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England and Wales High Court (Chancery Division) Decisions
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Cite as:  EWHC 3480 (Ch)
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BUSINESS AND PROPERTY COURTS IN MANCHESTER
INSOLVENCY AND COMPANIES LIST (ChD)
IN THE MATTER OF TAUNTON LOGS LIMITED (IN ADMINISTRATION)
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
1 Bridge Street West,
Manchester M60 9DJ
B e f o r e :
Sitting as a Judge of the High Court
| (1) KEVIN LUCAS AND ELIZABETH MANLEY
(AS JOINT LIQUIDATORS OF TAUNTON LOGS LIMITED (IN LIQUIDATION))
(2) TAUNTON LOGS LIMITED (IN LIQUIDATION)
|- and -
|(1) MALCOLM CRUICKSHANKS
(2) LIV LOGE
(3) DAVID ARDLEY
(4) VEENAY CHHEDA
(5) CHRISTOPHER CLAYHILLS-HENDERON
(6) MARK FROGGATT
(7) ANDREW HOLLINS
(8) MARTYN INWOOD
(9) GARETH JONES
(10) CHRISTOPHER JORDINSON
(11) RISHI MEHROTRA
(12) EDWARD MILLS
(13) THIRZAH SILVEIRA PAIXAO
(14) DOMONIQUE PIPER
(15) ALBERT PLATTNER
Timothy Sherwin (instructed by Irwin Mitchell LLP) for the Second to Fifteenth Respondents
Eleanor Temple (instructed by Freeths LLP) for the Applicants
Hearing date: Tuesday 1 December 2020
Crown Copyright ©
2.1. Declarations that:
2.1.1. Pursuant to s. 33 of the Companies Act 2006 ("CA 2006") and the Company's Articles of Association, the Respondents, in acquiring their respective shareholdings in the Company were obliged to pay to the Company the full value of the corresponding shareholding;
2.1.2. Further or in the alternative, pursuant to paragraph 19 of Schedule 1 and paragraph 60(1) of Schedule B1 to the Insolvency Act 1986 ("IA 1986") the Applicants have called up and/or called upon the Respondents to pay all unpaid share capital due from each of them to the Company;
2.1.3. The Respondents have not paid to the Company the sum equivalent to 70% of the share capital due from them upon the acquisition of their respective shareholdings in the Company, and each of the Respondents are accordingly indebted to the Company in the same amount (or such other amount as the Court shall determine); and
2.1.4. Further or in the alternative, Company monies have been used to repay sums due from each of the Respondents to Lendtech Ltd in connection with the acquisition by the Respondents of their respective shareholdings in the Company; and
2.2. An Order that in consequence of the above directions or otherwise, the Respondents shall each pay to the Applicants the sum equivalent to 70% of the share capital due from them to the Company upon the acquisition of their respective shareholdings in the Company, or such other sum as the Court thinks fit, within 14 days of an order of the Court, together with interest and costs.
4.1. An application dated 30 July 2020 brought by the 1st Respondent to strike out the Substantive Application;
4.2. An application dated 30 July 2020 brought by the 2nd to 15th Respondents to strike out the Substantive Application;
("together "the Strike Out Applications")
4.3. An application dated 19 August 2020 brought by the then Joint Liquidators of the Company, and now pursued by the Liquidator for:
4.3.1. Permission to amend the Substantive Application to reflect the change in status of the Joint Administrators following the conversion of the administration into a CVL pursuant to CPR 17.1(2)(b), 17.3 and 17.4; and
4.3.2. For a declaration that the correct procedure has been used to bring the Substantive Application before the Court, alternatively for relief rectifying any error of procedure pursuant to Rule 12.64 of the Insolvency Rules 2016 ("IR 2016"), alternatively CPR 3.10;
4.3.3. A declaration that the 5th Respondent was validly served with the Substantive Application on 17 July 2020; alternatively, for relief from sanction pursuant to CPR 3.9 for any failure to comply with CPR 6.32, 6.34 and or the Practice Direction thereto, and/or, for relief rectifying any error of procedure as to such service pursuant to Rule 12.64 of the Rules, alternatively CPR 3.10; and
("the Liquidators' Application")
4.4. An application dated 27 November 2020 seeking the removal of Elizabeth Manley as an Applicant in consequence of the making of the Block Transfer Order referred to in paragraph 3 above.
("the Removal Application")
13.1. Article 21 of the Company's Articles of Association as adopted by special resolution passed on 26 March 2014, that provides that:
"No share is to be issued for less than the aggregate of its nominal value and any premium to be paid to the company in consideration for the same".
13.2. S. 33(2) CA 2006, that provides that:
"(2) Money payable by a member to the company under its constitution is a debt due from him to the company. In England and Wales and Northern Ireland it is of the nature of an ordinary contract debt."
13.3. Paragraph 19 of Schedule 1 to IA 1986, which provides that the powers of an administrator include a power to "call up any uncalled capital of the company".
14.1. Alter the status of the Applicants from that of Joint Administrators to Joint Liquidators in consequence of the entry by the Company into CVL;
14.2. In addition to simply seeking declarations in relation to the matters referred to in paragraph 2.1 above, seek "and/or" thereto "determinations by the Court pursuant to Section 112 of the Insolvency Act 1986"; and
14.3. Rely upon s.74 IA 1986 in addition to the reliance in the Substantive Application upon paragraph 19 of Schedule 1 thereto.
15.1. S. 74 IA 1986 provides, so far as is relevant, as follows:
"(1) [Liability to contribute] When a company is wound up, every present and past member is liable to contribute to its assets to any amount sufficient for payment of its debts and liabilities, and the expenses of the winding up, and for the adjustment of the rights of the contributors among themselves.
(2) [Qualifications to liability] This is subject as follows-
….(d) in the case of a company limited by shares, no contribution is required from any member exceeding the amount (if any) unpaid on the shares in respect of which he is liable as a present or past member"
15.2. S 112 IA 1986 provides, so far as is relevant, as follows:
"(1) [Application to court] the Liquidator or any contributory or creditor may apply to the court to determine any question arising in the winding up of the company, or to exercise, as respects the enforcing of calls or any other matter, all or any of the powers which the court might exercise if the company were being wound up by the court."
16.1. The evidence in fact establishes that the Company received and accepted money from the relevant third party lender equivalent to 70% of the subscription price for their shares;
16.2. The Company provided share certificates to the Respondents in which it was represented that the shares that were issued fully paid up, and so an estoppel by share certificate arises barring the Company or its officeholders from alleging that the shares were not fully paid-up; and
16.3. The Joint Administrators/Joint Liquidators have provided no evidence that the Company ever paid back the sums due to the third party lender, and so no question of subrogation can in fact arise.
The Basis of the Strike Out Applications
20.1. The true nature of the claim against the Respondents is a simple debt claim on the basis that Article 21 of the Company's Articles of Association provided for payment in full for the shares on allotment, and the effect of s 33(2) CA 2006 is to constitute the sum payable as a simple contractual debt – see Palmer's Company Law, Volume 2, para 6.203. This is to be contrasted with a liability in respect of shares that might be the subject matter of a call in the strict sense, where there is no immediate requirement or expectation that the shareholder will pay the unpaid element for the shares, but circumstances might subsequently arise, e.g. on liquidation, when a call might be made for payment.
20.2. Whilst paragraph 19 of Schedule 1 to IA 1986 confers power on an administrator to call up any uncalled capital of the company, we are not presently concerned with such a situation because we are not concerned with uncalled capital, and the making of a call for monies unpaid in respect of shares, but rather a simple debt claim. Consequently, paragraph 19 is not, in the present circumstances, engaged.
20.3. "Insolvency proceedings", which may be brought by way of Insolvency Act Application Notices as provided for by r. 1.35 IR 2016, are confined to applications made specifically under IA 1986 or IR 2016, and in particular Parts 1 to 11 thereof – see r. 1.1(2) and, e.g., Jyske Bank (Gibraltar) Ltd v Spjeldnaes  BCC 16 holding that proceedings under s.423 (Part XVI) IA 1986 were not insolvency proceedings. Further, reliance is placed on the fact that r. 1.35(2)(a) and (b) require the insolvency application to state that it is made under IA 1986 or IR 2016 (as applicable), and the section of IA 1986 or the paragraph of a Schedule thereto, or the number of the rule under which it is made.
20.4. There is long-standing authority to the effect that the summary procedure provided for by the insolvency legislation is inapplicable and inappropriate for the bringing of simple debt claims to recover monies due and owing – see In re Etic, Limited  Ch 861 at 873 per Maugham J, holding that misfeasance proceedings were an inappropriate way to pursue a debt claim against a director. See also In re Brampton and Longtown Railway Company (1875) LR 20 Eq 620.
20.5. On this basis, whilst the Substantive Application purports to be an Insolvency Act Application Notice, it is not, but is a nullity and a mere piece of paper having no legal effect because it is not made under IA 1986 or IR 2016, in particular Parts 1 to 11 thereof, but merely to pursue what is, in substance, a debt claim.
20.6. The proceedings being a nullity, they cannot be saved by way of the amendments proposed by the Liquidators' Application. Even if the amendments as proposed by the Liquidators' Application would now provide a proper procedure and basis for claiming the monies alleged to be unpaid in respect of the shares, given the limitation defence that I have referred to, the amendment sought ought not now to be permitted as this would involve reliance on new facts – see CPR 17.4.
20.7. However, in any event, the claims as pursued by the Liquidator, as liquidator, face the same difficulty as faced the Joint Administrators in that the claim remains a simple debt claim that is not pursued pursuant to any relevant provision within IA 1986 or IR 2016, and the jurisdiction in respect of calls in liquidation, and requiring contributories to contribute towards the deficiency under ss. 74, 148, 150, and, as applied in the case of a CVL by s.165(4) IA 1986, are simply not engaged, and even if they were, the proper procedure relating thereto involving, at least, the preparation of a list of contributors by the Liquidator, has not been followed.
20.8. Given that the proceedings cannot properly be described as insolvency proceedings, the jurisdiction to remedy defects provided for by r. 12.64 cannot be relied upon by the Liquidator as that provision can only apply to what are properly described as insolvency proceedings.
20.9. Further, the Respondents maintain that it is not open to the Liquidator to rely upon CPR 3.10 in order to cure any error in procedure because:
20.9.1. The Liquidator has not sought to invoke a procedure provided for by the CPR, but rather has brought proceedings that purport to be insolvency proceedings, but which, on proper analysis, are not. As the CPR will only apply to insolvency proceedings so far as consistent with IR 2016 (see IR 12.1(1)), CPR 3.10 cannot be deployed in order to save insolvency proceedings that do not comply with the IR 2016.
20.9.2. It is that the circumstances are analogies to the bringing of proceedings in the name of a dead person, which will give rise to a nullity, see Millburn-Snell v Evans  1 WLR 41 referred to in the White Book 2020 at 10.4.1 (third cumulative supplement), commenting on the application of CPR 10.4.
20.9.3. Further, it is said by the Respondents that CPR 3.10 cannot be invoked to rescue proceedings where statute or rules with the force of statute provide for a particular form of procedure to be followed, which is not followed. Particular reliance was placed upon Re Osea Road Camp Sites  1 WLR 760. This case concerned unfair prejudice proceedings under what is now s. 994 CA 2006 brought otherwise than by way of petition. Pumfrey J held that as the statute specifically provided for such proceedings to be brought by way of petition, CPR 3.10 could not be relied upon to cure the defect.
20.10. It is further contended that even if there is jurisdiction to cure any defect, the court should not, in the exercise of its discretion in respect of that jurisdiction, do so in favour of the Liquidator given what the Respondents maintain was the Joint Administrators'/Joint Liquidators' abusive conduct. As to this:
20.10.1. It is suggested that the use of insolvency proceedings was a ploy to avoid paying the £10,000 issue fee that would have been payable on the issue of a Part 7 claim form;
20.10.2. It is said that the Joint Administrators/Joint Liquidators have used a wholly inappropriate and flawed procedure, and ought not to be relieved from their own folly;
20.10.3. It is said that to grant relief curing the defect would cause them prejudice and would involve depriving the Respondents of an accrued limitation defence given that no properly constituted proceedings were commenced within the relevant limitation period.
The Liquidator's Response to the Strike Out Applications
21.1. The proceedings as commenced by the Joint Administrators by way of the Substantive Application were properly constituted as insolvency proceedings, and the Substantive Application did comply with r. 1.35(2)(a) and (b) by referring to paragraph 19 of Schedule 1 to IA 1986.
21.2. The Respondents have taken an unrealistically narrow view of the scope of paragraph 19, it being the Liquidator's case that the reference to calling up uncalled capital of the company in paragraph 19 is wide enough to extend to a claim to recover allegedly unpaid amounts in respect of shares such as those in the present case, and the power under paragraph 19 must extend not merely to demanding payment, but to seeking to recover payment, and as that power is provided for by IA 1986, the present proceedings are properly to be regarded as being made under the IA 1986 Act, and in particular Part II thereof, s. 8 within Part II incorporating Schedule B1 to IA 1986, and paragraph 60 of Schedule B1 specifically conferring on administrators the powers set out in Schedule 1, including that under paragraph 19.
21.3. Further, and in any event, following the entry into CVL, the Liquidators were, and the Liquidator is now able to invoke remedies and procedures that would not have been available to them as Joint Administrators. As I have referred to, the amendments sought to be made by the Liquidators' Application refer to s. 74 IA 1986, and therefore seek to introduce the machinery for requiring members to contribute towards the deficiency on winding up through the mechanism of the settlement of a list of contributories and the making of calls, enforceable in the case of a CVL through the operation of ss. 165(4) and 112 IA1986. However, in her Skeleton Argument, and in the course of submissions, Ms Temple also made reference to s. 149 IA 1986 as providing for a summary procedure for the recovery of debts due from contributories, apart from money payable by virtue of any call.
21.4. Ms Temple recognised, as I understood her, that if the proceedings as issued are properly to be regarded as a nullity, then, not least given the limitation issue, they could not be saved by the amendments proposed by the Liquidators' Application. However, it was her submission that even if the Respondents are correct that paragraph 19 of Schedule 1 is incapable of applying to the claim to recover the contractual debt due in respect of the amounts alleged to have been left unpaid on the allotment of shares, and even if as a result the proceedings were incapable of being brought by way of insolvency proceedings, it is open to the court to rectify the defect either under 12.64 IR 2016, or under CPR 3.10.
21.5. The Liquidator places particular reliance on Phillips v McGregor-Paterson  1 BCLC 72. In that case liquidators commenced misfeasance proceedings by way of CPR Part 7 claim form. Of course, the liquidators themselves had no personal cause of action against the relevant defendant director, but could, through the procedural gateway provided for by s. 212 IA 1986, bring insolvency proceedings for misfeasance in their own name. It was argued by the Defendant that as the liquidators had used a form of originating process that fell entirely outside the scope of the then Insolvency Rules, there were no "insolvency proceedings" before the court which could be validated by the application of r. 7.55 of the Insolvency Rules 1986 ("IR 1986"). Henderson J held that, given the nature of the relief being claimed, the proceedings were "plainly insolvency proceedings", and that, therefore, r. 7.55 could be invoked to cure the "formal defect" – see paragraphs  to  of Henderson J's judgment. The Liquidator argues that, on the basis of the above hypothesis, the present case involves a mirror situation to that in Phillips v McGregor-Paterson, and just as r. 7.55 IR 1986 was applied to cure the defect in the proceedings brought by way of CPR Part 7 claim form that ought to have been brought by way of insolvency proceedings, so it is open to the Court in the present proceedings to cure the defect in proceedings brought by way of insolvency proceedings that ought to have been brought by way of Part 7 claim form by the application of CPR 3.10 , if necessary to do so, contrary to Ms Temple's primary submission that the proceedings are properly constituted in any event.
21.6. As to the question of discretion in respect of the jurisdiction to cure any procedural defect, it is submitted on behalf of the Liquidator that:
21.6.1. The procedure adopted, namely an Insolvency Act Application Notice, was not adopted because it was intended to avoid paying a large issue fee, but because that was considered to be the appropriate procedure to adopt, and the relevant proceedings were drafted by solicitors and reviewed by Counsel (other than Ms Temple). Even if the wrong procedure was adopted, there is nothing abusive in what was done.
21.6.2. Proceedings of some kind were issued within the relevant limitation period, and there is no question of the Respondents having been prejudiced by the use of the wrong procedure.
21.6.3. The Respondents can point to no further significant prejudice.
22.1. What is the true nature of the claims that the Joint Administrators sought to bring by the Substantive Application, and that the Liquidator seeks to continue;
22.2. Were the Joint Administrators, given the true nature of those claims, entitled to bring insolvency proceedings, or were they required to bring ordinary proceedings by way of CPR Part 7 claim form;
22.3. If the wrong form of procedure was adopted, what is the effect thereof, and in particular:
22.3.1. Are the proceedings as bought by the Substantive Application a nullity, and a mere piece of paper, or a formal defect, irregularity or procedural error that does not nullify or invalidate the proceedings, and which can, as much of jurisdiction, be cured;
22.3.2. If capable of cure, ought the Court to exercise its discretion in favour of the Liquidator and, if so, how;
22.4. Having regard to the procedural history, and the Court's determination of the above issues, what claims, if any, can the Liquidator now pursue, as liquidator, in respect of the monies alleged to have been unpaid on the allotment of the shares?
True nature of the claims made by the Substantive Application
24.1. Calls permitted by articles of association where there is no immediate obligation on the shareholder to make a payment, with the obligation to make payment only arising upon the company or its directors making a call upon the shareholder to do so; and
24.2. Calls that might, in the context of a winding up or CVL, be made by the Court or a liquidator on a contributory appearing on a list of contributories to contribute to making up a deficiency for creditors.
The former might potentially be relevant in the context of an administration, but the latter plainly could not be.
Was the correct procedure used to bring the claims?
The effect of the use of an incorrect procedure
Nullity or worthless piece of paper?
"Where there has been an error of procedure such as a failure to comply with a rule or practice direction –
(a) the error does not invalidate any step taken in the proceedings unless the court so orders; and
(b) the court may make an order to remedy the error."
"I was for a time attracted by this submission, but on reflection I am unable to accept it. I agree with the submission …. for the liquidators that the present proceedings are plainly insolvency proceedings, a term which is nowhere defined in the Insolvency Rules, by virtue of the fact that they are brought under various provisions of the Insolvency Act 1986. Accordingly, they are proceedings to which Part 7 of the Insolvency Rules applies, and the use of the wrong form of application is in my judgment a "formal defect" which is capable of being cured under r. 7.55. If that is right, the effect of r.7.55 is that the present proceedings are not to be invalidated by the formal defect unless the court considers that substantial injustice has been caused, and that the injustice cannot be remedied by an order of the court."
40.1. Unlike Phillips v McGregor-Paterson (supra), but like Re Osea Road Camp Sites Ltd  1 WLR 760, the required method of proceeding in the present case is, as suggested by the Respondents, to be properly regarded as prescribed by statute or the equivalent thereof such that CPR 3.10 is inapplicable thereto; and
40.2. It matters that the Insolvency Act Application Notice was issued within existing insolvency proceedings, in distinction to the situation in Phillips v McGregor-Paterson (supra) where the Part 7 claim form used was an originating process.
42.1. The new form of Insolvency Act Application Notice provided for by r. 1.35 IR 2016 does not distinguish between ordinary applications and originating applications, although the application is required to state: "where the court has previously allocated a number to the insolvency proceedings within which the application is made, that number" – r. 1.35(2)(f) IA 2016; and
42.2. Even if purporting to be brought within existing insolvency proceedings, it is perfectly permissible for an Insolvency Act Application Notice to join respondents to pursue new claims against them, such as claims brought within misfeasance proceedings.
Should the procedural error be cured?
45.1. I do not consider that I can properly go behind the Liquidator's evidence in paragraphs 18 and 19 of his witness statement dated 19 August 2020 that the use of the incorrect form was down to an error rather than a deliberate attempt to avoid paying the significantly larger issue fee that would have been involved in issuing proceedings using a Part 7 Claim Form, and it is not seriously suggested that I should do so. I note that Solicitors drafted the Substantive Application, and therefore that the Joint Administrators relied upon legal advice. In the circumstances, I do not consider there to have been any abuse of process.
45.2. Whilst it is true that the Respondents might be prejudiced in one sense if I do not strike out the present proceedings given that it is not open to them to raise a limitation point within the present proceedings if they are not struck out, bearing in mind that the present proceedings were commenced before the expiry of the relevant limitation period, the Respondents have not, as I see it, been prejudiced in any significant way by the use of the wrong form of originating process, or the error in procedure that has occurred itself. It is by reference to these matters that the question of prejudice is, in my view, to be considered. If matters had been dealt with correctly, then the Respondents would have the same difficulty in raising any limitation defence. The Substantive Application sufficiently identifies the claim against the Respondents, it was duly served upon them in good time, subject to the point with regard to service in Scotland on the 5th Respondent, and apart from some procedural delays they are in much the same position as they would have been in had the proceedings been commenced in the correct manner.
45.3. It would, in my judgment, be grossly disproportionate to strike out the present significant claims against the Respondents totalling some £3.3 million having regard to the nature, extent and effect of the error in procedure made, and taking into account the other factors required to be taken into account pursuant to CPR 1.1(2) for the purposes of applying the overriding objective.
45.4. It has not been suggested that the Liquidator is required to seek relief from sanction pursuant to CPR 3.9, but even if this were a requirement upon him, I would exercise my discretion in his favour having regard to the seriousness and significance of the procedural error, why the error occurred, and all the circumstances of the case, including those specified in CPR 3.9(1)(a) and (b).
The effect on the proceedings of the entry of the Company into liquidation