commercial neswletter december 2011

In this edition of Commercial Brief, we have the news of the appointment of a new Senior Civil Clerk, Justin Luckman, to the civil clerking team and coverage of our very successful commercial silks week. We also have a range of legal articles. Lance Ashworth QC looks at TUPE and pre-pack administrations in the first of a two part article in relation to this subject. Sandra Bristoll reports on a case concerning the proposed removal of liquidators. James Morgan looks into tracing for us and Iqbal Mohammed reports on developments in relation to Part 36.

I hope you enjoy this edition of Commercial Brief. If you would prefer your copy in electronic format (whether in addition to or instead of a paper copy) then please let us know. In any event, Commercial Brief can be downloaded in pdf format from

www.st-philips.comIf you have any comments or suggestions in relation to Commercial Brief, then please do let me know.

Commercial Brief | St Philips Commercial Brief

Welcome to Commercial BriefWelcome to the our latest edition of Commercial Brief. This is the first edition that I had the pleasure of editing since taking over the role from Ed Pepperall, whose hard work in the past has led to a reputation for the Commercial Brief to deliver an engaging mix of news and legal articles.

Editor, Marc Brown [email protected] 0121 246 7048

“St Philips Chambers continues to dominate the Midland Circuit due to the quality of its members and the high-profile work it brings in. The richly deserved reputation of its barristers sees it win instructions on a national and a regional basis.”

Chambers UK Guide 2012

Issue 9

St Philips Commercial Brief

Newspage 2 & 3............................................................................

TUPE and the pre-pack revisited Part1 by Lance Ashworth QCpage 4,5,6 & 7............................................................................

Tracing: A short practical guide by James Morganpage 8 & 9............................................................................

What’s in a good cause? by Sandra Bristollpage 10............................................................................

Part 36: Offers and Pitfallsby Iqbal Mohammedpage 11 & 12............................................................................

Contents

‘Silks Week’ showcased John Randall QC, Avtar Khangure QC, Lance Ashworth QC and Mohammed Zaman QC, all of whom have just received outstanding client feedback in the latest Legal 500 and Chambers UK Guide.

The week’s events closed with a champagne and cocktail reception at the recently opened Ginger’s Bar at The Asquith, the latest city centre venture from Michelin-starred chef Glyn Purnell.


Over 200 Commercial and Insolvency solicitors from across the Midlands converged on St Philips Chambers to attend a series of seminars given by the Commercial Group’s four Queen’s Counsel.

Commercial Silks Week Success

St Philips makes key clerking appointment

John Randall QC, Head of the Commercial Group at St Philips, commented: “It was wonderful to see so many people from the legal community attending our seminars and party. In fact we have had so much positive feedback that we plan to make ‘Silks Week’an annual event on the legal calendar. I would like to thank everyone who attended throughout the week for making it such a success and look forward to welcoming them back again next year”.

From left to right:

Avtar Khangure QC, St Philips Chambers Mike Gilmore,, Freeth Cartwright

From left to right:

Justin Luckman (Senior Civil Clerk)Lance Ashworth QCJohn Randall QCJoe Wilson (Chief Clerk)

St Philips Chambers has appointed one of the regions leading clerks, Justin Luckman, as their new Senior Civil Clerk. The new role will see Justin lead the commercial and civil group’s seven strong team of clerks, with a view to enhancing the effectiveness of the service we provide and raising Chamber’s profile among its key target audiences.

Justin added “I’m delighted to be joining St Philips and look forward to working alongside such a highly regarded group of barristers and clerks. Chambers ethos of providing an outstanding level of client care is well documented and I look forward to building on this to deliver an exceptional package of services to our existing and potential clients”

Justin joins from No 5 Chambers where he had been Senior Practice Manager for the Commercial and Chancery group since 2003 and brings with him over 20 year’s experience of clerking in Birmingham Chambers.

St Philips makes key clerking appointment


Commercial Group shines in legal directories

Legal 500 2011 ranks St Philips in their top tier and as “the ‘go to’ set for chancery and insolvency work” on the Midlands Circuit, praising it as “a ‘commercially astute set’ with clerks who are ‘phenomenal at securing the barrister clients wish to instruct’”.

The Chambers UK Bar Guide pays tribute to the Commercial Group stating that it “continues to dominate the Midland Circuit due to the quality of its members and the high-profile work it brings in. The richly deserved reputation of its barristers sees it win instructions on a national and a regional basis”. Highlighting the high levels continually attained by our staff it adds that chambers “boasts a sterling clerking team that is ‘always a pleasure to deal with.’ Sources wax lyrical about the chambers’ outstanding ethos of client service and enthuse that ‘it really does everything possible to take care of you.’”

We would also like to express our thanks to those of you who gave us such high praise when asked by the directories researchers and assure you of our continued desire to provide you with an exceptional service.

St Philips Chambers is ‘undoubtedly the “go to” set for chancery and insolvency work’.

Legal 500 2011

Commercial Silks new Leaders booklet

Our four Commercial Silks now appear in their own brochure, designed to promote their individual skills and their strength as the finest collection of Commercial Queen’s Counsel in the Midlands.

The Leaders booklet also gives a more personal insight into each of their practices and makes for an invaluable reference tool when choosing the appropriate QC for your case. Hard copies of this will be sent out in the post shortly but our inter-active electronic version can be opened and downloaded immediately by clicking on our website:

www.st-philips.com

The latest editions of the Legal 500 and Chambers UK Bar Guide have again confirmed St Philips standing as the home of the leading Commercial and Insolvency Barristers in the Midlands. Having again increased our number of rankings in these areas, we are delighted to be recognised for the quality of both our practitioners and our clerks on a local and national level.

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3

2

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1 From left to right:

Philip Heath, WeightmansBarry Doherty, WeightmansMelanie Mitulla, WeightmansGareth Griffiths, WeightmansJames Morgan, St Philips Chambers


Stephen Eyre, St Philips ChambersOwen Williams, Clarke WilmottNaomi Candlin, St Philips Chambers


Sandra Bristoll, St Philips ChambersAndrew Oranjuk, Harvey IngramBarry Jervis, Harvey Ingram


Alan Jones, Averta Employment Lawyers Natalie Frimpton, Wragge & Co Helen Davenport, Wragge & Co John Brennan, St Philips Chambers


In this paper, I will address the following questions:

On a sale of the business of a company by an Administrator do regulations 4 and 7 of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) apply? (Which I will deal with in this edition)

If they do apply, how, if at all, can the business of a company in Administration be sold without transferring the employees to the purchaser?

It is the first of those 2 questions which I shall address in this part of the paper. The second will be addressed in the next edition of the Commercial Group newsletter.

RELEvANT PARTS OF TUPE

Regulation 3 applies TUPE to:

“a transfer of an undertaking, business or part of an undertaking or business situated immediately before the transfer in the United Kingdom to another person where there is a transfer of an economic entity which retains its identity“.

Regulation 4 provides that:

“a relevant transfer shall not operate so as to terminate the contract of employment of any person employed by the transferor and assigned to the organised grouping of resources or employees that is subject to the relevant transfer, which would otherwise be terminated by the transfer, but any such contract shall have effect after the transfer as if originally made between the person so employed and the transferee“.

Regulation 7 deals with unfair dismissal providing that:

“Where either before or after a relevant transfer, any employee of the transferor or transferee is dismissed, that employee shall be treated for the purposes of Part X of the 1996 Act (unfair

dismissal) as unfairly dismissed if the sole or principal reason for his dismissal is-

(a) the transfer itself; or

(b) a reason connected with the transfer that is not an economic, technical or organisational reason entailing changes in the workforce.”

Regulation 8(7) is key to the questions posed and provides:

“(7) Regulations 4 and 7 do not apply to any relevant transfer where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner.”

WHy dOES IT MATTER IF TUPE APPLIES?

Where the purchaser of the business is willing to take on the entirety of the workforce, on the same terms, it may not make much practical difference whether he does so “under TUPE“ or whether there is a dismissal by the transferor immediately followed by a re- engagement by the transferee. But many cases are far from pure. It will of course be common for the transferor, being insolvent, to owe money to its employees; and further liabilities will accrue if, as will again be very common, the transfer gives rise to dismissals. It will in those circumstances be crucial to establish whether the liabilities in question have transferred to the (usually)

solvent transferee or remain with the insolvent transferor. If they pass to the transferee the employee will have an enforceable claim. If they remain with the transferor the employee will simply be an unsecured creditor and will - subject to one important complication - to a greater or lesser extent lose out.

The complication is that by statute, giving effect to the requirements of Council Directive 80/987/EEC, the Secretary of State is obliged to, in effect, guarantee, out of the National Insurance Fund, some of the obligations of an insolvent employer; and that obligation is, subject to the detailed provisions of regulations 8 (1)-(6) of TUPE, unaffected by the transfer of the employment under TUPE.

It follows that in the case of a transfer by a company in administration it is in the interests of employees (or at least those with claims not, or not fully, covered by the statutory guarantee) and of the Secretary of State that regulation 8 (7) should not apply, and in the interests of the transferee/purchaser that it should.

If Regulations 4 and 7 do apply to a sale by an Administrator, the practical effect is that where an Administrator sells the business or part of the business of a company, all of the employees will transfer to the purchaser of the business, who will be responsible for all obligations to the employees, including any claim for unfair dismissal. This could have a number of consequences for the Administrator:

It may be seen as a disincentive to a purchaser of the business, who may not want all or any of the employees;

On the other hand, it may be seen as an advantage to unsecured creditors, as any claims by employees would not fall to be considered by the company in administration and therefore would reduce the number of creditors sharing in the pot (assuming there is one); depending on the intentions of the purchaser, each of these may make it less likely that an Administrator will be able to effect a sale of the business of the

TUPE ANd THE PRE-PACK REvISITEd – PART 1Lance Ashworth QC

In September 2009 I addressed the potential difficulties thrown up by the decision of the Employment Appeal Tribunal in Oakland v Welleswood (Yorkshire) Ltd (UKEAT/0395/08). At that time, I suggested that the decision was wrong and might cause difficulties for Administrators.

At that time, I suggested that the decision was wrong and might cause difficulties for Administrators.

Lance Ashworth QC


company and therefore might make it less likely that the statutory purpose under paragraph 3 of Schedule B1 to the 1986 Act will be achievable.

dO REGULATIONS 4 ANd 7 APPLy TO AN AdMINISTRATION?

The intention of regulation 8(7) was plainly to exclude transfers following disastrous insolvencies but the problem is that it does not specify the precise kinds of insolvency caught by the regulation.

This was a short cut implemented by the government which chose simply to copy out the wording of the directive.

Is it possible to determine which insolvency proceedings will be caught by TUPE? First, in relation to compulsory liquidation procedures, the position has always been pretty clear and has been generally recognised as such by IPs: Indeed, the Department for Business, Enter-prise and Regulatory Reform (BERR) (as it was then known) Guidance on the 2006 Regulations stated that:

“[The Regulations apply] where the transferor is subject to “relevant insolvency proceedings”which are insolvency proceedings commenced in relation to him but not with a view to the liquidation of assets. The Regulations do not attempt to list all these different types of procedures individually. It is the Department’s view that “relevant insolvency proceedings”mean any collective insolvency proceedings in which the whole or part of the business or undertaking is transferred to another as a going concern. That is to say it covers insolvency proceedings in which all the creditors of a debtor may participate and in relation to which

the insolvency office-holder owes a duty to all creditors. The Department considers that “relevant insolvency proceedings” does not cover winding up by either creditors or members where there is no such transfer“.

So far so good: liquidation procedures will fall outside TUPE 2006.

There was a general acceptance that administration proceedings and business transfers in the context of administrations were caught by TUPE. Indeed, the Government’s own guidance had stated as much. But by not listing the applicable procedures, there was plenty of potential for confusion. What followed was Oakland v Welleswood (Yorkshire) Ltd (UKEAT/0395/08).

OAKLANd

W was a food wholesale business that ran into difficulties and a potential buyer was found. The intention was that W would be put into administration and that the buyer would take on assets (including some of the employees)

but not its debts. An Administrator was subsequently appointed out of Court and the business sale agreement was entered into on the same day. This was a pre-pack, albeit not one which was a sale back to the shareholders of the company.

Mr Oakland, W’s director and shareholder, was dismissed shortly after. He claimed unfair dismissal. In order to win, it was thought he needed to rely on TUPE to retain his service qualification.

The employment tribunal accepted that which was set out in the Administrator’s report to creditors and his Statement of Proposals, namely that, due to the scale of the insolvency, rescuing the company as a going concern was not achievable. In other words, the tribunal accepted the Administrator’s view that there was only ever one route to a sale of the assets and therefore held that TUPE did not apply and the purchaser was not liable to meet W’s claim.

The matter went to the EAT who had to consider (among others) the question: did TUPE apply or did administration proceedings fall within regulation 8(7) and thus fall to be excluded from TUPE 2006? This required consideration of whether those were proceedings with a view to the liquidation of the assets of the transferor.

The EAT in Oakland stated that there was no definitive guidance in existence as to whether administration proceedings should fall within TUPE 2006 so the answer was a matter of fact not of law. It said it is wrong simply to look at the type of proceedings, i.e. the label. What is required is that there needs to be an investigation into whether in the particular instance of those proceedings, in this case

Mr Oakland was not happy with the decision and appealed to the Court of Appeal.

Lance Ashworth QC

Continued on Page 6


administration, it was being carried out with a view to liquidation or with a view to selling the business as a going concern. There is no one size fits all: one has to look at the facts of the specific case.

Was the EAT in Oakland right? The persuasive finding of fact appears to have been the Administrator’s assertion that it was never possible to rescue the Company. This opened the way to a finding that the administration existed with a view to the eventual liquidation of the assets of the insolvent company by way of a creditor’s voluntary liquidation. TUPE therefore did not bite at all. M r Oak land had no r ights to c la im compensation for unfair dismissal against the purchasing company. No detailed consideration was given to the fact that there is only one statutory purpose, namely that set out in paragraph 3 of schedule B1.

Employment practitioners took the view that the decision was right: it was in line with comments from the Insolvency Service Practitioners Group and appeared to be in line with what the directive was trying to achieve in relation to insolvency. The EAT said that a rescue culture means a policy of ensuring that “a purchaser is not put off by the effects of TUPE protection”. The outcome was that some jobs were preserved and the creditors benefited from the best available option.

However, I suggested it might it make it more difficult in some borderline cases to establish the statutory criteria for an Administration and therefore IPs would have to consider very carefully whether they could, in the circumstances of the particular case they were dealing with, sign the form 2.2B. I suggested that the essence of the decision was that in such a sale, the IP is not achieving the statutory criteria: He is not rescuing the company as a going concern, but rather is selling off the business and assets of the company;

He may not be achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration) as the employment of the employees is terminated on the sale, leaving claims for redundancy/unfair dismissal in the old company, thereby increasing the number of claims against the total pot available to meet creditors’ claims leading to a smaller dividend i.e. this is no different from liquidation; He may not be realising property in order to make a distribution to one or more secured or preferential creditors - this will depend on the figures.

Mr Oakland was not happy with the decision and appealed to the Court of Appeal. The company, Welleswood, did not appear and was not represented. On 30th July, 2009 the Court of Appeal allowed Mr Oakland’s appeal, but on

an entirely new ground (some what surprisingly) not argued before the ET or the EAT, namely that by virtue of section 218(2) of the Employment Rights Act 1996, because the insolvent company had transferred its business to Welleswood and taken on the employees on the same terms, the transfer did not break Mr Oakland’s continuity of employment.

The Court of Appeal did not reach any conclusion as to whether the fact that a company was in administration necessarily meant that regulation 8(7) automatically applied, but felt that there was a strong argument that it did not automatically apply, that is to say a strong argument that the employee was able to rely on the automatic transfer under regulation 4. It was not possible to say precisely what they meant by this, however, it seemed to be suggesting that where there was a pre-pack, the employees would automatically transfer to the new employer, reducing creditor claims in the old company.

OTG v. BARKE

The issue has since been considered further by the Employment Appeal Tribunal (presided over by Underhill J) in 5 conjoined appeals reported under the name OTG Ltd. v. Barke UKEAT/0320/09/RN in which judgment was given on 16th February, 2011. The primary issue in the appeals was whether administration proceedings under Schedule B1 constitute, or may constitute, “insolvency proceedings .... instituted with a view to the liquidation of the assets of the transferor“ within the meaning ofregulation 8(7) (for short, “liquidation proceedings“), with the result that regulation 4 is disapplied. The competing contentions were, on the one hand, that they can never do so (“the absolute approach“) and, on the other hand, that they may do so if it is found as a matter of fact that the administration was instituted with a view to the liquidation of the transferor’s assets (“the fact based approach“).

The EAT declined to follow the earlier EAT decision in Oakland but adopted an absolute approach, that is to say that administration

proceedings can never amount to“insolvency proceedings...” instituted with a view to the liquidation of the assets of the transferorwithin the meaning of regulation 8(7).

Accordingly, regulations 4 and 7 are not disapplied in any case where a company has gone into administration.

The reasoning of the EAT in OTG v. Barke was heavily influenced by an earlier decision of the ECJ in Abels v. Bedrijfsvereniging voor de Metallindustrie en de Electrotechnische Industrie [1985] ECR 469 in respect of an earlier directive which did not have the equivalent of regulation 8(7). The company which employed Mr. Abels was put into a procedure under Dutch law known as “suréance van betaling“ “SvB“.

It subsequently went into liquidation. The ECJ held that the directive was not intended to apply to companies which went into liquidation, but that it did “however, apply where an undertaking, business or part of a business is transferred to another employer in the course of a procedure such as“ SvB.

In reaching this decision in Abels, the ECJ expressly considered the competing arguments advanced by the Danish and Dutch governments as to the economic effects of holding that the directive applied, including the Dutch Government’s argument (supported by the Commission) that an extension of the directive to such situations might dissuade a potential transferee from acquiring an under-taking on conditions acceptable to the creditors thereof, who, in such a case, would prefer to sell the assets of the undertaking separately. That would entail the loss of all the jobs in the undertaking, detracting from the usefulness of the directive.

Accordingly, it cannot be said that no consideration had been given to this question.

The EAT in OTG v. Barke favoured the absolute approach giving 5 grounds for doing so:

Regulation 8(7) (or more strictly article 5 of the directive) should depend on the legal character of the relevant procedure i.e. on the object of the procedure, not the object of the individuals operating it;

Regulation 8(7) is explicitly concerned with the object of the proceedings when instituted. The EAT held that paragraph 3 of Schedule B1 imposes an obligation on the administrator at the point that his appointment takes effect to consider first whether the primary objective of rescuing the company as a going concern is overridden by either of the considerations identified at sub-paragraph (3). Although they accepted that the reality may be that it is immediately clear that it is so overridden, the question must nevertheless be asked and

However, it is clear that, unless and until the issue is considered by the Court of Appeal, Employment Tribunals will follow OTG v. Barke

Lance Ashworth QC


answered. Formally, therefore, the EAT said it cannot be said at the moment of the institution of any administration proceedings that their object is to liquidate the assets;

Because an Administrator has 8 weeks to provide his Statement of Proposals under paragraph 49 of schedule B1, there is no requirement for an administrator to state at the beginning of an administration which of the objectives under paragraph 3 he is pursuing.

The EAT said that on the fact-based approach there is no authoritative way in which an employee or other person affected by a transfer by an administrator can therefore establish whether regulation 8 (7) applies, and thus in turn whether regulations 4 and 7 apply. Again the EAT accepted that it may be that in the great majority of cases the position will in practice be clear: certainly if an administrator has sold the entire business as a pre-pack he will evidently have decided to liquidate the company’s assets in pursuit of the second or third objective. But it said that it will not always be so (what, for example, if he has sold only part of the business?); and it is in principle important that persons affected are enabled to know where they stand in every case. Accordingly, the EAT said the fact-based approach inevitably increases the likelihood of disputes as to who is liable for the transferor’s obligations. Such disputes generate cost, delay and uncertainty. “A bright-line rule has clear advantages“.

Finally, the EAT relied on the avowed purpose of the Directive being to protect employees in the event of a transfer, and in particular to ensure that their rights are safeguarded. The EAT held that the absolute approach is “plainly the preferable construction from the point of view of achieving that purpose in any case where a transfer has actually occurred, since it results in regulations 4 and 7 taking effect, whereas the fact-based approach means that in many cases employees will be left only with the lesser protection afforded by the Secretary of State’s guarantee.”

Was OTG v. Barke correctly decided? It may well have come to the right answer, but with all due respect to the EAT, the analysis of the “purpose” in paragraph 3 of Schedule B1 to the Act flies in the face of reality. In the vast majorityof administrations, the company will end up in liquidation. This is especially so in the case of pre-pack sales. Before the Administrator can properly sign his form 2.2B, which happens prior to his appointment as Administrator, he must have considered whether the statutory purpose can be achieved. That must require him to know whether the “primary objective of rescuing the company as a going concern” can be achieved. If it cannot, which will almost certainly always be the case in a pre-pack sale, then that decision has been reached before the appointment of the Administrator and a fundamental plank in the EAT’s reasoning thatit is upon his appointment that the Administrator considers this cannot stand up to scrutiny.

Similarly, the fact that the Administrator has 8 weeks to provide his Statement of Proposals does not mean that it cannot be known what the purpose of the Administration is until such time. The EAT itself recognised that where the entire business has been sold as a pre- pack, there can be no question but that the Administrator has decided to liquidate the assets. There is nothing else to do. The employee knows if he is working for the purchaser or whether he is not. A ruling in favour of the fact-based approach would not prevent this.

However, it is clear that, unless and until the issue is considered by the Court of Appeal, Employment Tribunals will follow OTG v. Barke (the EAT has already applied it in Pressure Coolers v. Molloy UKEAT/0272/10/RN) and therefore Administrators and purchasers will have to proceed on the basis that even on the sale of the entire business of a company by means of a pre-pack, all of the employees will transfer to the purchaser of the business. This may well prove to be a big disincentive to would-be purchasers.

In the next edition, I will conclude this article by considering the second of the two questions posed at the outset, namely how, if at all, can the business of a company in Administration be sold without transferring the employees to the purchaser?


TRACING: A SHORT PRACTICAL GUIdEJames Morgan

Introduction

This article seeks to provide litigators with short practical answers to the following questions:(a) When is tracing necessary?(b) What are the pre-requisites for its operation?(c) What are the key rules?(d) Which defences may apply?

It should be remembered that tracing is neither a claim nor a remedy, but is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property: Foskett v McKeown [2001] AC 102 at 128.

If such a claim exists, then the claimant may seek a proprietary injunction instead of, or in addition to, an “ordinary” freezing injunction. This is likely to be advantageous for a claimant because if a good arguable case on the merits of a proprietary claim can be established, it is not necessary to establish a risk of dissipation of the assets. Further, a defendant may find it more difficult to persuade a court that he should be permitted to take his legal costs and/or living expenses out of the injuncted assets.

Whilst tracing is possible at law and in equity, the latter provides a far more flexible means of tracing property in the modern fraud context and is the focus of this article. The rules on tracing at law suffer from the serious limitation that they do not permit tracing through a mixed fund.

WHEN IS TRACING NECESSARy?

In three situations:(a) Where the claimant wishes to assert a proprietary claim over an asset which he did not originally own, but which was the product of assets originally owned by him. A simple example is where a dishonest director misappropriates £20,000 from his company’s bank account and uses it to purchase a BMW motor vehicle. In that situation, the company can claim the BMW as representing its property. Even if the BMW is transferred by the director to one or more third parties, subject to the operation

of any defences, the claimant can continue to maintain a proprietary claim to the car;

(b) Where the claimant needs to establish the receipt of its property by a third party as part of the elements of a personal claim against him, as is the case in a “knowing receipt” claim: El Ajou v Dollar Land Holdings [1994] 2 All ER 685 at 700. For example, in a bid to cover his tracks, the director may have passed the BMW to a third party for the purpose of sale to an innocent dealer. The resultant proceeds were then split between the director and the third party.

Tracing would establish that the third party received the company’s property (both the BMW and the cash produced by the sale) and, assuming the other elements were made out, the company would then have a personal claim against him;

(c) Where the claimant wishes to assert legal title to property for the purpose of establishing a claim in conversion or in unjust enrichment. An example of the latter is where payment is made by mistake to a third party as a result of the misrepresentations of a fraudster. However, for the reasons given above, the limitations on common law tracing means it is unlikely that any claim will exist beyond the first mixing of funds.

PRE-REQUISITES FOR OPERATION

There is a limitation on tracing in equity in that the claimant must be able to demonstrate that his assets have passed through the hands of a person who was in a fiduciary relationship with him. Cases where monies have been misappropriated, for example, by a trustee from his trust, or a director from his company, or a partner from the partnership, do not pose any difficulty in this regard.

However, the law has also developed (some may say strained) so as to establish fiduciary relationships in the following situations

(a) Where a contract that has been fraudulently induced is rescinded: El Ajou v Dollar Land

Holdings [1993] 3 All ER 717. The rescission of the contract creates a constructive trust notwithstanding that the relationship was previously a simple commercial one. By way of example, if a purchaser is fraudulently induced to acquire shares in a company then, upon rescinding the contract, he may seek to trace the purchase monies he previously paid over. However, if there is disposition of the purchase monies prior to rescission of the contract with no identifiable substitute, this will defeat the proprietary claim;(b) Where a payment is made by mistake, at least where the recipient had knowledge of the mistake before he used the money mistakenly paid over: Chase Manhattan Bank v Israel-British Bank (London) Ltd [1981] Ch 105; Westdeutsche Landesbank v Islington LBC [1996] AC 669 (although this principle has been criticised and may be subject to future review by the higher courts). An example of this would be where a company mistakenly makes two payments of £20,000 to a supplier to whom it owes only £20,000 and the supplier – with knowledge of the mistake – uses the additional £20,000 to purchase new machinery. The company could trace into the new machinery and maintain a proprietary claim to it; (c) There is also some support for the (controversial) view that a claimant may rely on equitable tracing where property is simply stolen from it: Westdeutsche Landesbank at 716 and Goff & Jones at 2-033. This may come to the aid of a company where the wrongdoing is perpetrated against it by third parties who are neither its directors nor employees.

KEy RULES

The key rules in relation to tracing in equity may be summarised as follows:(a) Tracing is permitted into and through a mixed fund;(b) If the mixed fund is made up of contributions from innocent parties then: i. In the case of a current account, Clayton’s Case (first in, first out) is usually applied unless this is impractical or would cause injustice (and courts are increasingly willing not to apply that rule, but to distribute funds on a pari passu basis – see for

It should be remembered that tracing is neither a claim nor a remedy

James Morgan


example Russell-Cooke Trust Co v Prentis [2003] 2 All ER 478);ii. In the case of a deposit account, the parties share pro-rata according to their contributions;(c) If the mixed fund consists of the claimant’s money and that of the wrongdoer then the claimant may “cherry pick”: if the money is dissipated then the withdrawals are (so far as possible) regarded as diminishing the wrongdoer’s funds; if the money is successfully invested then the claimant may claim that the withdrawals came from his funds;(d) Tracing is only possible to the extent that the balance ultimately standing in credit does not exceed the lowest balance of the account during the period since the claimant’s money was paid into the account (and therefore, on the face of it, it is not possible to trace monies paid into and through an overdrawn bank account);(e) An exception to this is where it can be shown that subsequent deposits into the

mixed fund were made with the intention of replacing the monies transferred out of it (although in a fraud case this is unlikely to arise);(f ) A further possible exception is “backwards” or “reverse” tracing where the wrongdoer uses credit to purchase an asset and the claimant’s money is then used by him to pay off that debt. It is an open issue whether the claimant is able to trace into the asset;(g) Where a wrongdoer has purchased property using the mixed fund, the claimant can assert a share of the purchased property pro-rata to the level of his funds used in the purchase.

dEFENCES

The key defence is that of the bona fide purchaser for value without notice. Clearly, the wrongdoer will not be able to avail himself of this defence. However, it may come into

play in relation to third party recipients. If the director in the example given above sold the BMW to an innocent garage for full value, then the company would not be able to maintain a proprietary claim to the car: its rights would be limited to tracing the money received by the director from the garage. However, if the director merely gifted the BMW to his wife, then she would not be able to avail herself of the defence and would hold the car on trust for the company.

In relation to UK properties, it should also be noted that a registrable disposition of property made for “valuable consideration” in circumstances where the claimant’s proprietary interest is not protected by an appropriate entry on the register will have the effect of preventing that interest from being enforced against the purchaser even if he was not acting bona fide and without notice: s.29, LRA 2002.

A simple example is where a dishonest director misappropriates £20,000 from his company’s bank account and uses it to purchase a BMW motor vehicle. In that situation, the company can claim the BMW as representing its property.


The application was brought by a creditor of Kimberly, Mr Beattie, who was in fact another insolvency practitioner and who was owed £5,000 for advice provided by him prior to the liquidation of Kimberly. Kimberly went into creditors’ voluntary liquidation on 5 September 2005. The related company, Atrium Trading Services Ltd (“Atrium”) had gone into administration on 29 March 2006, followed by a creditors’ voluntary liquidation on 23 February 2007.

The court has power to remove liquidators under s.108(2) IA1986 “on cause shown”. Norris J held that the court’s power is to be exercised by reference to the long-standing principle stated by Bowen LJ in 1887 in Re Adam Eyton Ltd (1887) 36 Ch D 299, 306, namely “by reference to the real, substantial, honest interests of the liquidation, and to the purpose for which the liquidator is appointed”.

On the facts of this case, Kimberly’s business had been the provision of payroll services to recruitment agencies generally and also to a related company, Atrium, which operated as an employment agency mainly in the construction industry. It appeared that Kimberly failed to account properly during its trading history to HMRC for VAT, PAYE and NIC collected on behalf of its clients and that consequently Atrium had also failed to account properly to HMRC.

Kimberly was transferred for nil consideration to a company owned by Kimberly’s directors, who later appointed the applicant as liquidator. Upon discovering that it had no assets, Kimberly was dissolved. HMRC had the dissolution declared void and the respondent liquidators were then appointed to Kimberly.

The tax liabilities of Kimberly and Atrium were confused and, on the face of it, Kimberly had no assets except potential claims against Atrium and its own directors whereas Atrium had significant cash balances. The applicant argued that a conflict of interest arose in relation to the beneficial ownership of the monies held by Atrium and that the liquidators of Kimberly should therefore be removed and replaced by an independent insolvency practitioner.

Norris J held that on the evidence before him the purported claim of Kimberly against Atrium was threadbare and that no alternative liquidator had been suggested, who would be better than the respondents, to consider the inter-company position.

In setting out the relevant principles to be applied on such an application, Norris J took into account the fact that as office holders, liquidators are fiduciaries and must act impartially in discharging their duty to protect, get in, realise and ultimately distribute the company’s assets to its creditors and contributories. He acknowledged that it is desirable if conflicts of interest are avoided by liquidators, but that in the liquidations of associated companies, conflicts of interest often arise when dealing with inter-company transactions. In observing that such conflicts do not necessarily disqualify a liquidator acting as such in relation to associated companies, Norris J cited Lord Hoffmann in Re Parmalat Capital Finance Ltd [2009] 1 BCLC 274, 279:

“It is not unusual for the same liquidators to be appointed to related companies even though dealings between them may throw up a conflict of interest. It avoids the expense of having different liquidators investigate the same transactions. The attitude of the court has been that any conflicts of interest can be dealt with by the court on the application of the liquidators when they arise.”

On the facts of this case Norris J held that it made sense for common liquidators to be appointed to Kimberly and Atrium so that

WHAT’S IN A GOOd CAUSE ??Sandra Bristoll

In the case of Re Kimberly Scott Services Ltd [2011] EWHC 1563 Norris J considered an unusual application under s.108(2) of the Insolvency Act 1986 to remove the joint liquidators of Kimberly Scott Services Ltd (“Kimberly”) on the basis that they were also the liquidators of a related company and that a conflict of interest arose.

the inter-company transactions could be investigated cost-effectively. Norris J held that any conflict of interest could be addressed on an application for directions. He identified the main purpose of the liquidation of Kimberly as being to investigate why it had no assets and to identify and recover any claims or assets, which did in fact exist.

Another significant factor was the fact that fraudulent trading proceedings had been commenced by the respondent liquidators, at their own personal risk, against the directors of both Kimberly and Atrium. In order to pursue these proceedings, they had arranged CFAs, an ATE insurance policy and a personal indemnity from HMRC. All of these funding arrangements for that litigation would fall away and would have to be renegotiated if the current liquidators were removed. Norris J therefore refused the application.

Norris J described the application before him as an “extravagant claim” and awarded costs against the applicant on an indemnity basis. This case was on its facts unusual, but Norris J helpfully sets out the principles to be applied on such an application and provides a costs warning to any applicant in the event that their application is held to be unjustified. This reflects both the court’s powers under r.4.143 IR1986 to filter out frivolous applications and to order security for costs and the presumption in r.4.143(4) that the costs of such an application will not be paid as liquidation expenses unless the court so directs.


PART 36, OFFERS ANd PITFALLSIqbal Mohammed

Part 36 offers are an important aspect of litigation, over and above any negotiations to settle which take place outside Part 36. The Court of Appeal and the High Court have recently grappled with what constitutes valid Part 36 offers as well as the extent to which offerors may rely upon Common Law rules to argue that such offers were withdrawn.

BACKGROUNd

Briefly, under rule 36.2, offers must comply with the form and content requirements set down to take advantage of the Part 36 procedure. If the offer is valid, the consequences set out in rules 36.10, 36.11 and 36.14 shall apply. Of course, parties are free to make any offers they wish, and in any form, and these are governed by the Common Law rules of contract.

However, Part 36 sets out its own particular scheme which aims to provide certainty of costs for the parties.

Crucially, for the offeror, rule 36.2(9) provides that the offeree may at any time accept the offer made unless the offer has been withdrawn. Under rule 36.3(7) an offer may only be withdrawn by the service of a written notice after the period for which it is open. If the offeror seeks to withdraw the offer within the period given (which must be at least 21 days), permission from the court is needed: CPR 36.3(5) and (6).

WITHdRAWAL OF A PART 36 OFFER

In Gibbon v Manchester City Council [2010] EWCA Civ 726, a Part 36 offer had been followed by rejection and a subsequent revised offer. Moore-Bick LJ held that while the Part 36 offer had been superseded by both events at Common Law, this could not be imported into the ‘procedural code’ of Part 36. Accordingly, the offeror having his offer rejected or moving on to considering a further offer did not impliedly withdraw the Part 36 offer he made. The judge specifically rejected any room for arguing that a Part 36 offer could be withdrawn by implication. In doing so, the court approved Sampla v Rushmoor Borough Council [2008] EWHC 2616 (TCC), in which Coulson J held that the words ‘at any time’ in rule 36.2(9) allow an offeree to reject and subsequently accept a Part 36 offer yet to be properly withdrawn. In Sampla, the Judge specifically held that the offeree’s counter offer would not ‘kill’ the original Part 36 offer as it would at Common Law.

C v d ANd TIME-LIMITEd OFFERS

Gibbon was approved by the Court of Appeal in the latest authority of C v D [2011] EWCA Civ 646. In C v D, the issue was whether an offer headed as an ‘offer to settle under CPR Part 36’ but ‘open for 21 days’ lapsed after that period and became incapable of acceptance. While Part 36 is silent on what happens to rejected offers, in the above authorities and in the appellate authority of Rolf v De Guerin [2011] EWCA Civ 78, an offer was not regarded as lapsing at the end of 21 days.

At first instance in C v D, Warren J held that the offer ‘open for 21 days’ was not an offer subject to the rules of Part 36 as it came to an end by its own terms rather than pursuant to rule 36.9(2). The Judge considered that ‘open for 21’ days only had one interpretation which resulted in the offer being time-limited and not an ‘offer to settle under CPR Part 36’ as stated.

In the Court of Appeal, Rix LJ agreed with Warren J that a time-limited offer could not fit into the Part 36 scheme (at 44):‘the claimant’s offer must be construed in the context of a Part 36 scheme which does not permit an offer within the scheme to be time limited.’

And at 45:‘…there is a necessary inconsistency with between an offer being both time limited and a Part 36 offer. An offer may be one or the other, it cannot be both.’

Critically, it was agreed that the offer made was intended to be a Part 36 offer and it was headed as an ‘offer to settle under CPR Part 36.’ The dispute concerned whether the words ‘open for 21 days’ amounted to the offer in fact being a time-limited offer and therefore falling outside of Part 36. Rix LJ considered that the express words denoting that the letter was a Part 36 offer and the time limiting clause were inconsistent. His Lordship recognised that the court was obliged to consider an interpretation which would harmonise inconsistent terms and

held that ‘open for 21 days’ could be so constructed.

Therefore, the contentious words were interpreted to mean that the offer would not be withdrawn within 21 days rather than meaning the offer was withdrawn after 21 days. The basis for this was that Part 36 offers may be withdrawn within 21 days with leave and the adopted construction was more reasonable in this context rather than being a purported withdrawal, making it a time-limited offer and falling outside of Part 36. His Lordship also drew upon the legal maxim ut res magis valeat quam pereat, which expresses that a court should prefer a construction which validates an agreement rather than one which frustrates it.

Rimer LJ in his separate judgement agreed that the words ‘open for 21 days’ could be construed to make the offer a valid Part 36 offer rather than a time-limited offer. Stanley Burton LJ also agreed and went further stating (at 83-84):

‘… I am left with the uncomfortable suspicion that when the offer letter was sent and received neither of the parties to these proceedings appreciated that a time-limited offer is not a Part 36 offer… Any ambiguity in an offer purporting to be a Part 36 offer should be construed so far as reasonably possible as complying with Part 36. Once it is accepted that a time-limited offer does not comply with Part 36, one must approach the interpretation of the offer in this case on the basis that the party making the offer, and the party receiving it, appreciated that fact.’

COMPLIANCE WITH FORMAL REQUIREMENTS

However, the Court of Appeal adopting an interpretation which allows the offer to be valid under Part 36, should not be seen as a ‘get out of jail’ card for an unambiguous failure to comply with rule 36.2. In Carillion JM Ltd v Phi Group Ltd [2011] EWHC 1581 (TCC), Akenhead J held that an offer which failed to specify a period of not less than 21 days within which the defendant would be liable for the claimant’s costs, as required by CPR 36.2(c), should not

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deputy Senior ClerkStuart SmithT: 0121 246 2065E: [email protected]

1st Junior ClerkRamesh ChauhanT: 0121 246 7055E: [email protected]

2nd Junior ClerkJames WackettT: 0121 246 7068E: [email protected]

Senior ClerkJustin LuckmanT: 0121 246 7050E: [email protected]

be treated as a Part 36 offer. Even though the offer was described as a Part 36 offer, intended to have Part 36 consequences and the minimum period could be implied, the failure was fatal. The Judge suggested that courts should be cautious about applying purely contractual interpretation principles when determining whether an offer complies with Part 36 and should apply the statutory criteria carefully.

Similarly, it was held in Mitchell v James [2002] EWCA Civ 997 that an offer proposing cost consequences inconsistent with rule 36.10 could not stand as a valid Part 36 offer.

CONCLUSIONS

These cases clearly show the risks faced by legal advisors in failing to properly frame or withdraw offers under Part 36. When considering an offer, some thought should be given to whether the kind of offer contemplated can properly be made under Part 36 and w h e t h e r t h e a d v a n t a g e s o f t h e c o s t consequences of a Part 36 offer outweigh the lost opportunity of making an offer completely on one’s own terms.

A time-limited offer is not valid under Part 36 unless it lends itself to a compatible construction. The litigation risk involved with a judge constructing the offer one way or the other is plainly best avoided.

In the heat of correspondence and litigation, parties move forward on to counter-offer and indeed counter counter-offer without the offeror considering his exposure to the original

Part 36 offer if it is later accepted. Clearly, Part 36 offers must be reviewed regularly as their advantageousness may change given disclosure, evidence and progress towards trial.

If an offer is intended to be made under Part 36 but the offeror wishes it to be valid for 21 days only, it should be withdrawn formally after 21 days rather than making the actual offer time-limited (and therefore an offer outside of Part 36).

It should be borne in mind that while an offer may fall outside of Part 36, it still may be

considered for the purposes of assessing costs under CPR 44.3.

A time-limited offer is not valid under Part 36 unless it lends itself to a compatible construction. Iqbal Mohammed

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commercial neswletter december 2011

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