Alan Jacob Katz and Others v Gordon Louis McNally and Others
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE PHILLIPS,LORD JUSTICE MORRITT,LORD JUSTICE LEGGATT |
| Judgment Date | 22 May 1997 |
| Judgment citation (vLex) | [1997] EWCA Civ J0522-14 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | FC3 96/6835/B |
| Date | 22 May 1997 |
[1997] EWCA Civ J0522-14
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR JUSTICE RATTEE)
Royal Courts of Justice
Strand
London WC2
Lord Justice Leggatt
Lord Justice Morritt
Lord Justice Phillips
FC3 96/6835/B
FC3 96/6836/B
MR L KOSMIN QC with MR P GILLYON (Instructed by Messrs Cobbetts, Manchester, M2 4WB) appeared on behalf of the Applicants
MR S COGLEY with MR D FEETHAM (Instructed by Messrs Booth & Co, Leeds LS1 1HQ) appeared on behalf of the Respondents
Thursday, 22 May 1997
The protagonists in this litigation are, on the one hand, the liquidators of Exchange Travel (Holdings) Ltd ("Holdings") and, on the other hand, Mr Gordon McNally and his wife Sylvia, who were Directors of Holdings. As at the beginning of July 1990 Mr and Mrs McNally were creditors of Holdings in respects of loans that they had made to the Company. Holdings owed Mr McNally £135,001 and Mrs McNally £127,031.44. At this time their son, Ross, who was the Managing Director of Holdings, was indebted to Holdings in the sum of £61,607.08. On the 3rd July 1990 Holdings paid to Mrs McNally the sum owed to her. On the 4th July 1990 Holdings discharged its indebtedness to Mr McNally by paying him £73,392.92 and setting off the balance of the sum standing to his credit against the sum owed to Holdings by Ross.
On the 18th September 1990 the Directors of Holdings successfully petitioned the Court for an Administration Order under Section 8 of the Insolvency Act 1986 on the ground that the company was insolvent in that it was unable to pay its debts when they fell due. On the 28th July 1992 the Administration Order was replaced by a Winding-up Order.
On the 9th August 1991 the joint administrators of Holdings, who were subsequently to become the liquidators, commenced proceedings against Mr and Mrs McNally and against Ross McNally, seeking declarations that the payments by Holdings to Mr and Mrs McNally and the use of Mr McNally's credit to discharge Ross McNally's debt constituted preferences under S.239 of the 1986 Act and orders for repayment of the sums in question.
After substantial delay the proceedings came on before Rattee J. in May 1996. He gave judgment on the 9th July 1996. He held that the set-off which discharged Ross McNally's indebtedness to Holdings did not constitute a S.239 preference, but that the payments of £127,031.44 and £73,392.92 to Mrs and Mr McNally respectively had constituted such preferences and that these sums, together with interest, must be repaid to the liquidators. Mr and Mrs McNally were ordered to pay 75% of the liquidators' costs.
Mr and Mrs McNally have served a Notice of Appeal against that part of Rattee J.s decision adverse to them, and the liquidators have served a notice of cross-appeal in relation to the finding that the set-off was not a S.239 preference.
The cross-applications
Unhappily the costs incurred by the liquidators in the proceedings have very substantially exceeded the amount at stake. They have spent in excess of £100,000 on fees, and VAT, for accountancy experts alone. No consideration appears to have been given to setting a budget for the S.239 proceedings that was proportionate to the amount that the liquidators were seeking to recover. Mr and Mrs McNally's own legal expenses made inroads into their not insubstantial wealth. In the result the position has been reached where, if Mr and Mrs McNally fight and lose their appeal, their remaining assets are unlikely to suffice to discharge their liabilities in respect of the judgment debt and costs at first instance, together with the costs of the appeal. Ultimate success on the part of the liquidators will have transferred Mr and Mrs McNally's wealth into the pockets of the accountants and the lawyers acting in the liquidation, without conferring any benefit on Holdings' creditors.
This lamentable state of affairs has led the parties to make the cross-applications that are before this Court. The aim of the liquidators is to ensure that Mr. and Mrs. McNally do not further diminish their assets in pursuing an appeal which the liquidators contend is hopeless. The aim of the McNallys is to use so much of their remaining assets as they need to fund their appeal while preventing the liquidators from ruining them by executing the judgment of Rattee J. pending the hearing of their appeal.
The liquidators have obtained a charging order nisi over all the McNallys' assets and seek, in addition, an order that the McNallys provide security for the costs of their appeal.
They have agreed, pending the result of this hearing, to a stay of execution of Rattee J's order. Mr and Mrs McNally seek an order that the stay of execution remain in force until the result of their appeal is known. They intend, however, to seek the release from the charging order of sufficient funds to finance their appeal.
The allegation of champerty
Before considering the cross-applications, it is necessary to deal with an attack that Mr and Mrs McNally have made on the propriety of these proceedings. The major creditor of Holdings is its own wholly owned subsidiary, Exchange Travel Agency Ltd ("Agency"). That Company also is insolvent, and it was placed into administration and then liquidation at the same time as Holdings and under the same office holders. Mr and Mrs McNally contend that facts have come to light since the trial below which demonstrate that Agency is funding these proceedings on a basis which is champertous and which renders these proceedings an abuse of process. They submit that, if the Court accepts their contention, the appropriate course is to order that these proceedings be stayed.
The circumstances in which this point is raised at this stage of the proceedings are as follows.
On the 11th February 1997, Mr and Mrs McNally instructed Cobbetts of Manchester as their Solicitors, in place of those previously acting for them who had come off the record. Mr Whittell of that firm, when reading the papers, was struck by the terms of one of the liquidators' reports to creditors dated the 26th November 1996. This included the following section:
4. Liquidation Committee
A meeting of the Agency Liquidation Committee ("the Committee") was held on 10 September 1996 at which the liquidators' progress with and approach to the liquidation, and the current and potential litigation (including in particular the preference proceedings in which Agency has an interest as the major creditor of Holdings) was considered.
As creditors are aware, the preference action is in Holdings. The Agency Liquidation Committee has sanctioned the continuation of these proceedings as a successful outcome enhances the dividend in Agency. The Committee also sanctioned Agency to indemnify Holdings to the extent that it had insufficient funds to meet the costs of the litigation in return for the granting of a first charge by Holdings to Agency over any recoveries arising from the action. The Receipts and Payments accounts attached to this report include £485,953 paid by Agency on Holdings' behalf under the indemnity. The indemnity and the strategy have also been approved by the Holdings Liquidation Committee.
Mr Whittell concluded that the nature of the involvement of Agency in these proceedings, as disclosed by this paragraph, was objectionable. Mr Cogley, who has been instructed before us on behalf of Mr and Mrs McNally, has submitted that Mr Whittell's reaction was correct. His submissions can be summarised as follows:
1) The same liquidators should not have acted for both Agency and Holdings, for the interests of the two companies, and of their creditors, would not necessarily coincide.
2) The Agency Liquidation Committee was both funding and exercising control over the S.239 proceedings which were being conducted in the Holdings liquidation.
3) In consideration of Agency funding the costs of the S.239 proceedings, the liquidators of Holdings had purported to give Agency a first charge over any recoveries in those proceedings.
The liquidators had no right so to do and, indeed, had no right to use such recoveries to defray their costs of the S.239 proceedings.
4) In the premises the agreement or arrangement between Agency and Holdings was champertous and an abuse of process.
I shall deal with each of these points in turn.
Conflict of Interest
The material facts have been sworn to by Mr Katz, one of the joint liquidators, in an Affidavit dated the 20th March 1997, and are as follows.
The same three office holders were appointed as joint administrators and subsequently as joint liquidators of both Holdings and Agency. When the appointments were made the affairs of the two companies were confusingly intermeshed. Mr and Mrs McNally were directors of both Holdings and Agency. Holdings did not trade in its own right, but incurred costs on behalf of its subsidiaries. Holdings used Agency's bank accounts to fund its expenditure. It was unclear whether the repayments which were the subject of the S.239 proceedings had been made by Agency or Holdings, and the S.239 proceedings were initially brought in relation to both Agency and Holdings. By early 1994 it had become apparent (i) that Agency was the major creditor in the Holdings liquidation and (ii) that the repayments which were the subject of the S.239 proceedings had been made by Holdings. The amount owed by Holdings to Agency is £9,227,829, and this...
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