Re Kimberly: no grounds for removing liquidators

Re Kimberly: no grounds for removing liquidators Bulletin No 351

Case: Beattie v Smailes & Anr, Re Kimberly Scott Services Ltd [2011] EWHC 1563 (Ch) (24 May 2011, Norris J) Synopsis The court refused to exercise its power under s108(2) IA 1986 to remove the Joint Liquidators of two related companies because the conflict of interests between the two companies was manageable by way of application to court for directions, and therefore removal was not warranted.  In addition, removing the Joint Liquidators would have significantly hindered the conduct of the substantial fraudulent trading claim that the Joint Liquidators had begun on the basis of CFAs, ATE insurance and an indemnity that was personal to them. Topics Covered: Liquidation Procedure; Liquidators’ Powers and Duties; removal (s108)(2) IA 1986)

The Facts Atrium and Kimberly were two companies from the same group, both in liquidation, and with common Joint Liquidators.  Atrium had operated in the field of recruitment and had provided services as a temporary employment agency in the construction and other fields.  Kimberly had provided payroll services both to recruitment agencies generally and to Atrium.  However, Kimberly had failed to operate its tax structure properly, it had also failed to account to HMRC for any VAT, NIC and PAYE deducted during the course of its payroll business, and it had failed to submit any corporation tax returns, giving rise to a substantial multi-million pound claim by HMRC against one or other, or both, of Kimberly and Atrium.  The nature of, and responsibility for, tax liabilities between Kimberly and Atrium were confused, and it had not yet been resolved what each of Kimberly and Atrium owed HMRC, or each other.  Kimberly had no assets except for a potential claim against Atrium and a fraudulent trading claim against its directors.  Atrium had cash at bank of £2.5m.  Other than Atrium and HMRC, Kimberly had one additional creditor: Mr Beattie, an IP, in respect of advice provided before Kimberly’s liquidation, for £5000. Mr Beattie had not previously proved his claim in Kimberly’s liquidation. Mr Beattie now brought this application to remove the Joint Liquidators of Kimberly and replace them with an independent IP on the grounds of the conflicting duties of the Joint Liquidators caused by the competing interests of Atrium and Kimberly. The Decision S108(2) IA 1986 provides that “The court may, on cause shown, remove a liquidator and appoint another.” The judge outlined the relevant principles for considering a removal application: 1.   As office holders, the Joint Liquidators are fiduciaries, charged with the duty of protecting, getting in, realising and ultimately passing on to others assets and property which belong to creditors or contributories. 2.   They must act impartially. 3.   The court has power to remove them under s108(2) IA 1986 “on cause shown”. 4.   The court’s power is to be exercised by reference to the general principle stated by Bowen LJ in Re Adam Eyton Ltd (1887) 36 Ch D 299 at 306 “…the due course is to be measured by reference to the real, substantial, honest interests of the liquidation, and to the purpose for which the liquidator is appointed.”   The primary purpose of the Joint Liquidators’ appointment was (in this case) to investigate why Kimberly had gone into liquidation without any assets, to identify the claims existing at the date of the liquidation, to recover such assets as exist and to distribute them. 5.   It is desirable that a conflict of interest on the part of a liquidator between his duties as liquidator and his interests in some other capacity should be avoided (Re Corbenstoke Ltd [1990] BCLC 60). 6.   Conflicts between competing duties are regularly encountered in liquidations of associated companies where there are intercompany dealings that have to be unscrambled.  Of itself, this does not disqualify a liquidator from acting, or properly found any application for his removal.  As Lord Hoffman observed in Parmalat Capital Finance Ltd [2009] 1 BCLC 274 at 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.” The Judge considered that appointing the same liquidators to both Atrium and Kimberly made good sense because in investigating both sides of the transactions their resources could be pooled.  Any conflict could be addressed by application to court for directions (Parmalat and Re York Gas [2010] EWHC 2275). In addition the Judge was influenced by the fact that the Joint Liquidators had just commenced fraudulent trading proceedings against the directors of Atrium and Kimberly for an amount in the order of £50 million. The claim was Kimberly’s only asset and was only possible because the Joint Liquidators were prepared to assume the personal risk of conducting the litigation without any assets from which to seek reimbursement for costs incurred or awarded against them, having negotiated CFAs with a legal team, an ATE insurance policy and a personal indemnity from HRMC in relation to the proceedings.  If the Joint Liquidators were removed, none of these agreements would stand and all would have to have been renegotiated by a replacement liquidator.  Much of the conflict of interest would be dealt with by the court in the course of the fraudulent trading proceedings in any event. Removal of the Joint Liquidators was therefore not warranted, and would be detrimental to the conduct of Kimberly’s liquidation. Comment This application by a creditor with such a relatively small claim was unusual.  It is not clear on the face of the judgment why the applicant considered that his £5000 claim against Kimberly merited separate consideration by an independent liquidator, nor why any dividend that he might receive on his small claim from an almost asset-less company was worth the costs incurred in bringing the application.  The Judge described it as an “extravagant claim” and awarded costs against the applicant on an indemnity basis. It does, however, provide a helpful reminder of the principles involved in considering an application to remove a liquidator, and a costs warning that the court will give short shrift to an application if it considers that it is not justified. In this last respect, this warning is no more than a reflection of the special costs regime which r4.143 IR 1986 imposes on these cases: There is a statutory filter for weeding out frivolous etc applications at the outset (r4.143(2)). The court has a special power to direct the applicant to provide a deposit or security as a condition of allowing him to proceed (r4.143(3)). Unless the court otherwise directs, the costs of the application are not payable out of the assets (r4.143(4)). Law Debenture sponsor of the Insolvency Lawyers Association