French & Mummery v Cipolletta
| Jurisdiction | England & Wales |
| Judge | Mr Jonathan Gaunt QC |
| Judgment Date | 15 May 2009 |
| Neutral Citation | [2009] EWHC 223 (Ch) |
| Court | Chancery Division |
| Docket Number | No. 6133 of 2007 |
| Date | 15 May 2009 |
[2009] EWHC 223 (Ch)
Before: Mr Jonathan Gaunt QC sitting as a Deputy Judge of The Chancery Division
No. 6133 of 2007
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
IN THE MATTER OF E D GAMES LIMITED
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Mr Simon Davenport QC (instructed by Birkett Long LLP) appeared for the Applicants
Mr Gregory Banner (instructed by Sprecher Grier Halberstam LLP) appeared for the Respondent
Hearing date: 5th May 2009
Approved Judgment
Mr Jonathan Gaunt QC:
This is an appeal by Mr Cipolletta against the Order of Mr Registrar Baister dated 10 th December 2008 dismissing Mr Cipolletta's application for an order striking out certain paragraphs of the Points of Claim dated 8 th February 2008, alternatively for summary judgment against the Applicants in respect of that part of the claim referred to as “the VAT claim”.
The application arose in the course of proceedings begun by an Originating Application dated 20 th August 2007, whereby the Applicants as liquidators of E D Games Limited (“the Company”) sought an order under section 212 of the Insolvency Act 1986 that Mr Cipolletta contribute such sum to the Company's assets by way of compensation for misfeasance or breach of fiduciary duty or other duty as the Court might think just. The Company had been incorporated on 18 th November 1996 and dealt in computer leisure products. It went into creditor's voluntary liquidation on 2 nd October 2002 with an estimated deficiency of some £900,000. Creditors of the Company include H M Customs & Excise and the Inland Revenue.
The Points of Claim disclose four heads of claim against Mr Cipolletta. Mr Cipolletta's application was only concerned with one of them, namely that pleaded in paragraphs 7(A), 7(B), 8-26 (excluding 22(b)), 28(a), 28(b) and the first sentence of paragraph 30 of the Points of Claim. The application was that all these paragraphs be struck out as disclosing no reasonable ground for bringing a claim pursuant to section 212 as a result of the failure of the Company to file VAT returns and make certain payments in respect of VAT, save insofar as the claim related to penalty charges and interest. Alternatively Mr Cipolletta applied for summary judgment in respect of the claim particularised in those paragraphs on the ground that it had no real prospect of succeeding save insofar as it related to penalty charges and interest.
The Liquidator's primary case, as pleaded, is that Mr Cipolletta deliberately caused the Company not to fill in and send back VAT returns for a period of about 22 months and also failed to account to the Inland Revenue for PAYE and NIC. Alternatively if, as Mr Cipolletta has claimed, he left these matters to his bookkeeper and was unaware of what was happening, he was in breach of his duty of care in connection with the management of the Company's financial affairs.
In support of the primary case it is alleged that Mr Cipolletta deliberately did not pay the VAT “in favour of being able to maintain payments for additional stock”. It is then pleaded in paragraph 30 of the Points of Claim as follows:
“By reason of the said breaches of duty by failing to cause it to pay its VAT liability at the appropriate time, failing to cease trading as and when the cash flow became obvious and thereby prolonging the life of the Company beyond that which it should have been and thereby creating a much greater deficiency to creditors than would otherwise have been the case. Further, the other (non VAT) based breaches of duty have led to serious financial loss of the Company.”
Mr Cipolletta's application was supported by a Witness Statement of his solicitor which contended that the Points of Claim disclosed no reasonable cause of action, alternatively that the Liquidator had no real prospect of success on this part of the claim because:
“Section 212 is a procedural provision permitting claims vested in a company to be brought (inter alia) by a liquidator of that company. The Applicant's case discloses no basis upon which the matters complained of caused a loss to E D Games Limited (save in respect of the interest or penalties incurred as a result of non-payment of such liabilities).”
That was answered by a Witness Statement of the Liquidator's solicitor which contended that the Points of Claim settled by Counsel highlighted the facts:
“that Mr Cipolletta, in the face of specific warnings from the company's financial administrator, sought to channel the company's resources in favour of prolonging its payments to himself and to trade suppliers in order to keep the company afloat, when it was perfectly clear (or ought to have been perfectly clear from the Company's existing software systems) that the company had either run out, or was running out, of money.”
He then contended that Mr Cipolletta's solicitor was wrong to suggest that an application can only be brought under section 212 if the director's conduct or breach of duty has caused a loss to the Company and gave reasons for that contention. He said that it was incumbent upon Mr Cipolletta to demonstrate some authority for the proposition that loss being caused to the Company was a necessary pre-requisite to an application under the section and suggested that the question whether the causing of loss to the Company was a pre-requisite to such an application was, in any event, a matter not appropriate to be dealt with on an interlocutory application.
Notwithstanding those contentions, when the matter came before the Learned Registrar, it was common ground between Counsel, as recorded in the Judgment of the Learned Registrar, that:
(a) section 212 does not create a new cause of action but is simply a gateway provision enabling a claim which could otherwise have been brought by the Company to be brought by the liquidator or a creditor; and
(b) for a remedy for misfeasance or breach of other duty to be available under the section there must be an act resulting in actual loss to the Company.
Based on those propositions, Mr Banner, Counsel for Mr Cipolletta, submitted to the Learned Registrar and to the Court on this appeal that loss to the Company is a necessary ingredient of a claim under the section and must therefore be pleaded. He submitted that the non-payment of tax does not of itself prove a loss to the Company and that a deficiency or a greater deficiency to the creditors is not a loss to the Company, but a loss to the creditors. He therefore argued that because the first sentence of paragraph 30 of the Points of Claim does not assert any loss to the Company, it therefore does not disclose a reasonable cause of action, alternatively that, even if the matters alleged were proved, the claim could not succeed.
Latching on to the plea of “failing to cease trading as and when the cash flow became obvious and thereby prolonging the life of the Company beyond that which it should have been”, he argued that this is in substance an attempt to bring a wrongful trading claim under section 214 by the back door without having to establish the precise date at which Mr Cipolletta knew or ought to have concluded that there was no reasonable prospect that the Company would avoid going into insolvent liquidation. He drew my attention to correspondence in which the liquidator had considered bringing such a claim, the inference being that he deliberately decided not to do so. Such a claim would now be statute-barred.
For the liquidator, Mr Simon Davenport QC began his submissions to me, as he had to the Learned Registrar, by reminding me that it is not appropriate to strike out a claim unless the Court can be certain that the claim is bound to fail, citing Hughes v Richards [2004] EWCA Civ 266 at [22]. In reply Mr Banner sought to argue that this test is only applicable to a situation where the law is in the course of development but I do not accept that. In my judgment, it is clear from the Judgment of Lord Browne-Wilkinson in Barrett v Enfield LBC [2001] 2 AC 550 at page 557, cited in Hughes, that that test is generally applicable and that, if a case concerns a area of law which is uncertain and developing, that is another reason for it not being appropriate to strike out a claim, it being of great importance that developments in the law should be on the basis of actual facts found at trial and not on hypothetical facts assumed (possibly incorrectly) for the purpose of a strike out...
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