Dormco Sica Ltd ((in Liquidation)) v S B L Carston Ltd
| Jurisdiction | England & Wales |
| Judge | Jones |
| Judgment Date | 12 January 2023 |
| Neutral Citation | [2023] EWHC 20 (Ch) |
| Docket Number | CASE NO: CR-2017-006695 |
| Court | Chancery Division |
and
[2023] EWHC 20 (Ch)
INSOLVENCY AND COMPANIES COURT JUDGE Jones
CASE NO: CR-2017-006695
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (CHD)
IN THE MATTER OF DORMCO SICA LIMITED (IN LIQUIDATION)
AND IN THE MATTER OF THE INSOVENCY ACT 1986
Mr Peter Shaw K.C. (instructed by Charles Russell Speechlys LLP) for the Respondent
Mr Munn and Mrs Munn in person
Hearing dates: 28 April, 1 July, 3 November 2022 and 12 January 2023
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
………….. CHJ 11/1/23 ……………
I.C.C. JUDGE Jones
This judgment was handed down remotely at 2.00pm on 12 January 2022 by circulation to the parties or their representatives by email and by release to The National Archives.”
I.C.C. Judge
A) Introduction
This judgment assesses the contributions to be paid by Mr and Mrs Munn pursuant to the judgment handed down on 1 December 2021 (“the Liability Judgment”). Applying the Civil Liability (Contribution) Act 1978 (“ the 1978 Act”) it was decided that an assessment was required to determine (using the definitions adopted in the Liability Judgment):
a) The amount (if any) SBL should recover from Mr Munn as his contribution towards the liability they both owed to SICA for the same damage suffered by it. SBL's liability arose pursuant to its settlement of SICA's claim under section 423 of the Insolvency Act 1986 (“ IA”) resulting from SBL's purchase of SICA's goodwill (“the Goodwill”) at an undervalue. Mr Munn's liability arose as a result of his breach of duty as a director of SICA which caused the sale at an undervalue.
b) The amount (if any) SBL should recover from Mr and Mrs Munn as their contribution as a result of them also being liable for the same damage for which SBL is liable to SICA. That liability being also pursuant to section 423 IA. They having received sums which represented (at least in part) the market value of the Goodwill within the consideration they received for the sale to ETL of part of their shareholding in CHL, the parent of SBL and SICA. The definition of “the Goodwill” derived from the Asset Sale Agreement between SICA and SBL is:
“the goodwill of SICA in connection with the Business and the exclusive right for SBL (or its assignees) to use the names and represent itself as carrying on the Business in succession to SICA including the benefit of all pending contracts, orders and engagements and the right to all lists of customers and suppliers of the Business.”
Those decisions resulted from a series of transactions (“the Arrangement”) which on 6 February 2015 hived across the Goodwill to SBL for only £1.00, together with other assets for which it paid good consideration. The Arrangement left SICA an insolvent company but this did not significantly affect CHL's balance sheet adversely. As a result of the Arrangement SBL now owned SICA's business but without its debts and liabilities. The resulting increase in the value of SBL was reflected beneficially in CHL's balance sheet. Therefore, SBL and CHL gained from the transaction as a result of a “purchase” at an undervalue. The shareholders of CHL also gained from its increased share value in particular because they sold part of CHL's issued share capital to ETL as part of the Arrangement. The shareholders were Mr and Mrs Munn jointly and Mr Rees, who is not a party to the proceedings. Under the terms of the Share Purchase Agreement, Mr and Mrs Munn and Mr Rees received on completion consideration totalling circa £2.3 million between them. They also had the possibility of receiving additional deferred, performance based consideration of circa £0.575 million. The total in fact paid for 40% of CHL's shares, including the deferred consideration, was £2,800,000. Mr and Mrs Munn received 70% of that sum, Mr Rees the balance.
SICA commenced proceedings against SBL alone to recover the true market price of the Goodwill, relying on section 423 IA. SBL joined Mr and Mrs Munn as Part 20 Respondents. Shortly before trial, SBL agreed pursuant to CPR Part 36 procedure to pay SICA compensation totalling £2,650,000. As a result SICA took no part in the trial, which was limited to addressing the Part 20 claim. For the purposes of deciding that contribution claim, the Liability Judgment decided that Mr Munn was responsible for the Arrangement. His liability as a director of SICA followed. He and Mrs Munn were also liable to restore the benefit they had received from the Arrangement to the extent that it represented SICA's loss because the Arrangement was a transaction that defrauded creditors (as the term is applied to section 423 IA).
However, a distinction exists between Mr and Mrs Munn. It is not in dispute that Mrs Munn did not have knowledge of the fact that the sum received from CHL for their shares was attributable to the sale of the Goodwill by SICA at an undervalue. SBL has accepted that she should be treated as an innocent party in the context of a statutory provision, section 423 of the IA, for which liability depends upon the intention of the transferring party (SICA) not the intention of the recipient. Namely, to put assets beyond the reach of a person making, or who may at some time make, a claim against the transferor or otherwise to prejudice the interests of such a person in relation to such claim. The effect of this upon the outcome of the assessment is one of a number of issues to be determined.
The issues have been addressed over two, one day hearings at which SBL was represented by Mr Shaw K.C. (as he is now). Mr and Mrs Munn have acted in person. The second day was required to consider one matter specifically left over from the first day, and other matters identified within a draft judgment disseminated after that first day. It had been circulated under the usual embargo terms but also on the stated basis that further submissions would be required before a final decision could be made (unless, of course, the new matters it addressed were accepted).
The matter outstanding had been raised during the trial but had had to be left over to the assessment. It concerned the complication that SBL was placed into administration on 8 October 2021, the fourth day of the liability trial. It is apparent from the subsequent liquidation, and not in dispute, that SBL is not in a position to pay the settlement figure of £2,650,000 or any significant part of it. This gives rise to the issue ( “the Insolvency Issue”): whether a contribution order should be made in those circumstances and, if so, whether the court could and, if so, should order payment directly to SICA. SBL's liquidators were agreeable to direct payment but there is concern that this would be contrary to the IA on the basis that any contribution to be paid to SBL would be an asset of its insolvent estate to be distributed in accordance with the IA's statutory waterfall. If so, it could not be paid directly to SICA, an unsecured creditor.
The other issues for determination upon this assessment flow directly from and need to be understood within the context of the relevant provisions of the 1978 Act. Therefore, it is best to explain its requirements before identifying those issues in order to place them within their statutory context.
B) Assessment of Contribution — The Law
SBL chose to commence proceedings under the 1978 Act in the absence of SICA proceeding to recover its damage from Mr and Mrs Munn. This resulted in a settlement between SBL and SICA. The contribution proceedings continued because without an order for a contribution or an indemnity, SBL would have to pay the whole of the damage suffered by SICA (up to the agreed compensation). By doing so, SBL would discharge Mr and Mrs Munn from any liability to SICA (unless and to the extent that the damage suffered was more than the compensation sum or they are liable for different damage). This highlights the point that the court when applying common law or statutory rights of contribution is concerned with achieving what is just and equitable in terms of apportionment between those liable. It is not considering the position from the perspective of the claimant and, as a result, seeking to ensure the claimant can obtain judgment and recovery against the parties they chose not to sue.
Those common law and statutory rights arise because it is potentially unfair between those liable for the same damage that one should be discharged from their liability because the other pays the injured party in full. To avoid that result, the court had a common law jurisdiction to enable the paying party to recover an indemnity or contribution (as appropriate) from the non-paying party. However, the jurisdiction was limited and the Law Reform (Married Women and Tortfeasors) Act 1935 (“ the 1935 Act”) was passed to extend the court's jurisdiction and to overcome various limitations of the common law. The 1978 Act, a reforming statute, further extended the scope of the 1935 Act's jurisdiction, as well as making other changes to the law.
In essence the 1978 Act is concerned (as the 1935 Act had been) with reallocation of the burden of liability for the same damage by the exercise of a wide discretionary power of redistribution as between those who are liable. That occurs without altering the injured party's rights or affecting their pursuit of those rights, including any decision not to pursue each liable party...
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