Claims against IPs: the rising tide

First published in the September 2018 edition of RECOVERY magazine and reproduced with the permission of R3 and GTI Media

The role of an IP has always been challenging – taking control of a company in crisis, making swift decisions based on limited information and balancing the competing interests of stakeholders; all of this requires sound judgment, often under extreme pressure. It is no surprise that, when things go wrong (or perhaps more accurately when parties feel they have lost out), the IP can become the focus of blame, and their insurance policy an attractive target for ‘last resort’ litigation.

The traditional situation in which an IP finds themself the target of litigation is one where lenders have enforced personal guarantees against the company’s directors or shareholders. Faced with the prospect of paying out under the guarantee, the director or shareholder responds with a cross claim against the IP¹, usually along the lines that the IP breached his/her duties by failing to realise the best price when selling key assets. In other words, a claim that the IP ‘undersold’ those assets².

However, in the past few years, there has been a noticeable change in the type of claims brought against IPs and their firms, as well as a large uptick in their frequency. Two main themes have emerged.

The first is that claims for ‘underselling’ are increasingly being brought as standalone actions, rather than as a defensive tactic to demands under a guarantee. See, for example, AM Holdings v. Batten & LePage [2018] EWHC 934 and Davey v. Money & Another [2018] EWHC 766 (Ch). Both of these claims were brought by the company or its shareholders as standalone claims that (inter alia) the IPs had undersold the company’s assets. It is notable that both claims were brought after what would ordinarily be perceived as successful administrations – in AM Holdings the company returned to solvency, and in Davey unsecured creditors had received a significant dividend.

The second theme is the rise in claims based on economic torts – most notably claims for unlawful means conspiracy. The most high profile of these claims has arguably been Premier Motor Auctions v. Lloyds Bank and PwC, which was dismissed earlier this year, but there have been (and still are) many similar claims at various stages of proceedings. The typical allegation in such claims is that the IP or their firm unlawfully conspired with a secured creditor (usually a bank) to place the company into an insolvency process with a view to extracting the associated fees and (in the case of the bank) a discounted equity stake in the company.

In this article we look at a number of cases exemplifying these themes and consider: (i) what has driven the increase in them; (ii) what tactics IPs and their firms have used to defend them; and (iii) what the future holds for this type of litigation.

The primary, unavoidable factor behind the increase in claims is the growth of the litigation funding and after-the-event (ATE) insurance market. Most IPs will be familiar with these tools having used them to pursue claims against (for example) former directors in order to bolster the assets of the insolvent estate. However, as Recovery readers will no doubt be aware, the litigation funding market has experienced exponential growth in recent years. Some estimates now value the market at £2.7bn – a tenfold increase since 2009³. The sheer amount of capital that litigation funders have to invest means they have inevitably had to cast the net wider when funding claims. One consequence of this is that litigation funding has evolved from a tool that IPs utilise to bolster the insolvent estate, into a double-edged sword that may cut the wielder.

Add into the mix the 2014 report by Lawrence Tomlinson. Although the Tomlinson Report focused upon perceived failings in the way in which banks dealt with distressed businesses, it also made a number of allegations about the role of accountancy firms, pointing to what it perceived to be

• The high potential for conflicts of interest when undertaking independent business reviews for banks, given the same accountancy firm was likely to be appointed to act as the business’s administrator; and
• The "unfair and opaque" behaviour of administrators and receivers when in office.

The publicity surrounding the report, together with an increased appetite for litigation against large institutions following the 2008 financial crisis, has arguably created a significant impetus for those looking to pursue claims against banks, accountants and other financial institutions.

The final and perhaps most interesting factor behind the increase in claims, is developments in the law of economic torts, in particular unlawful means conspiracy. Unlawful means conspiracy occurs where two or more people act together unlawfully (the unlawful act can be civil or criminal), intending to damage a third party, and do so.

One aspect that renders IPs particularly vulnerable to claims for unlawful means conspiracy is, of course, that they hold office personally and take appointments jointly with other IPs. This, combined with the fact their firm often has a separate advisory engagement with the company and/or one of the company’s lenders , means there are multiple parties over whom a claimant can make an allegation of conspiracy.

Furthermore, in 2007–2008, two House of Lords decisions clarified two key elements of unlawful means conspiracy and, as a result, made it much easier for claimants to pursue this course of action.

The first of these decisions was OBG Ltd and others v. Allan and others [2007] UKHL 21, which confirmed the level of intention that a claimant must demonstrate to establish unlawful means conspiracy. OBG confirmed that a claimant does not need to show that the defendant’s sole or predominant purpose was to injure another person, only that it was one of the defendant’s purposes. The result being that the relevant level of intention for unlawful means conspiracy can be established where injury to the target is a means to an end, rather than an end in itself⁴, which is a much lower threshold.

This makes it easier for claimants seeking to plead unlawful means conspiracy. As an example, a claimant looking to bring a claim that an IP (or his or her firm) conspired with a bank to place a company into insolvency, does not need to demonstrate that the IP’s sole purpose was to injure the company; he or she only needs to show that injury to the company was a means to an end; that end can, for example, be the professional fees the insolvency appointment would generate.

The second House of Lords decision was Total Network SL v. HMRC [2008] UKHL 19. Here, it was confirmed that the ‘unlawful means’ in question do not need to be something that is directly actionable by the claimant against the defendant. In other words, as long as there has been an unlawful action that is actionable by someone, even if not the claimant, then (providing all the other requirements are met) a claim for unlawful means conspiracy can be brought.

The fact the ‘unlawful means’ do not need to be directly actionable by the claimant has very wide implications in an insolvency context. In theory, it means individual creditors can bring claims for unlawful means conspiracy in circumstances where they would not otherwise have a cause of action. Take claims against administrators as an example. In an administration, absent special circumstances, the administrator owes his or her duties to the company, not to individual creditors⁵. However, if a creditor can establish that the office-holder has breached his or her duty to the company (ie the unlawful means), the requisite intention and the necessary element of combination (i.e. the conspiracy), then following Total it seems possible, in theory, for that creditor to bring a claim against the administrator (and others) for unlawful means conspiracy. At the time of writing this article, we are not aware of any such claims having been pleaded and whether such a case could ever proceed on policy grounds is debatable. However, with determined claimants pleading ever more creative causes of action, it seems only a matter of time before this is attempted.

Faced with a perfect storm of available funding, cultural impetus and claimantfriendly legal developments, it is no surprise that IPs and their firms have tried to dispose of such claims at an early stage, thus saving the time and cost of defending a claim to trial.

As seasoned litigators will appreciate, the English Civil Procedure Rules (CPR) provide certain mechanisms for the early disposal/determination of a claim, namely

• An application for strike-out under CPR r3.4 on the basis that the statement of case discloses no reasonable grounds for bringing the claim or that it is an abuse of the court’s process; and/or
• An application for summary judgment under CPR r24.2 on the basis the claimant has no real prospect of succeeding on the claim or issue and there is no other compelling reason why the case or issue should be disposed of at a trial.

In practice, applications made under these provisions are most likely to be successful where they are based on discrete points of law, contractual construction or procedure (e.g. limitation). In those cases, if the court is satisfied that it has all the evidence necessary to determine the question before it, then it is likely to ‘grasp the nettle’ and decide matters. IPs may therefore benefit from considering whether any such ‘killer’ points can be raised at the outset.

Two recent examples where IPs have made successful applications to determine claims at an early stage are AM Holdings (see above) and Fraser Turner Limited v. PwC and others [2018] EWHC 1743 (Ch). In both cases, the court was prepared to deal with a short point of law or construction.

• In AM Holdings, the claim against the former administrators (for ‘underselling’ certain properties) was stuck out on a point of law – namely that the applicable provisions of Guernsey law governing the administrators’ discharge precluded further liability to the company for breach of duty.
• In Fraser Turner, the claim for unlawful means conspiracy was struck out as the court was able to determine a short point of contractual interpretation – namely, whether the contract (a royalty deed) contained certain express or implied terms. The court held that the contract did not contain the terms alleged by the claimant, thus meaning there was no breach of contract, no unlawful act and the claim was therefore ‘not maintainable’.

Of course, an early application for strike out and/or summary judgment will not be an option in every case. Where there is no procedural or legal ‘killer blow’, and where the underlying evidence is contested and requires detailed analysis, then the claim is unfortunately likely to proceed to trial.

Underselling claims, by their nature, are likely to involve contested factual and expert evidence around the sale process and asset value. This means they can be very difficult to strike out, leaving the IP in question with the prospect of defending years of litigation to clear their name – the case of Davey, which involved a two-year wait for judgment, being a good example of this.

Claims for unlawful means conspiracy are also difficult to dispose of early because the allegations are rarely based upon direct evidence of wrongdoing – rather they are based upon inferences made from certain key (and largely uncontested) facts, which may be open to a number of interpretations. It is more difficult to convince a court at an early stage that such claims are ‘fanciful’ or stand ‘no real prospect of success’ as the court is likely to want to see and hear all of the evidence before reaching a decision.

IPs therefore face a longer game to try to defeat these claims. Where an IP or firm is confident that the merits are in their favour, the best option is likely to involve mounting a vigorous and robust defence and waiting for the claimant to run out of steam (or funding), or ultimately, vindication from the court by way of judgment. Premier Motor Auctions v. Lloyds Bank and PwC is a recent example of where such a case failed to last the distance. The claim against both defendants for (inter alia) unlawful means conspiracy in relation to the way in which the company entered insolvency was dismissed (effectively dropped) just weeks before trial.

Clearly, each case will require its own unique tactics and IPs will need to consider their options carefully and with close input from their legal advisers. However, other tactics IPs playing the longer game may wish to consider might include

• Making early voluntary disclosure, especially where a claimant has pleaded a case ‘pending disclosure’, to demonstrate that there is nothing in the allegations and the claimant should abandon the case; and/or
• Making use of interim applications, such as security for costs, to protect their position and to increase the pressure on the claimants to obtain further funding and/or stronger ATE insurance. The Premier case is a recent example of where the defendants successfully applied for security for costs (see the Court of Appeal’s decision at [2017] EWCA Civ 1872).

It is perhaps of little comfort but, ultimately, where a claim that impugns the IP’s integrity or professionalism fails, the IP can at least expect to recover indemnity costs, the case of Two Right Feet Limited (In Liquidation) v. (1) National Westminster Bank PLC (2) Royal Bank of Scotland PLC (3) KPMG LLP [2017] EWHC 1745 (Ch) (where the claim was abandoned after disclosure and the defendants were awarded indemnity costs) being a good example of this.

It remains to be seen whether the highwatermark for claims against IPs has been reached. What is notable is that none of the recent claims have resulted in a successful judgment for the claimants and that, where possible, claims have successfully been struck out at an early stage in proceedings.

Perhaps, as a simple matter of economics, the more of these claims that fail – whether in the initial stages, or just before trial – the less appetite funders and insurers will have to invest in similar litigation in the future.

However, in the light of the contentious nature of insolvency work and the evolution of the law (particularly around conspiracy), it seems inevitable that determined claimants will find new and ingenious ways to bring claims against IPs and their firms, as well as the means to fund them. For now, these claims pose a real threat, and one which practitioners will be keen to avoid.