Court refuses to allow contributory to inspect proofs of debts in insolvent subsidiary

A liquidator has been successful in an appeal against a decision that saw him personally liable for the costs incurred by paid-up shareholders in obtaining an order that they were entitled to inspect all proofs of debt in the liquidation of a company. The order permitting the shareholder to inspect the proofs of debt was also reversed on appeal.

The appeal arose out of the liquidation of Burnden Holdings (UK) Limited (the “Company”) in respect of which the Supreme Court has recently handed down judgment on a question of limitation in claims against directors arising out of their accountability for holding Company property (see our related article).

Whilst waiting for the outcome of the appeal in relation to limitation on a claim for alleged misfeasance by Mr and Mrs Fielding arising out of them becoming accountable for company property, Mr and Mrs Fielding applied to restore Burnden Group Holdings Limited (the “Group”) in which they were controlling shareholders  to the Register of Companies. The Group had been the only shareholder of the Company.  They claimed the reason for the restoration was that if there were any surplus funds following a successful claim for breach of duty against Mr and Mrs Fielding (although they inevitable said the claim was without merit and unlikely to succeed) then the Group would receive any surplus funds. 10 days after restoration of the Group, it applied to review all proof of debts in the liquidation of the Company.

The liquidator refused the request to review the documents on the following grounds;

1. The main shareholder was a fully paid up shareholder and therefore he did not consider them to be a contributory in accordance with 4.79 of the Insolvency Rules 2016 (“IR 2016”);
2. Grounds of confidentially; and
3. He was yet to adjudicate creditor claims, the only asset in the liquidation was the claim and he did not know if Mr and Mrs Fielding would have sufficient financial resources to satisfy a judgment.

The Group’s application to the Court sought to determine whether the Group had standing to inspect the proofs, and to ask the Judge to order inspection. The application was successful at first instance.

On appeal, Norris. J reconsidered the meaning of “contributory” in the context of Rule 4.79 IR 2016, finding that the Judge was correct in his finding that the main shareholder, although paid up, would in fact fall within the definition of a contributory.

He then considered whether the Judge had erred in law in overturning the original refusal by the liquidator. In doing so Norris. J analysed the test set out by the Privy Council in Delloite and Touche-v-Johnson [1999] 1 WLR. 1605 for determining whether and on what terms to grant such relief against liquidators. He held that in order to satisfy the test a contributory must demonstrate that examination of the documents would probably result in some benefit accruing to him. Norris. J held that Mr and Mrs Fielding themselves had claimed that the proceedings forming the main asset were “without merit” and that it was “unlikely” to produce an surplus and therefore they had not demonstrated an legitimate interest and therefore, in his view, had not satisfied the test to allow the Judge to overturn the liquidators decision.

The appeal was therefore allowed and the personal costs order set aside.

This is an important decision as not only does it clarify the definition of contributory for the purposes of the IR 2016 but it also highlights that tactical applications in insolvency are unlikely to be successful. The application appeared to have all the hallmarks of a fishing expedition and not one arising out of legitimate interest. The costs order made against the liquidator at first instance was unusual because officer holders enjoy the protection of  Rule 12.47 IR 2016 (formerly  Rule 7.39 of the Insolvency Rules 1986) which provides that office holders who are defendants or respondents are not liable for costs unless the Court orders otherwise. The making of an order for costs against office holders were rule 12.47 applies generally requires unreasonable conduct on the part of the officer holder which did not appear apparent in this case.