York Gas Ltd, Re

MR JUSTICE NEWEY: I have before me an appeal from a decision of Registrar Nicholls dated 19 April 2010. The appellants, Mr Jacob and Mr White, are the liquidators of a company called York Gas Limited. Mr Jacob is a consultant with Grant Thornton UK LLP and Mr White is a partner in the same firm.

The background, in brief summary, is as follows. York Gas was part of the International Energy Group whose parent company was Independent Energy Holdings PLC (or “IEH”). The principal trading company in the group was Independent Energy UK Limited (or “IEUK”).

In September 2000, companies in the group went into administration and receivership. In 2002, IEUK and IEH went into creditors’ voluntary liquidation, and in the next year, York Gas followed suit. Mr Fishman and Mr Bailey of Ernst & Young LLP were appointed as liquidators of IEUK. The appellants became the liquidators of IEH and York Gas.

The statements of affairs for both IEH and York Gas show IEH as a creditor of York Gas. Hitherto, that inter-company claim has not been dealt with because, as Mr Jacob explained in a witness statement, the liquidators of IEUK have been undertaking a substantial reconciliation exercise in relation to dealings between companies within the group. However, that exercise is now, I gather, close to completion.

The appellants recognised that a conflict of interest arose with regard to IEH’s claim against York Gas. Mr Jacob described the problem in the following terms in his witness statement:

“IEH has a claim in the liquidation of York Gas of £4,657,606 which presents a conflict of interest which may compromise the Joint Liquidators’ ability to act in the best interests of the creditors of York Gas. This is because, on the one hand, the Joint Liquidators as liquidators of IEH, have to assert this claim whilst, on the other hand, the joint liquidators as liquidators of York Gas will have to adjudicate the claim. In pursuing IEH’s claim, the Joint Liquidators of York Gas would, as a consequence, be acting against the interests of the creditors of York Gas itself.”

The appellants sought to address this problem by applying for Mr Malcolm Shierson, a partner in Grant Thornton, to be appointed as an additional liquidator of York Gas. Mr Jacob explained his thinking as follows in his witness statement:

“In order to deal with the conflict of interest identified above, it is considered that the most effective and efficient course is for an additional office-holder to be appointed to York Gas. The new office-holder will be able to deal (from York Gas’s perspective) with the incoming claim made by IEH and Mr White and I will be able to deal (from IEH’s perspective) with its outgoing claim against York Gas.”

Mr Jacob went on to observe that it would be necessary for Mr Shierson to obtain independent legal advice to ensure that the rights of the creditors of York Gas were protected. He also said that “Chinese walls” would be put in place within Grant Thornton to ensure the independence of Mr Shierson and that separation of information was maintained.

It was the application for Mr Shierson to be appointed as an additional liquidator which came before Registrar Nicholls on 19 April. He dismissed the application.

In the course of his judgment, the Registrar said the following:

“Even taking into account that Mr Shierson would obtain independent legal advice, the court needs to be satisfied that the identified conflict of interest is addressed in such a way that this conflict does not cause, or appear to creditors to cause, prejudice to either company. Furthermore the court needs to be satisfied that the perception of a creditor of either company is one of a clear understanding of the separate and distinct roles and responsibilities of the liquidators of both companies and ensure that no information that has been obtained by the joint liquidators, Mr White and Mr Jacob, is used unfairly to the benefit of one company and/or to the detriment of the other.”

The Registrar arrived at the following conclusion:

“Where there is clear and acknowledged conflict of interest the court must be satisfied when making further appointment that the risk of prejudice has been fully addressed and the views and perception of the creditors taken into account and this court is not satisfied that appointing a new team and a third insolvency practitioner from Grant Thornton achieves that objective.”

The Registrar had earlier in his judgment made these points in particular. First, he referred to the fact that there was no evidence of creditors having been consulted. Secondly, he said this:

“… in a case of this nature, when the liquidations have been in place since May 2002 and July 2003, clearly Mr White and Mr Jacob would seek to continue to prosecute a claim with knowledge that they have gained from both sides, namely from York Gas’s point of view and IEH’s point of view.”

Mr Tom Smith, who appears before me (as he did before the Registrar) for the appellants, referred me to several authorities in support of the proposition that, as a matter of principle, a conflict of interest faced by officeholders can be effectively managed by a division of responsibilities between officeholders who are members of the same firm. The most recent of these authorities was Sisu Capital Fund Ltd v Tucker [2005] EWHC 2170 (Ch), where Warren J discussed earlier cases. I agree with Mr Smith that the authorities show that the appointment of an additional insolvency practitioner from the same firm as existing officeholders can potentially be an acceptable way to manage a conflict of interest such as the one in the present case.

One of the relevant cases is Re Arrows Ltd [1992] BCC 121. In that case, partners from Ernst & Young had been appointed both as provisional liquidators of Arrows Limited and as receivers of a number of connected companies. Arrows Limited applied for the removal of the provisional liquidators, and it was common ground that there could be conflicts of interest between Arrows Limited and the companies in receivership. Hoffmann J nonetheless refused to replace the provisional liquidators. In the course of his judgment, Hoffmann J said the following:

“The removal of the provisional liquidators therefore involves very considerable practical disadvantages. As against that, the alternative strategy is to approach the matter from the other end and to secure when necessary that the interests of the receivership companies are represented, either by receivers who are independent of the provisional liquidators or, and this may in proper circumstances be sufficient, by receivers who, though belonging to the same firm as the provisional liquidators, are given independent legal advice.

In my view, everything points to the second course being the practical one to adopt.”

I pause to observe that, in the present case, Mr Jacob has acknowledged that if Mr Shierson is appointed as additional liquidator, it will be necessary for him to obtain legal advice.

If the appointment of an additional officeholder from the same firm can, in principle, provide a solution to a problem such as that in this case, were there particular reasons for rejecting that course here? One of the matters to which the Registrar referred was the fact that creditors had not been consulted. To my mind, however, that could not, in the circumstances of the present case, be a sufficient reason to dismiss the appellants’ application. It is significant in this context that there is no creditors’ committee in place for York Gas. Had there been such a committee, as Mr Smith recognised, the appellants would, in practice, have consulted it, even had there been no obligation on them in theory to do so. The fact is, however, that there is no such committee.

Another matter to which the Registrar referred was the fact that the appellants would be in a position to prosecute a claim on behalf of IEH against York Gas with knowledge gained both as liquidators of IEH and as liquidators of York Gas. As to this, Mr Smith submits as follows:

“… this reason, even if well founded, would not be a reason not to appoint Mr Shierson as an additional liquidator of York Gas but rather would be a reason to remove Mr Jacob and Mr White as liquidators of IEH. That course, however, would be unnecessary, unjustified and disproportionate.”

I agree. I also agree with Mr Smith that, on the facts of this case, the premise which appears to underlie the Registrar’s reason – namely, that the liquidators of IEH should not be able to advance IEH’s claim with the benefit of the information relating to that claim which was available to York Gas - is unfounded. There is here no reason to think, as I see it, that the appellants have any information which it would be wrong should be advanced on IEH’s behalf. In this context, I agree with Mr Smith that in this case one would in any event expect the liquidators of the two companies to exchange all relevant materials.

The upshot is, as I have been persuaded by Mr Smith, that the Registrar’s decision was erroneous and that I should allow the appellants’ appeal. I should say that I entirely understand the Registrar’s concern that conflicts of interest should be properly managed. I should also note that the Registrar, for the brief hearing before him, did not have the benefit of a skeleton argument such as I have been provided with and will not have seen the authorities to which I was referred. At the end of the day, though, it seems to me that, in the circumstances of the present case, the conflict of interest which has arisen, and which the appellants have recognised, can be adequately managed by the course that the appellants propose should be taken. I will, accordingly, allow the appellants’ appeal and I shall make an order, as Mr Smith asks, for Mr Shierson to be appointed as an additional liquidator of York Gas pursuant to section 108 of the Insolvency Act 1986.