the claim.

The payment of interest on debts in a winding up is governed by section 189 of the Act. Section 189(1) provides:

“In a winding up interest is payable in accordance with this section on any debt proved in the winding up, including so much of any debt as representing interest on the remainder.”

Under section 189(4) the rate of interest is the greater of any rate applicable to the debt apart from the winding up and the rate specified in section 17 of the Judgments Act 1838 on the day on which the company went into liquidation. Since 1 April 1993, the specified rate has been 8%.

Accordingly, the liquidator is bound to pay interest, if the Company has sufficient assets, on the debt to HMRC at the rate of 8%. He has no discretion in that regard. That liability forms part of the Company’s loss in respect of which the liquidator applies under section 213 for a contribution to the Company’s assets. Accordingly, this is not an application whereby the liquidator is pursuing a cause of action against Mr Charalambous for a personal debt or damages owed by him to the Company that would have engaged the regime for discretionary interest under section 35A of the SCA. It follows that the authorities under that provision have no direct application in the present case.

Nonetheless, in my view, it does not follow that if the liquidator delays unreasonably in bringing proceedings under section 213 he can necessarily visit the effect of that delay in terms of higher interest payment upon the respondent to that application. However, that consideration can be taken into account not by a reduction in the rate or period of the interest which the liquidator is liable to pay on the debt, which is fixed by statute, but by the court in its discretion under section 213(2) determining that it is not reasonable for the contribution ordered against the respondent to cover the entirety of that interest. Mr Charalambous has helpfully referred me to the relevant part of the judgment of Jackson J in Claymore Services Ltd v Nautilus Properties Ltd [2007] EWHC 805 (TCC), [2007] BLR 452, where the judge thoroughly reviewed the authorities on the issue of when a claimant should not be awarded part of the interest that he would normally receive on account of delay in commencing or prosecuting proceedings. I regard this as giving valuable guidance by analogy on the question whether the contribution ordered under section 213(2) should leave out of account a period for which the liquidator has to pay interest to a debtor pursuant to section 189.

In the present case, the liquidator waited to commence such proceedings until the time when it appeared that there were assets from which recovery could be made. There was difficulty tracing Mr Higgins, and he appeared to be without assets. The third respondent, Mr Chareb, could not be found at all. It was only Mr Charalambous who appeared to own any property. Initially that was jointly owned with his wife and I am told that it was thought that he had no substantial equity in the property. However, that house was transferred into his sole name on his divorce shortly before the expiry of the limitation period, when the liquidator commenced these proceedings. Given the application of a limitation period to these proceedings, which of course was not exceeded, I do not see that any legitimate complaint can be made against the liquidator for starting the proceedings only in November 2007 in those circumstances.

I accept that this is not a case where Mr Charalambous has had the use of this money over the period concerned. However, applying the principles derived by Jackson J, for the reasons set out above I do not regard this as a case where the liquidator “has delayed unreasonably in commencing …proceedings”, taking a realistic view of the delay in all the circumstances. I note that Mr Charalambous does not allege there has been any further delay since proceedings were commenced. Accordingly, I make no reduction in the amount of interest included in the contribution recoverable from Mr Charalambous.

It follows that, on the amended figures, Mr Charalambous is liable to make a contribution as to one-half of the outstanding claim of £490,137.32: that is to say, in the amount of £245,068.66. That liability is joint and several with the liability of Mr Higgins to pay the full amount.

Mr Charalambous requests a stay of execution for a year in respect of the existing charging order registered against his home which the liquidator obtained to secure sums due under the costs order made by the Chancellor on 11 February 2009 following the determination of a preliminary issue. However, consideration of such a stay is not within the terms of my directions following judgment. Mr Charalambous is at liberty to issue such an application supported by appropriate evidence, to which the liquidator can then respond. It is therefore not appropriate to consider that matter in this judgment and I make no further comment upon it.