Berntsen & Ors v Tait & Ors

This is a Respondents’ application in insolvency proceedings either to strike out the proceedings or to give summary judgment in the Respondents’ favour. I am therefore not concerned to determine issues of fact. But I must set the proceedings and the application in their context: and must therefore give some factual account. In the overview which follows I have drawn upon what is agreed, what is said by the members of the LLP in their statements of case and evidence, and what appears on the face of the documents. I will make reference to the contentious areas. I will focus on two themes: the banking arrangements of the Applicants’ partnership, and the nature of the Respondents’ engagement.

Mr Innes Berntsen (“Mr Berntsen”) and Mr Christopher Richardson (“Mr Richardson”) decided to invest the proceeds of the sale of their business in a hotel development project. They purchased the Coniston Hotel at Sittingbourne, Kent (“the Hotel”), which was in an extremely run down condition, with a view to refurbishing and enlarging it. For that purpose on the 6 September 2007 they formed a limited liability partnership called the Coniston Hotel (Kent) LLP (“the LLP”), of which they were the only two members. The partnership constitution is not in evidence. Part of the business of the LLP traded under the name of “Bedfont Construction”: as its name suggests that was concerned with the building and construction work that was required. The Hotel business itself was to trade under the name of “The Coniston Hotel”.

The working capital of the LLP was provided in part by contributions from Mr Berntsen and Mr Richardson: whether those contributions formed the capital of the partnership or were loans is not entirely clear (their statement of case saying only that they “placed in to the LLP” certain sums). For the purposes of this application I will treat them as loans. The balance of the working capital was originally provided by term loan and overdraft lending by National Westminster Bank Plc (“the Bank”).

The project was originally scheduled to take just over two years so that the Hotel would open at the end of 2009. But the shape of the development changed somewhat as the opportunity to acquire adjoining land arose and additional features were added, so that the timeline became extended. The opening date was rescheduled for April 2010, and then further extended until mid June 2010. By the beginning of June 2010 the Hotel was very near completion.

On 3 June 2010 the bank returned some cheques drawn on the LLP’s account unpaid, indicated that it would not meet cheques that had already been drawn in favour of builders and suppliers, stopped the LLP’s corporate credit card, and stated that it regarded the loan and overdraft facilities as exhausted. In essence Mr Berntsen and Mr Richardson say that the Bank was not entitled to do this (a) because the Bank had always supported their project and had promised that there would be enough money to complete it: and (b) that the Bank’s Regional Commercial Manager (“Mr Flannery”) had throughout been so closely involved in their project, had given so much financial and commercial advice about the project, and had invited Mr Berntsen and Mr Richardson to repose such trust and confidence in him, that (although an employee of the Bank) he had become a fiduciary agent of the LLP and was not entitled to act against the interests of the LLP (as he did by withdrawing the facilities which he had promised). Mr Berntsen and Mr Richardson rely in part on a press release issued by the Bank in January 2007 entitled “Natwest supports Coniston Hotel purchase” which read

“Natwest has provided a multi million pound funding package for local businessmen, Chris Richardson and Ernie Berntsen, to re-develop the Coniston Hotel. … Scheduled to open in late 2007, the re-development will provide local employment opportunities and will support the local tourist industry. Chris and Ernie worked with Mike Flannery, Commercial Banking Manager, Natwest Thames Gateway, to complete the purchase. Tailored to suit the industry, the financial package includes a long term loan coupled with interest rate protection and day to day cash flow facilities”.

The facilities which had been negotiated (and about which there is no dispute) were a term loan and an overdraft. There was in addition a general business loan (but there is a dispute about its availability). The facility about which there is the greatest dispute is a chattel mortgage from Lombard.

The term loan had been part of the original funding and was initially £3.4m. But it was increased as the Coniston Hotel project was modified. As a result of the latest extension (signed on only 24 May 2010) at the beginning of June 2010 it afforded a facility of £4.2m which was due for repayment on 30 June 2010. As at 2 June 2010 £83k (taking the highest figure contended for) remained available to be drawn. The position of Mr Berntsen and Mr Richardson is that Mr Flannery had promised them that this would be rolled over into a new facility: the Bank disputes this.

The overdraft had also been an original feature. Oddly, it appears not to have had any formal limit, the Bank simply drawing a line when it chose. It did so on 3 June 2010 when it returned two cheques totalling some £90k and indicated that it would not meet cheques totalling £225k which had been drawn but not yet presented. Mr Berntsen and Mr Richardson say that the Bank was not entitled to impose any limit on the overdraft because the Bank had said that there would be enough money for the development: and further that the overdraft could not be called in.

On 21 May 2010 the Bank granted a £350,000 facility known as the “General Purpose Business Loan”. Mr Berntsen and Mr Richardson say that this was “intended to assist cashflow issues, caused amongst other things, by VAT payments” i.e. that it was available for any purpose. The Bank says that it was intended to fund VAT payments until they could be recovered at the end of the quarter. The facility had a repayment date of 30 June 2010. It is common ground that this had been drawn down by £199,000 at the material time. Clause 4.1 of the Loan Agreement says:-

“The Customer will repay the Loan from the proceeds of the Company’s VAT refund by the Repayment Date or, if earlier, the date the proceeds become available. If those proceeds do not repay the Loan, the Customer will repay the balance of the Loan by the Repayment Date”.

The Lombard chattel mortgage was intended to be asset finance secured on fixtures and fittings in the Coniston Hotel. Internal Bank documents show that a loan of £400k had been approved in principle by Lombard on or about 3 June 2010 (having originally been declined). The approval was subject to a Second Charge being granted over the Hotel and a joint and several personal guarantee being given by Mr Berntsen and Mr Richardson in the sum of £400k. In these proceedings the Bank’s position (supported by an apparently contemporaneous attendance note and an e-mail to Mr Richardson dated 2 June 2010) is (a) that it told Mr Berntsen and Mr Richardson that the facility had not been approved (as was initially the case); but (b) that it did not tell them that a review had led to approval of the funding; and (c) that it took that course because on 3 June 2010 the Bank had discovered that the position was worse than it had expected. In these proceedings Mr Berntsen and Mr Richardson say that they thought that the Lombard chattel loan (which they put at £500k) had been granted (because Mr Flannery had “pre-agreed” it) and indeed that the £225k worth of cheques drawn (but not presented) had been so drawn on the footing that the Lombard funding would be available, and that any demand for a personal guarantee was unlawful. (In a complaint to the Financial Ombudsman Service on 4 October 2010 one of their complaints is that they were “bullied to provide personal guarantees”). They rely on some valuation instructions prepared by the Bank on 11 June 2010 (and which came into their possession during the administration) which state:-

“The Bank has agreed to provide [the LLP] with a loan facility of up to £5,029,000… to assist with the development of Coniston Hotel…”

It is said that this figure only makes sense if the total loan facility includes the Lombard loan.

It is Mr Berntsen’s and Mr Richardson’s case that they had been promised by Mr Flannery a “term out” loan upon completion of the Hotel sufficient to refinance all of this borrowing: an e-mail dated 28 May 2010 records an appointment with him to discuss this arrangement. They rely on a Lending Proposition put by Mr Flannery to his superiors on 11 February 2010 which includes the following:-

“We have already given our commitment back in 6/08 to a term out loan albeit at a lower level i.e. without the additions detailed above [which referred to the project additions and changes]….The terms of the term out loan as previously agreed was (sic) as detailed below. However it had not [been] fully finalised [in view of] issues that could have developed throughout the development stage…….Loan/indebtedness expressed as a % of value shall not be greater than 60% (to start when debt termed out)…[Personal guarantee] limited to £300k from [Mr Berntsen and Mr Richardson] until hotel can evidence that it can generate profits….MV day 1 £7.70m based on EBITDA at £781k….”

On 3 June 2010 there was a meeting between the LLP members and the Bank (represented by Mr Burgess and Mr Wade). Mr Berntsen and Mr Richardson said that it was at this meeting that the Bank confirmed its refusal to release any further funds unless they gave additional security for loans which they said had already been agreed to fund the hotel development. There were 70 contractors on site and 65 members of staff recruited to open and run the Hotel.

That same evening Mr Richardson (together with someone from Zenon Tax who undertook the book-keeping for and gave tax advice to the LLP) met with Ms Rayment of BDO. Mr Berntsen and Mr Richardson submit that on behalf of the LLP they engaged her (and her colleague Mr Tait) as individual insolvency and restructuring advisers practising from the offices of BDO, and that Ms Rayment and Mr Tait thereby became the fiduciary agents of the LLP. The Respondents do not accept that analysis: they say that it was BDO that was retained as adviser. At that meeting Mr Richardson outlined the problems of the LLP. There is a full attendance note recording these instructions, and at the hearing I indicated that I would rely on this as indicating what Mr Richardson told Ms Rayment: Mr Miah did not argue that I should not. The key points were (a) that when re-assessed in April the project was underfunded by £1.1m; (b) that that shortfall was intended to be funded by an injection of £400k by Mr Berntsen and Mr Richardson (which was made), an eventual £200k VAT refund and £500k from Lombard refinancing the equipment; (c) that the Bank had refused cheques of £80k and that there were uncleared cheques of £190k; (d) that suppliers and trade creditors were owed £280k (of which about £40k was disputed); (e) that there were £180-£260k further completion costs (plus VAT); (f) that there were staff costs which over 2 months were £200k. It appears to me from her notes that she understood (or was told) that an additional £900k was needed to finish the project and begin trading: this would be consistent with what the bank records as its understanding at the meeting held earlier on 3 June 2010.

The following day Ms Rayment reported this meeting to the Bank. This report led to a meeting with the Bank’s Restructuring Group which Ms Rayment summarised on 9 June 2010 saying:-

“…we are currently not formally engaged by either the LLP or yourselves and are therefore unable to provide any formal written advice to either party. You mentioned you were happy for us to work with the management and didn’t think we needed a dual letter of engagement. We are more than happy to proceed on this basis but are mindful of our relationship with the bank and would wish to retain the ability to keep you informed at all stages. We will seek to build this into our engagement letter but it is possible that we may require a dual engagement letter to achieve this.”

Mr Berntsen and Mr Richardson say that this demonstrates that from the outset Ms Rayment and Mr Tait had divided loyalties.

Mr Berntsen and Mr Richardson were also taking legal advice from Vertex Law. Their lawyer is recorded as informing BDO on 9 June 2010 that there were no funds available from personal sources or from third parties, that there was pressure from subcontractors and a growing level of concern from employees, that the amount required to complete the work had increased significantly above £200k (a figure which did not include the working capital required to open and trade as a hotel) and that the members needed a firm commitment from the Bank. None of this seems to be in dispute.

As at 10 June 2010 Mr Berntsen and Mr Richardson thought the hotel was worth £7.7 million as it stood (based on their understanding of a Savills valuation made in February 2010). Mr Tait told the Bank’s Restructuring Group that the valuation of the hotel was the “critical issue”: and he told the LLP to commission a valuation from Knight Frank (“KF”). Mr Berntsen and Mr Richardson say that in doing so he was acting in concert with the Bank and that the KF valuation was not an independent third party valuation.

On 14 June 2010 an Engagement Letter dated 11 June 2010 was signed: Mr Berntsen and Mr Richardson say (in a letter before action from their Counsel Mr Miah dated 1 December 2010) that they relied on legal advice from Vertex Law in signing it. According to its terms it set out the basis on which BDO were to provide professional services to the members of the LLP. The professional services were an Independent Business Review to be undertaken within seven days. Phase 1 entailed:-

According to Appendix A to the Engagement Letter the Bank confirmed the appointment of BDO to undertake this work, and Mr Berntsen and Mr Richardson each on behalf of the LLP confirmed the Bank’s instructions and undertook to co-operate with BDO and to be responsible for the fees incurred.

The following terms are material to this application:-

The KF valuation as at 15 June 2010 came in (in draft) at £2.5-£3m with the Hotel in its existing state (depending on the marketing period), £3.75-£5m with the Hotel completed and sold as a “turnkey” sale (depending on the marketing period), and £5.5m with established trading. This was obviously insufficient to support any further lending (or, for that matter, a term out loan of 60% LTV by way of refinancing). The total costs to complete the building were £200,000 (on the footing that Mr Berntsen and Mr Richardson remained in control, because they had negotiated very favourable rates with their suppliers). This figure was assessed by GVA Grimley and is on this application agreed to be accurate.

The Lombard loan was not offered to the LLP. The Bank did not commit to providing any further facility that would fund the completion of the Hotel and its opening for trade. Mr Berntsen and Mr Richardson say that Mr Tait and those working with him should have refused to agree any further valuation exercise being undertaken in relation to the Hotel (and compelled the Bank to work on the Savills valuation), and they should have “point[ed] out the obvious” that the Bank was contractually bound to advance sufficient money to complete the development, open and trade it without the provision of any additional security such as personal guarantees: and if the Bank did not acknowledge that it was so bound, then they should have advised the LLP to sue the Bank, in which event the Bank, if sued, would have advanced the money, and would have done so before any creditor took any insolvency proceedings, so enabling the project to be completed and opened. (In fact the Bank has been sued in the Queen’s Bench Division and has denied any such obligation as is asserted. Summary judgment has been given in favour of the Bank, although that judgment is under appeal. Mr Fenwick QC invited me to treat the Master’s judgment as containing findings of fact that would assist me on this application. I have not taken that course).

On 22 June 2010 Ms Rayment and Mr Tait (together “the Joint Administrators”) were appointed joint administrators of the LLP, the LLP acting by Mr Richardson, upon whom authority had been conferred at a meeting between himself and Mr Berntsen on the 21 June 2010. Mr Berntsen and Mr Richardson say that this administration was “needless” because sufficient funds had already been agreed to enable the Hotel to complete, open and trade, and the Bank was contractually obliged to make those sums available.

In the proposals prepared by the Joint Administrators (which Mr Berntsen and Mr Richardson say “contains a litany of material misrepresentations designed to justify a needless administration”) the sum due to trade creditors (many of whose claims have been valued at £1 because the precise amount was not known) comes to £817,584. But Mr Berntsen and Mr Richardson dispute this figure. They say that the British Gas debt of £28,000 should be £12,000 lower and that the claim of Thorley & Petherick Ltd (who were decorators) is overstated by £10,000. However, these are marginal reductions. Mr Berntsen and Mr Richardson also say that although there undoubtedly were claims by trade creditors “arrangements could have been made”, by which I think they mean that (a) many creditors would have agreed not to pursue their debts for an indefinite period, (b) there were sufficient funds available both to complete the project and to pay those existing creditors who had refused to defer their claims, so that (c) the moratorium conferred by the administration was unnecessary.

Of the existing confirmed facilities, on the members’ case when the administration began (a) there was £83k available under the term loan expiring 30 June 2010; (b) the existing overdraft was fully utilised; (c) there was £150k of the “General Business Loan” available until 30 June 2010 (and more until that date if a VAT repayment was received earlier). They would add to that £400k due from Lombard and something available on the corporate credit cards.

Although the contemporaneous estimate of the costs to complete and trade was £900k, Mr Berntsen and Mr Richardson have subsequently completed a cash flow forecast which shows that on the footing that construction assets (plant and equipment) could have been sold for £135k, the objective could have been achieved for £368k. On this case therefore receipt of the Lombard loan remained fundamental to rescuing the business as a going concern.

The Hotel was in due course sold as it stood for £4.25m to West Register (a company associated with the Bank) under a sealed bid process. The proceeds (net of costs) were paid to the Bank under its fixed charge. There was a deficiency in the administration of £6.267m. Over £1m remained due to the Bank in respect of the shortfall on its security realisation. Mr Bertsen and Mr Richardson were loan creditors for £4.4m. That is why the LLP is now in liquidation.

On 1 August 2011 Mr Berntsen and Mr Richardson (acting in person) commenced insolvency proceedings against the Joint Administrators seeking an order that they should forthwith cease to act as joint administrators of the LLP, that the administration be “discharged” and that the costs of the administration should be borne by the Joint Administrators personally. The evidence in support accused Mr Tait of helping the Bank to achieve a hidden policy of acquiring the Hotel, of deliberately misconstruing figures, of making fraudulent misrepresentations, and of participating in wrongdoing by facilitating the Bank in disposing of the Hotel.

Before the hearing of that application for the removal of the Joint Administrators the LLP (acting by the Joint Administrators) petitioned the Court for a winding up order on the grounds (a) that the objectives of the administration (achieving a better result for the creditors as a whole than would have been likely if there had been an immediate winding up; and realising property in order to make a distribution to secured creditors) had been achieved; and (b) that the LLP was insolvent and unable to pay its debts as and when they fell due. On the 12 December 2011 Mr Justice Vos (having heard Counsel for Mr Berntsen and Mr Richardson) made a winding up order in respect of the LLP (with the Official Receiver being appointed liquidator). As regards the insolvency proceedings which had been commenced against the Joint Administrators the order provided:-

“2.

The Joint Administrators shall be discharged from liability under… paragraph 98 of Schedule B1 such discharge to take effect 28 days after they have submitted and filed their final progress report SAVE in respect of any application made under paragraph 74 and 75 of Schedule B1…

6.

The members’ application for the Administrators to pay the costs of the administration and the application for the costs to remove the administrators shall be adjourned to be heard before the Registrar on a hearing fixed for 9 February [2012]”.

At that hearing on the 9 February 2012 Mr Berntsen and Mr Richardson were ordered:-

“… to state which of paragraphs 74, 75 and/or 88 of Schedule B1… they rely on for the purpose of the Application: and … to state in relation to each such paragraph the heads of relief claimed thereunder”.

Mr Berntsen and Mr Richardson complied with that order by indicating that they relied only on paragraphs 74 and 75 of Schedule B1. They added:-

“The applicants shall seek to recover compensation/ loss/damages occasioned by breach of fiduciary duties of and/or negligence under both paragraphs 74 and 75 of Schedule B1 and in particular shall claim the following heads of relief:

(1)

Tangible Assets – such as Full Value of Hotel, Plant & Machinery

(2)

Non Tangible Assets – such as costs of Administration, interest on loans etc

(3)

Loss of Future Profits against Business Forecasts

(4)

Costs of Disruption to Personal Position”.

When the Joint Administrators were appointed they became subject to a duty to perform their functions “in the interests of the [LLP’s] creditors as a whole”. If the Joint Administrators decided that all they could do was to realise property in order to make a distribution to a secured creditor then they were bound to see that they did not unnecessarily harm the interest of the creditors of the company as a whole. As to both duties see generally paragraph 3 of Schedule B1 to the Insolvency Act 1986 (“IA 1986”).

Once the Joint Administrators had formulated proposals and those proposals had been approved by the creditors, then the Joint Administrators were under a duty to manage the affairs, business and property of the LLP in accordance with those proposals: see paragraph 68 of Schedule B1.

By paragraph 74(1) of Schedule B1:-

“A creditor or member [of an LLP] in administration may apply to the court claiming that… the administrator is acting or has acted so as unfairly to harm the interests of the applicant (whether alone or in common with some or all other members or creditors)…”.

Paragraph 74(3) of Schedule B1 deals with the relief which the court can order, providing that the court may “grant relief” or may dismiss, adjourn, or otherwise deal with the application. In relation to the relief which the court may grant paragraph 74(4) of Schedule B1 provides:-

“In particular, an order under this paragraph may

a)

regulate the administrator’s exercise of his functions;

b)

require the administrators to do or not to do a specified thing;

c)

require a creditors’ meeting to be held for a specified purpose;

d)

provide for the appointment of an administrator to cease to have effect;

e)

make consequential provision”.

It is quite plain that for the purposes of paragraph 74 of Schedule B1 the application is brought by reference to the applicant’s standing as “a creditor or member” and is directed to the protection of his interests as such. The primary relief is directed to regulating the conduct of the administration itself. But as the opening words of paragraph 74(4) of Schedule B1 indicate (“in particular”) that is not the entire limit of what the court may do if it decides to “grant relief” under paragraph 74(3)(a) of Schedule B1. It is arguable that if a creditor establishes that the administrator has acted unfairly to harm the interests of that creditor alone, then (in the exceptional case in which that unfairness cannot be undone by regulating the conduct of the administration differently) the strict wording of paragraph 74 admits the possibility of ordering a compensating payment to be made by the administrator to that creditor. I do not need to decide the point for this application: but in reaching a case management decision I should recognise the existence of the argument.

Paragraph 74 does not exist to enable individually disgruntled creditors to pursue administrators for compensation. Its focus is “unfair harm”: and that, I think, will ordinarily mean unequal or differential treatment to the disadvantage of the applicant (or applicant class) which cannot be justified by reference to the interests of the creditors as a whole or to achieving the objective of the administration. (The reference to an administrator acting unfairly to harm the interests of “all other members or creditors”, so that unequal or differential treatment had not occurred, would (I think) only arise in relation to issues concerning the expenses of the administration, or where the administrator was also an office holder in another insolvency and acted unfairly prejudicially as regards the stakeholders in Company A in promoting the interests the stakeholders in Company B).

It is in my judgment clear from the statutory wording that a case based on “unfair harm” is something distinct from a case centred on breach of fiduciary or other duty (which ought to be brought under paragraph 75 of Schedule B1). As Millett J held in the early days of IA 1986 in Re Charnley Davies (No2) [1990] BCLC 760 (in relation to the former administration provisions)

“In my judgment the distinction between misconduct and unfairly prejudicial management does not lie in the particular acts or omissions of which complaint is made, but in the nature of the complaint and the remedy necessary to meet it. It is a matter of perspective. The metaphor is not a supermarket trolley but a hologram. If the whole gist of the complaint lies in the unlawfulness of the acts or omissions complained of, so that it may be adequately redressed by the remedy provided by law for the wrong, the complaint is one of misconduct simpliciter. There is no need to assume the burden of alleging and proving that the acts or omissions complained of evidence or constitute unfairly prejudicial management of the company's affairs. It is otherwise if the unlawfulness of the acts or omissions complained of is not the whole gist of the complaint, so that it would not be adequately redressed by the remedy provided by law for the wrong. In such a case it is necessary to assume that burden, but it is no longer necessary to establish that the acts or omissions in question were unlawful, and a much wider remedy may be sought.”

Paragraph 75 of Schedule B1 enables the court to examine the conduct of a person who has been an administrator of an LLP on the application of a creditor or “a contributory”. But it is provided by paragraph 75(3) that such an application must allege

“… that the administrator

(a)

has misapplied or retained money or other property [of the LLP]

(b)

has become accountable for money or other property [of the LLP]

(c)

has breached a fiduciary or other duty in relation to [the LLP] or

(d)

has been guilty of misfeasance”.

In my judgment the reference to “misfeasance” is a reference to the sort of wrongdoing that is covered by section 212 IA 1986. Paragraph 75 is concerned with wrongful conduct of the administrator in relation to the company or the LLP, which can be pursued by an office holder a creditor or a contributory.

If the claim succeeds and the question of relief arises then paragraph 75(4) of Schedule B1 makes clear that the court may order the wrong doing administrator:-

“ (a) to repay, restore or account for money or property;

(b)

to pay interest;

(c)

to contribute a sum to the company’s property by way of compensation for breach of duty or misfeasance”.

The court cannot order the wrongdoing administrator to pay equitable compensation for breach of fiduciary duty or damages for breach of some other duty to an individual creditor or to a contributory. If there is a deficiency in the insolvency then the payment goes for the benefit of the creditors as a class: and if the company proves solvent in administration then the benefit goes to the contributories as a class.

The Registrar’s order of the 9 February 2012 (in addition to directing to Mr Berntsen and Mr Richardson to identify which paragraphs of Schedule B1 they relied on and what relief they sought under each paragraph) directed the Applicants to file Points of Claim. This was done on 14 March 2012. Counsel for the Applicants submitted that Points of Claim did not require the degree of definition or particularity that would be expected in Particulars of Claim in proceedings under CPR Part 7. I do not agree. In insolvency proceedings Points of Claim must set out concisely every fact necessary to establish the legal basis for the relief which is sought: concisely – but with the degree of particularity which will enable the Respondent fairly to understand the nature of the case he will have to meet at trial. It is not the function of the Points of Claim to set out the evidence by which those concisely stated particular facts will be proved at trial. That is the function of the witness statement. If these rules are properly observed the Respondent will not have to hunt through the witness statements, picking up a sentence here and a sentence there, to see the nature of the legal case he is going to have to meet in his own evidence.

Paragraph 1 of the Points of Claim pleads that the Applicants were “members” of the LLP and that Ms Rayment and Mr Tait “were insolvency Practitioners working from offices at BDO Stoy Hayward”. That statement of case omits the material fact that Mr Berntsen and Mr Richardson are not merely members (and so only entitled in the event of a surplus in the insolvency) but also creditors (indeed, after the Bank, the largest creditors) of the LLP. It was common ground at the hearing before me that they were pursuing their case primarily in their character as creditors.

Paragraphs 2-4 inclusive set out the bare bones of the business of the LLP, and alleged that Mr Flannery “assumed the role of Business and Financial Advisor to the… project and was relied upon to monitor and arrange adequate finance to the project”. The following paragraph alleges that “Mr Flannery arranged for the Applicants and the LLP certain borrowing facilities”: these are then identified as the LLP Loan of £4.24 million, the overdraft facility of £340,000.00, the “general purpose loan” of £350,000.00, the “Lombard” loan of £400,000.00 and credit cards of £120,000.00. This gives total credit facilities of £5.45 million. Paragraph 6 alleges that Mr Berntsen and Mr Richardson did not themselves know the full extent of the facilities until January 2012.

Paragraphs 7 and 8 then allege that the Bank “erroneously and/or falsely calculated that more money was needed to complete the project than they were prepared to lend” and ceased funding. Paragraph 9 alleges that following “the Bank’s wrongful action and refusal to deal with them” Mr Berntsen and Mr Richardson engaged Ms Rayment and Mr Tait

“To assist the Applicants with the task of negotiating with the Bank to reopen the agreed facilities Mr Flannery had arranged and to advise the Applicants generally as to the appropriate steps to take in order to successfully complete the project”.

Paragraph 11 then alleges that

“The engagement of the Respondents to assist and advise the Applicants in the set of tasks established a fiduciary relationship between them and established a legitimate expectation that the Respondents would act towards them in a manner…that would be in the paramount interests of the Applicants and the LLP”.

Paragraph 12 then alleges that: “In reliance of certain advice given to them by the Respondents” Mr Berntsen and Mr Richardson allowed the LLP to enter administration and for Ms Rayment and Mr Tait to be appointed as Joint Administrators.

The breaches of fiduciary or other duty are set out in paragraphs 13, 15 and 16. Paragraph 13 says that

“The Respondents have failed to act and/or conduct themselves in a manner consistent with their fiduciary obligations and/or in the best interests of the Applicants and/or the LLP”.

Paragraph 15 alleges that the Respondents

“Are in breach of the… duty to act towards the Applicants with good faith”.

Paragraph 16 alleges that Ms Rayment and Mr Tait are guilty of

“Breaches of the duty of care owed by the Respondent to the Applicants”.

The particulars of these breaches are set out in paragraph 14 of the Points of Claim and may be summarised in this way:-

The Applicants have provided details of this allegation (albeit in answer to a request about another allegation) in these terms:-

“… both Mr Tait and the Bank… ignored the Applicants’ continued protests that sufficient funds had been agreed by the Bank to complete, open and trade the hotel. No diligent assessment to ascertain the true position was ever carried out by the Respondents”.

In answer to a request to identify the confidential information and the incorrect information divulged to the Bank the Applicants have answered:-

“The emails vary in length and contain numerous pieces of confidential information, to many to particularise within the Points of Claim”.

In answer to a request for a statement of their case as to the knowledge of the Joint Administrators as regards available banking facilities the Applicants say:-

“The Applicants are unable to state what was within the knowledge of the Respondents concerning borrowing facilities. The Applicants shall aver they made it quite clear to the Respondents that the Bank had put in place agreed loan facilities to enable the Hotel project to complete, open and trade. The Respondents chose to disregard their duties to the LLP and acted in deliberate conflict of interest, so as to further the interests of the bank”.

When asked to particularise the allegation of misrepresentation to creditors the Applicants said that the misrepresentations were too many to particularise within the Points of Claim, and that “many of them” had been pointed out in the evidence.

When asked to identify the occasions when the Applicants had told Ms Rayment and Mr Tait that adequate loan facilities had been put in place the Applicants said that they were “too many to particularise”, but said that “some of the material occasions” had been referred to in the evidence. All but one of the occasions identified occurred prior to the entering of the LLP into administration. The one subsequent occasion was on the 7 July when reference was made to the instructions given to GVA Grimley.

On 4 July 2012 Ms Rayment and Mr Tait applied to have these proceedings summarily dismissed:-

It is necessary to clear away one fundamental issue relating to the character of the proceedings, and then to address the specific issues that arise on the application.

The letter before action settled by Mr Miah contained veiled accusations of fraud. The evidence filed by Mr Berntsen and Mr Richardson when these proceedings commenced contained specific allegations of fraud, deceit and dishonesty. The Points of Claim advanced no such case. The evidence filed in opposition to this application contained further allegations of fraud and dishonesty. Mr Miah’s skeleton argument asserted “likely fraudulent conduct”, “material concealment”, “deliberate concealment” “orchestration of a highly dubious valuation”, “[complicity] in the deliberate and unlawful cessation of funding” and deliberately lowering a valuation in concert with KF. I asked Mr Miah whether he was pleading fraud. After a passage of argument (Transcript Day 1 page 86 line 18 to page 89 line 15) it is clear that there is no allegation of fraud or dishonesty and the case is being run (so far as duties are concerned) as one of negligence and breach of fiduciary duty.

I can now rule on the issues that arise on this application.

First, Mr Miah (Counsel for the Applicants) submits that the application is an abuse of process because Vos J. has already ordered that there be a full hearing of Mr Berntsen and Mr Richardson’s entire claim. I do not agree. By his Order of 12 December 2011 Vos J. simply ordered that the discharge he was granting should not extend to any claim under paragraphs 74 or 75 of Schedule B1 (thereby preserving that claim for adjudiction) and that Mr Berntsen and Mr Richardson’s then pleaded claim (that the Joint Administrators should pay the costs of the administration) should proceed to the next set hearing. He did not purport to restrict the Order that the Registrar could make at that hearing (let alone give case management directions in relation to claims at common law and under paragraph 75 which had not then even been pleaded). So I hold that this present application is properly brought and is not an abuse of process.

Second, Mr Fenwick QC and Mr Smiley (Counsel for the Joint Administrators) submit that the Points of Claim are so diffusely pleaded, the witness statements are so littered with allegations of fraud and dishonesty that now form no part of the proceedings and are otherwise so incoherent that they do not advance any legally recognisable and/or sustainable claim, that the whole should be struck out. In particular they say that, since the prayer for relief does not identify any quantified or legally recognisable claim and the statement of case does not suggest how what is claimed is causally connected to any of the complaints made, the only fair course is to dispose of the entirety summarily. In my judgment it is apparent from the Points of Claim (and from the contents of the witness statements) that the nature of Mr Berntsen’s and Mr Richardson’s claims has not been carefully analysed, with the result that the Points of Claim do not meet the standard to be expected in insolvency proceedings. I accept the submission that it is not possible to “set an agenda” for disclosure, for evidence or for trial. But in my judgment it would be disproportionate (or more directly, unjust) to strike out or dismiss the entire claim if by pruning and definition the members’ case can be put in a form that the Joint Administrators can address: and Mr Berntsen and Mr Richardson should still be afforded that opportunity (notwithstanding the commendable efforts already made by those representing the Joint Administrators to force them to focus on the relevant questions). This is particularly so where, if I were summarily to determine the present proceedings Mr Berntsen and Mr Richardson would be deprived of the claim which they now have under paragraph 74 (having commenced their proceedings whilst the LLP was “in administration”, a status it no longer has).

Third, Counsel for the Joint Administrators submit that the present proceedings confuse claims by Mr Berntsen and Mr Richardson for personal losses caused to them by the alleged professional negligence of Ms Rayment and Mr Tait with claims for harm suffered by them as members or creditors of the LLP because of the alleged failure to act in accordance with the duties imposed by Schedule B1: and that the former should be pruned from the action.

I accept this submission. The liabilities for acts as administrator to which the discharge contained in Vos J Order did not extend were (a) claims under paragraph 74 (“the administrator…has acted so as unfairly to harm the interests of the applicant [semble as a creditor or member]”) and (b) paragraph 75 (“the administrator ….has breached a fiduciary or other duty in relation to the [LLP]..or has been guilty of misfeasance”). The objective of these paragraphs is to regulate the administration in accordance with the statutory responsibilities imposed on the administrator and to reconstitute the administration estate (by repayment, restoration, account or contribution). Professional negligence proceedings for acts prior to the administration have as their objective the compensation of the claimant for personal losses caused by breach of a common law duty owed to him personally because of some retainer. The issues are very substantially different, and so is the procedure for their resolution.

My attention was drawn to two cases. In Clydesdale Financial Services Ltd v Smailes [2009] EWHC 1745 (Ch) the claim of CFS against the administrators related to a sale conducted immediately before their appointment. David Richards J said (at para [52]):-

“[The administrators] further submit that the claim by CFS under paragraph 75 of Schedule B1 is not maintainable because all or most of the acts or omissions complained of occurred before their appointments as administrators. While I accept the proposition advanced by [Counsel] that paragraph 75 is concerned with the conduct of administrators in their capacities as administrators, the facts of the present case are at present sufficiently obscure to make it difficult to divorce their actions before the moment of their appointment from their capacity as administrators. I decline to strike out CFS claim under paragraph 75.”

In Re Automold [2009] EWHC 3709 (Ch) the point was again taken that in an application based upon paragraph 75 of Schedule B1 substantial parts related to pre-appointment conduct. HHJ Purle QC refused to strike out the pleadings because

“…. what will inevitably be explored in evidence is the alleged brief that the administrators had from [the creditor] prior to taking office and their then plans and intentions as to how the administration would be conducted. All that is going to be gone into at the trial, even if the impugned paragraphs are now struck out.”

These were each case management decisions in other cases, the detailed facts of which are not apparent. Neither case establishes any principle. In the instant case there seem to me to be strong reasons to separate out the issues and the procedures (even if it might be desirable that ultimately two cases are heard by the same judge at the same time).

I hold that the present proceedings should be confined to Mr Berntsen and Mr Richardson’s claims as creditors or members under paragraphs 74 and 75 of Schedule B1.

Fourth, counsel for the Joint Administrators submit that I should strike out any claim founded on paragraph 74 of Schedule B1 on the footing (a) that such a claim is only available to “a creditor. . of a company in administration” and that the LLP is now in liquidation ; and (b) any claim that could be brought under paragraph 74 can also be brought under paragraph 75. I do not accept this submission.

When the insolvency proceedings were commenced the claim was properly grounded upon paragraph 74. In my judgment that claim does not disappear simply because, before it could be adjudicated, the LLP had gone into liquidation. The fact of liquidation of course shapes the relief that is now available. Paragraph 74 (4) of Schedule B1 describes some of, but does not define all of, the relief that the Court might grant. A Court can still grant relief under paragraph 74 even though the administration has come to an end.

Nor do I accept that paragraph 74 and paragraphs 75 are to all intents and purposes identical. Paragraph 74 is about management and paragraph 75 is about misconduct. Under paragraph 74 there is I think the possibility of arguing for relief on an individual basis: whereas under paragraph 75 the relief is directed to restoring the administration estate for the benefit of all members of the relevant class (secured creditors, unsecured creditors or contributories).

In my judgment if I were to strike out the claim under paragraph 74 then I might be depriving Mr Berntsen and Mr Richardson of an element of their claim: and it is neither necessary nor proper to take that step. Vos J’s order should be given full effect. The winding up of the LLP does not discharge the Joint Administrators from any claim under paragraph 74 of Schedule B1.

Fifth, Counsel for the Joint Administrators submit that any claims based on the contention that the LLP had sufficient facilities in place with the Bank to complete the development of the Hotel have no prospect of success since, even on the member’s own evidence, they did not have adequate funds available to complete, open and trade. I do not accept this submission.

I will set on one side the claim that no reasonably competent insolvency and restructuring advertiser would have advised that the LLP seek the protection of administration. (Under the course I propose to take that allegation no longer forms part of these proceedings). I would accept that from and after 22 June 2010 the case that the LLP could have been rescued as a going concern (or at least the development built out and sold on) is not promising. The confirmed facilities had been all but exhausted. The argument depends on establishing that the Bank could have been persuaded to process the Lombard loan offer (and that the required real and personal security would for that purpose have been forthcoming) and would have permitted the application of the loan to support limited trading in administration (to complete the required £200k works). It also depends on demonstrating that the KF valuation would have been challenged by an administrator performing his statutory responsibilities and would (if subjected to sustained criticism) have come more into line with the Savills valuation (or that some other valuer would have been instructed and would have aligned its valuation with Savills) in order to support such lending. It finally depends on establishing that the completed Hotel could have been sold for more than £4.25m plus the completion costs. Notwithstanding the present state of the evidence I do not think that this case can be dismissed as entirely fanciful.

In the result this application succeeds, but not to its fullest extent. I hold (a) that the common law claim for professional negligence is not properly included within the insolvency proceedings brought under paragraphs 74 and 75 of Schedule B1; (b) the claim for “Loss of operating profits (business forecast over 25 year term)” and for “Losses occasioned by disruption to the Applicants’ personal positions” are not properly advanced in the insolvency proceedings: and (c) that Mr Berntsen’s and Mr Richardson’s personal claim for “Loss/ damages/equitable compensation for breach of fiduciary duty and or negligence” has (as currently advanced) no real prospect of success save insofar as it embodies their original claim that the costs of the Administration should be borne by the Joint Administrators personally.

I will accede to the relief sought in paragraph 4(a) of the application of the Joint Administrators that Mr Berntsen and Mr Richardson be ordered to file Amended Points of Claim. These will (subject to any further submissions made when judgment is handed down):-

My present view is that should be done within 28 days: but timetabling can be addressed when judgment is handed down.