Godefroy & Anor v Company Health Ltd & Ors

JUDGE HODGE QC: This is the extemporary judgment of the court in the matter of Company Health Ltd and three other limited companies, all now in creditors’ voluntary liquidation. The application was issued by the joint liquidators of the four companies on 2^nd November 2015.

The applications seek declarations that proposed dividends to be declared by the four companies in favour of the three individual respondents to the application – the fifth respondent, Mr Iain MacKinnon; the sixth respondent, Mr Robert Parker; and the seventh respondent, Mr Peter Davies are held on trust by the joint liquidators for the first, second and third respondent companies respectively, Company Health Ltd (CHL), CR Realisations Ltd (CRRL) and Diagnostic Technologies Corporation Ltd (DTCL). There is another group company named as fourth respondent – DTC Group Ltd (DTCGL).

The evidence filed in support of the application is contained within the witness statement of Mr Jason Godefroy, one of the joint liquidators of each of the four companies, dated 30^th October 2015, together with exhibit JG/1.

The applicants are represented by Mr Jonathan Lopian (of counsel), who has produced a detailed written skeleton argument dated 15^th December 2015 which I have had the opportunity of pre-reading. Mr Lopian has also addressed me for about an hour and a quarter.

The corporate respondents are of course all effectively controlled by the applicants, their joint liquidators. None of the individual respondents have appeared before the court, and none are represented before me. I am satisfied that they have been duly served with the proceedings, and such service was accompanied by a letter from the applicants’ solicitors, Bermans, dated 3^rd November 2015. The only response to the application has been an email sent on 1^st December 2015 by the fifth respondent, Mr Iain MacKinnon, in which he states that, having spoken to a solicitor who has been providing him with advice on the matter historically, the positon of the individual respondents is that they will not support or join in the application. The application is therefore not opposed. Nevertheless, the court has to be satisfied that it is appropriate to grant the declaratory relief sought. In addition to the declaration I have already mentioned, the application seeks an order that the proposed dividend payments be paid by the joint liquidators to the first three named respondent companies in specified amounts.

The application has been amended today, although nothing turns on the precise nature of the amendments, and I have given permission for that and have dispensed with re-service. I am satisfied that the amendment does not occasion any prejudice to the three named individual respondents.

The background to this application can most conveniently be stated by reference to the contents of a letter that was sent to all known creditors of the companies concerned on 30^th October 2015. In summary, the position is that the four named respondent companies were all subsidiaries of a group of companies called Company Health Group PLC (CHG). There were, in addition, two further subsidiaries – Milligan & Hill Ltd (M & H) and Cheviot Artus Ltd. With the exception of the last named company, all have passed into a form of insolvency. The last named company did not go into either administration or liquidation, but was dissolved in February 2011.

The parent company, CHG, itself went into administration in February 2010 following the presentation of a winding up petition against it, and it moved into creditors’ voluntary liquidation on 29^th September 2010.

The holding company, CHG, had borrowed monies from the three individual named respondents, which had been guaranteed by the four respondent companies and the other two subsidiaries to which I have referred. During the course of the liquidation, three of those subsidiary companies – namely the first, second and third respondents – repaid in full the lenders’ outstanding indebtedness. However, each of them did so in differing amounts.

Essentially, the purpose of this application is to attempt to equalise the ultimate burden of such repayment of the parent company’s debt as between the three paying subsidiaries. That is necessary because dividends have been, or are still to be, declared by the four respondent companies.

That position is related in a little more detail in the letter to creditors (to which I have already made reference). That letter recalls that in the previous progress report dated 12^th December 2014 the joint liquidators had advised that the subsidiaries were in the process of seeking legal advice and, as part of that advice, were making an application to the court for directions in respect of the claims submitted by creditors - in fact the three named individuals (as lenders) - against the subsidiaries. The letter recalled that the liquidators had informed creditors that the creditors in question had received dividends from CHL, DTCL and CRRL such that, in aggregate, the creditors had been repaid in full. The liquidators had explained that, given the provisions of the Insolvency Act 1986, the manner in which the creditors had been paid in full, and the nature of the creditors’ claims, the creditors’ claims remained lodged in each of these subsidiaries’ estates and ranked for future dividends, along with the other creditors. It had further been explained that, given that the creditors had been repaid in full, they were not entitled to retain any further dividends. In those circumstances, the subsidiaries’ creditors had been informed that directions were required from the court as to which of the subsidiaries’ estates should be entitled to the return of any further dividends notionally payable to the creditors in question, and in what proportions.

The joint liquidators stated that they were then in a position to set out more precisely the details of the application being made to the court. They explained that the creditors in question had made a loan to CHG, which had been guaranteed by each of the subsidiaries, and had submitted proofs of claim in respect of those guarantees in the subsidiaries’ estates and had received dividends from CHL, CRRL and DTCL in an aggregate sum of some £455,155, representing the full amount of the lenders’ claims. Of the 100 pence in the pound that the creditors had received, DTCL was said to have paid 47.5 pence, CHL 27.5 pence and CRRL 25 pence. M & H and DTCGL had not made any contribution.

DTCGL was said recently to have declared a dividend to its unsecured creditors. DTCL, CHL, DTCGL and CRRL were said also to be in a position to pay further dividends to their unsecured creditors. The notional total dividends payable by those four subsidiaries to the creditors were £23,148 by DTCL, £24,929 by CHL, £35,612 by CRRL and £40,064 by DTCGL. The creditors would not be entitled to retain those dividends for their own benefit, and it was said that they would hold the surplus of £123,753 on trust for the subsidiaries.

In order to equalise to the maximum possible extent the positions between the paying subsidiaries, the liquidators were said to be seeking the court’s approval to the surplus being repaid to DTCL, CHL and CRRL in the following proportions: £99,566 to DTCL, £12,316 to CHL and £11,871 to CRRL. The net result of such repayment would be that DTCL, CHL and CRRL would each have effectively paid £135,030 to the creditor, whilst DTCGL would have paid £40,064, which was the maximum amount it was able to pay.

The letter to the named individual respondents (to which I have previously referred) spelt out the implications of the application for them. It said that the application sought the court’s approval to the joint liquidators’ solicitors’ proposal that the surplus should be accounted for in such a way as to equalise the position so far as possible between the various guarantor subsidiaries. Bermans wished to make it clear that the application had no effect on the respondent individual lenders since they had no economic interest in its outcome. However, since the subject matter of the application was the surplus, it was necessary formally to join all three lenders as respondents. I do not think it is necessary for me to refer to anything more in that letter.

Mr Lopian, in the course of his written and oral submissions, has outlined the background to the application very much in the manner I have just set out. He points out that, whilst the three lenders have been repaid in full, the proofs of debt that they have lodged in the liquidations of CHG and the four remaining guarantor subsidiaries have not been withdrawn. He points out that a creditor is not required to reduce or withdraw its proof after it has been submitted in the liquidation of a guarantor to take account of payments received from, or dividends declared by, a co-surety or the estate of a co-surety. He has taken me to passages in the judgment of Mr Justice Astbury in the case of in Re Houlder [1929] 1 Ch 205, at pages 201 to 212, and in the judgment of Mr Justice Vinelott in case of Re Amalgamated Investment & Property Company Ltd [1985] Ch 349, at pages 379E to 380F and 383E to 384B.

Mr Lopian submits (and I accept) that, for as long as they have not been paid 100 pence in the pound on their proofs in each of the guarantor subsidiaries’ liquidations, the lenders will be included in any further dividends to be paid to creditors by those companies on a pari-passu basis. However, he submits that, whilst they stand to receive a further dividend, the lenders are not entitled to recover more than 100 pence in the pound of the principal debt, and they will hold any further dividends they will receive from the guarantor subsidiaries on trust for the guarantors, and will be expected to account to them for the surplus.

In support of that proposition, Mr Lopian refers me to a decision of Mr Justice Tadgell, sitting in the Supreme Court of Victoria, in the case of Westpac Banking Corporation v Gollin & Co Limited (In liquidation) [1988] VR 397. He has taken me to the headnote which reads:

“A creditor who proves in the bankruptcy of his debtor need not deduct from the amount of his proof any sum paid to him by a guarantor on foot of a whole moneys guarantee so long as any part of the guaranteed debt remains unpaid by the bankrupt estate. Consideration of the nature of the respective rights of creditor and surety upon the bankruptcy of the debtor.”

Mr Lopian has taken me to two passages in particular in the judgment of Mr Justice Tadgell. The first is at pages 403 to 404. There, Mr Justice Tadgell said that it was immaterial whether the creditor first proved in the bankrupt estate for what he could get and then claimed against the guarantor for so much of the remaining balance of the debt as the guarantee afforded, or whether he claimed against the guarantor first and proved later to the extent necessary. Either way, it was said that the creditor could retain no more than 100 per cent of the debt. If he obtained more, he was said to hold the excess as trustee for the guarantor. Mr Justice Tadgell reiterated that at the end of the first paragraph on page 404 where he said that the creditor holds any excess as trustee for the surety. Reference was also made to a passage at pages 409 to 410.

I am satisfied that Mr Justice Tadgell’s judgment is sufficient authority for the proposition for which it is cited by Mr Lopian. He points out that this application really concerns precisely how the surplus should be dealt with. He submits that there are no hard and fast rules, and it appears that much will depend upon the particular circumstances of each case.

In the light of that, and because none of the companies in liquidation have a liquidation committee from whom sanction for the joint liquidators’ proposed solution might have been sought, the court is being asked to approve the joint liquidators’ proposed solution, and to make the declaration and directions sought in the amended application notice against the background set out in the letter to creditors.

Mr Lopian explains that the joint liquidators are keen to equalise the position as between the paying guarantors to the maximum extent possible. In order to achieve this, a form of equitable accounting so far as the surplus dividends are concerned is called for. Further dividends are to be paid by each of CHL, CRRL, DTCL and DTCGL. If those dividends (in so far as they are to be paid to the lenders) were simply to be returned to the paying companies, the net result would be that the guarantor subsidiaries would have paid unequal amounts under their guarantees. DTCGL would have paid nothing; DTCL would have paid 22.5 per cent more than its effective rateable share of 25%, (bearing in mind that two of the six subsidiary companies are insolvent); CHL would have paid 2.5 per cent more than its rateable share; and only CRRL would have paid its proper rateable share. On that footing, the creditors of DTCGL would have been unjustly enriched at the expense of the creditors of both DTCL and CHL.

In order to equalise the position as between the paying guarantors to the maximum extent possible, the joint liquidators invite the court to accept a form of equitable accounting of the surplus. Full equalisation as between the paying guarantors is not possible in view of the fact that DTCGL is unable to pay its full rateable share of £111,288, but only the lesser sum of £40,063. The consequence is that CHL, CRRL and DTCL would each have to bear more than their rateable share. However, out of the payments to be made by the four subsidiaries, it will at least be possible to equalise the position as between them. That will only happen if the surplus is to be apportioned between the four subsidiaries in such a way as to achieve that result.

What is proposed is to subtract the dividend to be paid by DTCGL of £40,063 from the total amount paid to the lenders of £445,153, and then to divide that figure by three. That qualified equalisation between the paying subsidiaries will mean that each of them should end up having paid £135,030 to the lenders. In order to achieve that result, CRRL would need to pay a further £23,742 in addition to the amount it has paid to date in respect of the guarantee; CHL would need to pay a further £12,612 in addition to the amount it has paid to date in respect of the guarantee; and DTCL would not need to make any further payment over and above the amount that it has already paid in respect of the guarantee, but instead should receive back a sum of £76,418. The direction proposed by the amended application notice seeks to achieve that result.

Mr Lopian has taken me, by way of analogy, to the decision of the Court of Appeal in the case of Brown v Cork [1985] BCLC 363. Whilst not identical on its facts, it is said at least to illustrate the approach taken by the court in dealing with the question of a surplus held by a creditor. In that case, the members of a group of companies had executed a joint and several cross-guarantee, whereby each had guaranteed to a bank the liability of each of the other companies to the bank. In addition, the cross-guarantee had been supported by fixed and floating charges granted by each company, which had covered the whole of the company’ assets. The group had got into difficulties and the bank had appointed a receiver, who had realised the companies’ assets. After paying off the bank, he held a surplus. One of the companies had gone into liquidation before the bank had been repaid, and the other companies went into liquidation after payment to the bank. The question before the court was as to how the surplus was to be applied. Affirming the decision of His Honour Judge Blackett-Ord, then the Vice Chancellor of the County Palatine of Lancaster, sitting as a High Court Judge, the Court of Appeal held that the surplus should be distributed amongst the companies in proportions, on the basis that each company, so far as the money realised from its charge permitted, would have discharged its own indebtedness to the bank, and also an equal share of the deficiency attributable to the indebtedness to the bank of those companies which had been unable to discharge their own indebtedness in full. The Court of Appeal rejected an alternative suggestion that a separate account should be prepared for each company showing the amounts due to it and from it by way of contribution to or from its co-sureties, and that in making that calculation, there should be set-off against contribution liabilities any sum due from one company to another on their inter-company trading accounts.

Mr Lopian relies upon that authority by way of analogy for the proposition that the court should seek to achieve equality of contribution to the parent company guarantee by each of the companies who have been able to contribute to the discharge of the liability of the parent company, to the extent that that is capable of being achieved in all the circumstances. I accept that that is the approach that the court should adopt, and that it should endorse the solution designed to achieve that result proposed in the present case by the joint liquidators.

For those reasons, I propose to grant the declaration sought in paragraph 1 of the amended application notice, and to make an order directing that the proposed dividend payments be paid by the joint liquidators to the first, second and third respondent companies (CHL, CRRL and DTCL) in the amounts set out in paragraph 2 of the amended application notice. I am satisfied that that order will achieve the most equitable outcome as between the creditors of each of the paying subsidiary guarantors and will ensure that the creditors of DTCGL are not unjustly enriched at the expense of the creditors of DTCL and CHL. I am satisfied that the joint liquidators have put forward their proposals in the way best calculated to equalise the position between the four partially solvent subsidiary companies within Company Health Group PLC. That concludes this judgment.