LexisNexis Corporate Rescue and Insolvency: Case Alerter – November 2024

At-a-glance cases provided by Gatehouse Chambers’ Insolvency Team, featuring:

• Re SP Commodities Limited (in Liquidation) [2024] EWHC 2747 (Ch)
• IPS Law LLP v Safe Harbor Equity Distressed Debt Fund 3 LP [2024] EWHC 2663 (Ch)
• Piacquadio and O’Hara v (1) Sparkes (2) Zeno Fine Art Ltd (3) Ahearne [2024] EWHC 2518 (Ch)

Read the latest CRI Cases Alerter authored by Lauren Godfrey, Michael Maris and Thomas Mitty below.

Re SP Commodities Limited (in Liquidation) [2024] EWHC 2747 (Ch)

Facts

The liquidator of the Company pursued a former director, R, for misfeasance. Wasted costs were previously ordered against R for causing the trial to be adjourned by changing solicitors. While assessing how R would pay its wasted costs, the liquidator uncovered R’s potentially dispositive activity at the Land Registry.

The liquidator made an on-notice application for, and was granted, a freezing order. R gave an address for service in Dubai where he did not reside so substituted service was sought and granted. Despite being served with the order setting out the return date, R did not engage. The liquidator was forced to incur costs preparing for a potentially contested hearing. R opposed continuation of the order at the return hearing, but Miles J determined that it would continue until trial.

The liquidator of the Company applied for its costs from R. The case was adjourned awaiting the outcome in the Court of Appeal of Dos Santos v Unitel SA [2024] EWCA Civ 110. Dos Santos, it will be remembered, recast the test to be applied to freezing injunctions, bringing it into line with the American Cynamid approach applying generally to interim remedies (after 25 years of the courts applying a “merits-based” approached. Dos Santos also clarified that there was no hard rule that a contested interlocutory applications resulting in a decision based on the merits should have costs awarded to the successful party in the application; rather costs remained a broad discretionary exercise for the judge.

Held

Mr David Halpern KC, sitting as a High Court Judge, determined that the above applications for freezing orders and substituted service were interlocutory applications based on the merits. He was not convinced that there should be a distinction between the assessment of costs at the first and return hearings in an application for a freezing injunction. In any event, as the application was made with notice, he treated the freezing order costs as one whole. The judge noted that any decision as to whether costs should follow the event was fact-sensitive and would vary from case to case. Counsel for R accepted that his client’s conduct had necessitated the need for substituted service and so R was liable for those costs. In relation to the freezing order, R’s Counsel argued that:

• an undertaking should have been sought instead;
• the cross-undertaking in damages was insufficient; and
• R had not fully opposed the order at the return

The court rejected those arguments because:

• there was no suggestion that R would provide an undertaking given his non-engagement;
• the requirements for a freezing order had been satisfied, regardless of the limited value of the cross undertaking; and
• R had contested the order at the return hearing – no higher level of opposition was required.

It was held that R was liable for the costs of the substituted service and freezing orders, and that those costs should be subject to immediate assessment so that the liquidator could recover its costs before trial.

IPS Law LLP v Safe Harbor Equity Distressed Debt Fund 3 LP [2024] EWHC 2663 (Ch)

IPS Law LLP (IPS) applied to restrain Safe Harbor Equity Distressed Fund 3LP (SHED) from advertising a winding-up petition. The principal debt was £500,000, said to have arisen from a loan made by SHED to IPS under a loan facility agreement (Facility Agreement). IPS was a firm of solicitors and SHED a wholly owned subsidiary of Safe Harbor Equity LLC (SHEL). SHED and SHEL were members of the Safe Harbor group of companies (Safe Harbor Group).

The underlying proceedings arose from the parties’ dealings regarding proposed claims premised on the misuse of data belonging to professional athletes (Personal Data Claims). Global Sports Data and Technology Ltd (GDST) was incorporated with a view to promoting a project to enable the pursuit of the Personal Data Claims, known by all parties as “Project Red Card”). IPS’s case was that:

• IPS acted as GDST’s solicitor in negotiating the provision of litigation funding for Project Red Card; and
• IPS was intended to be the borrower if Safe Harbor Group provided any funding for Project Red Card.

IPS contested SHED’s right to seek a winding-up order on various grounds which could be divided into two broader groups:

• arguments based on IPS’s contention that it was assured that the Facility Agreement would never be enforced, giving rise to an estoppel or collateral contract, such that there was a triable issue over SHED’s right to present a petition; and
• arguments that IPS had crossclaims arising from its contention that it had a contractual entitlement to a share of damages from the Personal Data Claims. It was said that entitlement gave rise to crossclaims far exceeding the level of the petition debt.

The court considered the well-known summary of the applicable legal principles relevant to the application, as summarised in Angel Group Ltd v British Gas Trading Ltd [2012] EWHC 2702 (Ch). In short, it is well-settled that the court will restrain a petitioner from presenting or advertising a petition where the debt on which the petition is based is disputed on genuine and substantial grounds.

Having carefully considered the evidence the judge decided that there was no substantially triable issue arising from any of the grounds raised in the first group of arguments. The judge further concluded that there was no substantially triable issue regarding the second group of arguments because there was no rational prospect of IPS showing at trial that it had any binding contractual right to share in the proceeds of Project Red Card, and as such it had no rational prospect of showing any actionable loss or damage at trial capable of being off-set against the petition debt. Further and in any event, the application was refused because the court did not consider that there was any substantially triable issue over the contention that there was any wrongful disclosure or misuse of confidential information. The court also dismissed IPS’s contention that the petition was an abuse of process.

Accordingly, there was no substantial dispute over the debt identified in the petition and the application to restrain advertisement was dismissed.

Piacquadio and O’Hara v (1) Sparkes (2) Zeno Fine Art Ltd (3) Ahearne [2024] EWHC 2518 (Ch)

This case is a decision of Sir Julian Flaux C, handed down on 4 October 2024. The liquidators of an art dealer applied to continue freezing injunctions which had been made against the respondents. The second respondent was another art company, which was wound up in 2023. The first respondent had been its director. The third respondent was allegedly a de facto director. The liquidators’ case was that the second respondent had been engaged in a fraudulent art scheme. It induced investors to buy art prints on the basis that it would act as a broker and advise the investors on any resale. However, unbeknownst to investors, the second respondent was selling them prints at a mark- up. Additionally, if they wished to resell the paintings, the second respondent simply brought them back itself. The claims were:

• a claim under s 213 of the Insolvency Act 1986 (IA 1986) against all three respondents;
• claims against the first and third respondents under s 212 IA 1986 for misappropriation and fraudulent breach of duty.

The case turned on three issues.

• First, whether the applicants had a good arguable case. The court applied the test set out in The Niedersachsen [1983] 1 WLR The applicants needed to show that their case was “one which is more than barely capable of serious argument, but not necessarily one which the judge considers would have a better than 50 per cent chance of success”. Sir Julian Flaux C held that the respondents’ attempts to show that the applicants did not have a good arguable case amounted to a full-scale forensic attack on the applicants’ case, amounting to precisely the sort of “mini trial” deprecated by the authorities. He held that the points could not be resolved on an interlocutory application. Instead, there was a good arguable case because:

• • the second respondent’s marketing materials gave the impression that it was acting as a broker or intermediary, rather than retailer;
  • the materials conveyed that the company only made a profit by way of commission, and did not mention the mark-up; and
  • there was no real secondary market for the

• Second, whether the applicants had established a real risk of dissipation. Sir Julian Flaux C reiterated that it did not follow from the fact that there was a good arguable case of dishonesty did not automatically establish a risk of dissipation. The dishonesty must point to the conclusion that the assets are likely to be dissipated. However, he held that the dishonesty alleged (of defrauding investors and misappropriating the proceeds) was a “paradigm” example of dishonesty pointing to the likely risk of dissipation. There were further factors pointing to the risk of dissipation, including the first respondent’s actions subsequent to his resignation as a director, and the company’s use of offshore structures.
• Third, whether the applicants had breached their duty of full and frank disclosure at the ex parte The respondents made a number of criticisms of the manner in which the order had been secured at the ex parte hearing, alleging 12 distinct categories of breach of the duty of full and frank disclosure. The applicants’ counsel described this as showing “no signs of proportion or restraint” and being a “scatter-gun approach”. Sir Julian Flaux C cited the judgment of Coulson LJ in Mex Group Worldwide Ltd v Ford and others [2024] EWCA 959, where he stated:

“127 … It is almost always the position that, no matter how big the case or how complex the underlying issues, a defendant’s case that the claimant failed to make full and frank disclosure at the ex parte hearing will stand or fall on no more than a handful of alleged failures. That is because, if the ‘big ticket’ allegations of failure are not established, or are established but found to be immaterial, then the less significant failures will not bridge the gap. It is the law of diminishing returns. In our view, this case is no different to the norm.

128. Accordingly, those preparing this sort of attack in the future should ensure that they concentrate their efforts on alleged failures of disclosure which are clear-cut and obviously important. Quality not quantity should be the watchword.”

At the hearing, the respondents’ main focus was on the applicants’ need to have made all enquiries of the respondents. They criticised what they contended was a deliberate decision not to interview the first respondent. Sir Julian Flaux C held that it was sufficient that they had made enquiries of him; that he had answered; and that the answers had been put before the court. The application to continue the injunctions succeeded.