Kean v Lucas, Re: J&R Builders (Norwich) Ltd)

The Applicant is Muriel Kean who describes herself as “a significant creditor and former director and shareholder” of J&R Builders (Norwich) Limited (the “Company”). The Company entered a creditors’ voluntary liquidation in November 2014 when Mr Kevin Lucas was appointed liquidator. In September 2015 solicitors acting for Mrs Kean wrote to Mr Lucas inviting him to call and hold a meeting of creditors for the purpose of considering his removal as liquidator. Mr Lucas refused to requisition such a meeting on the ground that the request was not supported by 25% in value of the Company’s creditors. Mrs Kean applies to the court for a declaration that Mr Lucas wrongfully refused to call the meeting and a direction that he does so.

This judgment deals with the exercise a liquidator should carry out in order to determine whether or not the threshold of 25% in value of the Company’s creditors has been reached. It will also determine whether that threshold has been attained in this case.

As agent, the liquidator acts in the interests of all creditors, and has statutory powers to carry out his or her functions. Some of a liquidator’s powers, however, may only be exercised if approved by the liquidation committee or if there is no committee, at a meeting of creditors and if that is not possible by the approval of the court. This may be viewed as a control on the liquidator’s power. Another control on his power is the ability of creditors to remove him from office through a general meeting of creditors summoned specially for the purpose pursuant to section 171 of the Insolvency Act 1986 (the “Act”) in accordance with the Insolvency Rules 1986 (the “Rules”).

A liquidator will have to summon the meeting if requested by 25% in value of a company’s creditors, excluding those who are connected with it: r. 4.114(1) of the Rules.

Mr Lucas has carried out an extensive exercise to determine whether one claim in particular should be included in the calculation. Mr. Shaw, acting for Mrs Kean, submits that he has adopted the wrong approach. Rule 4.57(1) concerns requisitioning meetings and provides:

“that any request by creditors for a meeting shall be accompanied by, among other things, a list of creditors concurring with the request and the amount of their respective claims in the winding up.”

Mr Shaw contrasts the language of r. 4.57(1) with that of r. 4.67(1) which concerns a creditor’s entitlement to vote at a meeting of creditors. A creditor is only entitled to vote at such a meeting if there has been “duly lodged (by the time and date stated in the notice of the meeting) a proof of debt…”. The chairman of the meeting is obliged to adjudicate upon the proofs of debt at the meeting: r. 4.70. It is note-worthy the language of r. 4.57 (1) and r. 4.67(1) have different temporal boundaries. A creditor is not bound to lodge his proof until he has notice of the meeting. The notice itself must state the time and date by which the proof must be lodged.

Mr. Shaw argues that the exercise to be undertaken by a liquidator when deciding whether or not to accept a claim at the requisition stage, should be simple, and there should be little if any inquiry into the merits of the claim. He refers the court to Re Greenhaven Motors Ltd (in liquidation) [1999] 1 BCLC 635 which is best known for giving guidance to the court on when to grant sanction to exercise certain powers. In Greenhaven Motors, Chadwick LJ said (642):

“In deciding whether or not to sanction the exercise of a power under s 167(1)(a) of the Insolvency Act 1986, the court may have regard to the wishes of the creditors and contributories, as proved to it by evidence: see s.175 of the Insolvency Act. The court may, if it thinks fit, direct that a meeting be called for that purpose. In my view it is plain that a creditor or contributory of a company is entitled to be heard on an application by the liquidator under s 167(1)(a). I do not understand that to be in dispute. But an application under s 167(1)(a) of the Act is not a suitable context in which to decide whether or not a person claiming to be a creditor is indeed a creditor. In my view, the Act does not require the court to attempt that task. At the end of the day it is a matter for the discretion of the court whether or not to authorise or sanction the compromise: see Re Bank of Credit and Commerce International SA (No 3) [1993] BCLC 1490 at 1510. The court may, and usually will, take into account the views of someone claiming to be a creditor or contributory, but it is not bound by those views. If the claim appears thin, or the claimant can be seen to have no real interest in the assets having regard to prior claims, his views may carry little weight. I would think it inappropriate for the court to embark, in the context of an application under s 167(1)(a) of the Act, on a detailed examination of the question whether a person wishing to be heard is indeed a creditor or a contributory. The circumstances in the present case demonstrate that such examination is likely to prove inconclusive. I think it is sufficient that the court should be satisfied that the claim is made bona fide and it is not plainly misconceived. If the claimant satisfies that test, then he should be heard. It remains a matter for the court what weight should be given to his wishes.” (emphasis added)

Ms Meyer and Mr Shaw inform the court that there is no authority on how a liquidator should decide which creditors are to be included in the total value of creditors. Mrs Meyer submits that a liquidator should consider each creditor’s claim and “apply some reasonable assessment on the evidence before him”. Elaborating on the test she considers that a liquidator needs to apply a reasonable degree of scrutiny as Mr Lucas has done in this case. The test proposed may at first sight seem attractive, but it is unsupported by statute, the Rules or case law.

In my judgment, the dicta of Lord Justice Chadwick in considering who are the creditors for the purpose of deciding whether to sanction the exercise of a power under section 167(1)(a) of the Act, is most apposite to the exercise that should be undertaken by a liquidator for the purpose of requisitioning a meeting of creditors pursuant to section 171(2) of the Act. I am conscious that the amendments to the Act introduced by the Small Business Enterprise and Employment Act 2015 have removed the need for a liquidator to obtain sanction in certain respects but that has no effect on this decision.

In my judgment the exercise that needs to be undertaken at the creditors’ meeting does require a degree of scrutiny and is different to the requisition stage. At the meeting the chairman is provided with an express power to admit or reject a creditor claim for the purpose of voting: r. 4.70(1). The same words (to admit or reject) do not appear in r. 4.114(1). The only task a liquidator is to undertake when calculating creditor claims for the purpose of determining whether 25% or more in value of creditors request a meeting, is to discount connected party claims and any claim that appears obviously wrong or mala fide.

I am fortified in my view by the mechanisms in place to appeal against a decision of a liquidator. There is no appeal mechanism within the Rules dealing with a failure to accept a claim, when calculating the percentage in value of creditors for the purpose of requisitioning a removal meeting. On the other hand, the Rules provide an appeal mechanism against a decision of a chairman at a meeting when deciding on a creditor’s entitlement to vote. As there is no procedure permitting an appeal from a decision of a liquidator at the requisitioning stage it must follow that the threshold test is low: the claim has to be not obviously wrong. As there is a procedure to appeal against the rejection of a proof at the meeting, the test is higher than at the requisition stage.

Accordingly, I reject the argument advanced by Ms Meyer that a more complex investigation is required and that Mr Lucas correctly required detailed information from one creditor in particular in order to make a “reasonable assessment” before deciding whether or not to call a meeting.

Ms Meyer submits that “alternatively…the claim of [the impugned claimant] is misconceived, being not one for a debt but rather an unliquidated claim.” I shall turn now to the nature of this claim, and whether 25% in value of creditors have asked for a meeting to consider the removal of Mr Lucas.

The disputed claimant is Grand Prix Paint Plant (“Grand Prix”). As I understand it Grand Prix is the alter ego of Mr Hurst. Mr Hurst is a 78-year-old businessman. He traded through many different named unincorporated businesses, and was a director of a number of companies. Ms Meyer and Mr Shaw agree that if the Grand Prix (or other named businesses through which Mr Hurst traded) claim is included in the calculation of claims, the requisite 25% will have been reached. In her first witness statement Mrs Kean says that Grand Prix wrote to the liquidator on 2 November 2015 providing a break-down of the debt owed. Mrs Kean says:

“It will be seen that they claim to be owed £124,348.00. Given the timing of this letter, I don’t believe that the claim of Grand Prix Paint Plant would have been taken into account in any calculation that the Liquidator might have done…..I have been in further contact with Grand Prix Paints Plant and understand that they instructed their own solicitors, Neil Davies & Partners, to correspond with the Liquidator….It will be seen that they have also made a request for a meeting of creditors to consider the Liquidator’s removal…….the Liquidator is challenging the validity of their debt.”

The letter of Grand Prix dated 2^nd November 2015 states:

“It has come to our notice that [the Company] is in Administration and or Liquidation. We understand that you are conducting the …. winding up and with that in mind, we wish to advise you that we have an accumulated debt of £124,348 against them.”

The author of the letter asked for the debt to be registered and to be supplied with a proof of debt form. Attached to the letter was a document setting out the basis of the claim which reads as follows:

“The following lists the loan/investment payments made by my companies Grand Prix Paints, Intercity Marketing and Sketchley made directly to J&R Builders (Norwich) Limited Lloyds Account No: 04651834 between May 2010 and June 2014. There are other loan payments made between 2006 and 2010 however I do not have the records as these were destroyed in a fire. The debt that I am pursing at this time of £124,348.00 for which I have proof of the loan payments by way of date of transfer of payment. There is an additional debt of approximately £126k that I currently have no proof of debt.”

There follows a list of debts and dates. On 8 February 2016 Neil Davies & Partners wrote to Mr Lucas:

“We have seen a copy of a letter that our client wrote to you dated 2 November 2015 lodging a claim in the liquidation of the Company in the sum of £124,348:00. We enclose a Proof of Debt in the revised sum of £134,500 and supporting Company bank statements showing the funds being received (as highlighted) that our client can presently identify……

Our instructions are that a Mr Garry Richman (Mr Richman) who instructed your firm as director and provided the details for the Statement of Affairs omitted to include our client’s claim. We note that Mr Richman appears to have signed the statement of truth upon the face of the Statement of Affairs. That is at best surprising when we are instructed that Mr Richmond knew full well of the debt owed by the Company to our client.”

In his first witness statement Mr Lucas says “my response to their claim can clearly be seen from my letter dated 29 February 2016….” The letter referred to is addressed to Neil Davies & Partners, seeking further information:

“As previously advised, your clients claim was not included on the statement of affairs and it cannot be identified from the accounts of the company. In addition, there has been no evidence received to support your client’s claim as submitted”. (sic)

The deposits upon which your client’s claim is reliant are made from various parties and the presence of the payments on the bank statements of the company….cannot be used to solely substantiate that these monies were loans or advances either by your client or that were repayable by the company. It is therefore, clear, right and wholly appropriate that your client is put to a strict proof of his entitlement to make a claim against the company.

Once the above information has been received I will be in a position to review your client’s claim further. At this time your client is not deemed to be a creditor of the Company, your client is not in a position to request that I requisition a meeting pursuant to Rule 114(1) of the Insolvency Rules.” (emphasis supplied).

In my judgment the approach taken by Mr. Lucas putting a claimant to ‘strict proof’ was wrong. That is not the applicable test when calculating votes for the purpose of requisitioning a removal meeting of creditors. Although Mr Lucas did not repeat what test he was applying in correspondence, his view of the test as expressed in the letter is very likely to have informed his decision making process, and he erred.

As a result of Mr Lucas applying a ‘strict proof’ test the matter was not advanced until Mrs Kean issued this application pursuant to section 112 Insolvency Act 1986. At the hearing on 12 October 2016 it became clear that the argument related to (i) the test to be applied and (ii) whether or not Grand Prix should be included in the calculation. At that hearing the argument regarding the test occupied the whole time estimate (and exceeded it). Counsel agreed that the matter should be adjourned for a very short time to deal with further evidence on the issue of Grand Prix. I gave both parties permission to file further evidence on the basis of their consent. The adjourned hearing came back to court on 14 October 2016. Mr Lucas filed a third witness statement running to 21 paragraphs, and Mr Hurst (trading as Grand Prix) filed a statement running to 20 paragraphs. Both statements were handed to me at the court hearing.

Mr Hurst’s position is that he had a long association with Mr and Mrs Kean as directors of the Company and agreed to lend money for the purpose of building an industrial business park on a piece of land which he sold to the Company. He says:

“The director of the Company, Robert Kean ….and I have known and trusted each other in business for a very long time. At the time of the transfer of the Site to the Company a verbal agreement was reached between Robert Kean, on behalf of the Company, and I that the Company would clear the Site, obtain the relevant planning permissions and build an industrial business park.”

As regards the terms of the oral agreement Mr Hurst says:

“that upon completion of the business park I would become entitled to own and manage the Site’s management company and as part of that a management house would be built on the Site. The management company would provide me with an income and the house a place to live. In consideration of all this, it was agreed that I would advance the Company certain monies. I viewed the monies as either payments on account of the work that the Company would eventually undertake for me or a loan to be repaid in the future. …..several of my sole trader and company businesses advanced the monies to the Company. Where the monies were advanced by companies they were attributed to my directors’ loan account. I am aware that the advanced were used in order to assist it with payment of creditors and wages of the Company….Ultimately the management house was not built for me (nor did the management company commence trading) and there is no doubt in my mind that I am entitled to a return of the monies I advanced.”

Mr Hurst sets out the payments made and states when they were paid by reference to bank statements. He continues:

“As the agreement with the Company was a verbal agreement based upon mutual trust I can confirm that there were no invoices, formalised loan documentation or correspondence in respect of the monies that my businesses or I advanced to the Company. It would appear entirely unfair that my claim is denied by the Respondent because I did not formalise the arrangements in writing. Not all business is conducted with written formulised documents.”

Mr Lucas has obtained a file of papers from the former solicitors of the Company, looked at a newspaper article concerning the sale of the land, obtained the land registry certificate, obtained an unsigned agreement, and made other investigations in order to determine the legitimacy of the claim. He says that the unsigned agreement:

“effectively provides for a joint venture agreement between Mr Kean and Mr Hurst”. Clause 3.1 of the unsigned agreement is expressed as a joint venture “by inviting [Mr Hurst] to participate in the developing Company…..the nett profit will be divided 40% each to the Purchaser and Vendor and 20% to an advisor.” (sic).

I comment that there is no evidence that the agreement was acted upon or that the parties intended that the provisions recorded in the agreement would be finally binding. The written agreement does not mention the provision of a house and the evidence of Mr Hurst, made with a signed statement of truth, regarding the relationship between the Company and his various trading bodies, contradicts the agreement.

In his witness statement Mr Lucas seeks to undermine Mr Hurst’s testimony: “A member of my staff discovered Mr Hurst had previously been convicted for conspiracy to defraud and attached…is a copy of the newspaper article she found online relating to this.”

Mr Lucas states that Mr Hurst perjured himself in previous court proceedings. He states that the books and records of the Company do not disclose Mr Hurst or any of the entities under which he claims to be a creditor. In his evidence Mr Lucas says:

“I was therefore faced with a situation where I was aware of certain historical issues relating to Mr Hurst and his involvement with Mr and Mrs Kean and the Company that put me on notice that I should be particularly careful in dealing with the matter. I was aware that the accounts of the Company indicated no liability to Mr Hurst. I was aware that the aged creditor list showed all liabilities that there had been to Mr Hurst had been paid. I was aware that Mr Kean himself was of the view that the Company was solvent. I was aware that the entries on the aged creditor list bore no relation whatsoever to the claim put forward by Mr Hurst himself. I was aware that some payments could be accounted for, for example, the 2 payments of £25,000 in April 2012 clearly related to the payment of the £50,000 deposit on Unit B5 that Mr Hurst purchased from the Company. Consequently, there was no basis for those monies being owed to Mr Hurst. The sale had completed.

Mr Lucas’s accepts that “it would be nonsensical to ignore [Mr Hurst’s] claim if in fact he was a creditor at the time”. His concession relates to an irregularity arising out of the late filing by Grand Prix of its claim pursuant to r.4.57. No insolvency proceeding shall be invalidated by any formal defect or any irregularity unless the court before which objection is made considers that substantial injustice has been caused by the defect or irregularity. Mr Lucas makes clear that there is no objection but insofar as it is necessary I shall waive any defect as there is no substantial injustice arising from the defect.

In my judgment the liquidator in this case embarked upon an unnecessary exercise of investigation. He was wrong to apply a “strict proof” test, and unless the claim of Mr Hurst was obviously wrong or there was evidence that Mr Hurst was acting mala fide, the claim should have been accepted for the purpose of calculating claims in order to requisition the meeting. The meeting is the proper forum for claims to be tested. It is at the meeting that the chairman has the power to reject or accept any claim.

Not all the criticism can be levelled at Mr Lucas. The evidence provided by Mr Hurst is not only weak but in parts contradictory. He has no accounting records evidencing his claim. The claim is made up of various payments made between June 2010 and June 2014, but there is no evidence to support the contention that any of the payments made (as evidenced by the Company’s bank statements) were loans. Although Mr Hurst has stated that the purported loans were not recorded in writing there is no evidence as to when they are or were repayable. There is no evidence that interest was paid by the Company in respect of the purported loans (a normal incident of a commercial loan). No demand has ever been served in relation to repayment. The purported loans may have been payments received by the Company for services rendered to the various trading vehicles of Mr Hurst.

The criticism of the evidence can go further. The Company books and records are silent in respect of the purported loans. At its highest Mr Hurst is able to say “there is no doubt in my mind that I am entitled to a return of the monies I advanced”. Yet his evidence is that some of the monies was paid by companies. The companies should have books and records, but they have not been produced. There is a failure to explain why, if Mr Hurst were to receive the benefit of a house on the transferred land, payments were made by Companies.

Looking at it from the point of view of the Company, the director of the Company did not include the purported loan claim in the statement of affairs. Although the Company entered voluntary liquidation in November 2014 Mrs Kean says in her statement that she only became aware of Mr Hurst as a creditor in October or November 2015. It is startling that Mrs Kean does not, in her witness statement, support the claim made by Mr Hurst. In respect of the debt she states “It will be seen that they claim to be owed £124,348.00”. Mr Kean (also a director) has produced a witness statement stating simply “I confirm the contents of Robin Hurst’s witness statement”. Accordingly, he adopts the weak evidence of Mr Hurst and I infer is unable to add more.

On the other hand, the fact that the claim is expressed as a loan makes it difficult to conclude at this stage that the monies advanced provide Gran Prix with an unliquidated claim rather than a liquidated debt. Despite all these short-comings in the evidence the test remains constant. It is not for the court to usurp the function of the meeting of creditors or second guess what the chairman of the meeting will decide in respect of Grand Prix’s entitlement to vote. If the claim were statute barred it would obviously not be included in the calculation. If the claim was against the wrong party, it would be obvious that the claim should not be included in the calculation.

The liquidator has great reservations as to whether or not the claim is made in good faith or bona fide; that is whether the claim is made believing it to be a good claim. Those concerns are not trivial. Drawing upon his researches the liquidator suspects that the claim is a false claim. He may or may not be right, but suspicion is insufficient. Although there may be serious misgivings, in my judgment there is insufficient evidence to support bad faith in relation to the claim, at present.

Order accordingly.