Corporate Insolvency – liquidation – proceedings brought against floating charge-holder -litigation expenses – dispense with service
Two companies were placed into administration. Pricewaterhouse Coopers were the administrators. Compulsory winding up orders were then made against the companies, and the applicant liquidators were appointed. Lloyd’s Bank held a debenture over the companies’ fixed and floating assets and was the companies’ major creditor.
The liquidators began proceedings against PWC and Lloyd’s, making allegations of fraud. The injury alleged was loss of the companies’ enterprise value. The liquidators entered into CFAs with solicitors and counsel as well as arranging ATE insurance and third-party funding.
The liquidators applied for an order approving and authorising the litigation expenses under rule 4.218 of the Insolvency Rules 1986. They also sought to dispense with service on Lloyd’s (which would normally be required) pursuant to rules 4.218E(5) and (6) as: (1) the application contained confidential and potentially privileged material; (2) the bank could not be impartial and may seek to frustrate the proceedings; and (3) the application for approval of those expenses only arises if the liquidators are successful, because the costs and expenses incurred are conditional.
The judge started from the general common law rule that both sides to any litigation had the right to be heard (now bolstered by article 6 of the ECHR). He had regard to National Commercial Bank of Jamaica v Olint [2009] 1 WLR 1405, which set down the principle that a judge should not entertain an application made without notice to the other side unless notice would defeat the purpose of the application or there would be no time to give notice.
The judge concluded that liquidators’ arguments failed that test as (1) none of the material necessary for the application was confidential or privileged; (2) parties in litigation were rarely impartial, but that did not mean that they should not be heard; and (3) that whether the expenses were conditional or not did not affect the question of service on Lloyd’s. The judge accordingly adjourned the application to enable it to be served on Lloyd’s.
This case stands as a warning to insolvency practitioners seeking approval of litigation expenses. The general rule is that such applications should be on notice to charge holders, even if those charge holders are defendants, unless there are very good reasons to proceed without notice.
