Hammonds (A Firm) v Pro-Fit USA

JurisdictionEngland & Wales
JudgeMr Justice Warren
Judgment Date17 August 2007
Neutral Citation[2007] EWHC 1998 (Ch)
Docket NumberCase No: NO. 2898 of 2007
CourtChancery Division
Date17 August 2007
Between
Hammonds (a firm)
Applicant
and
Pro-Fit Usa Ltd
Respondent

[2007] EWHC 1998 (Ch)

Before

Mr Justice Warren

Case No: NO. 2898 of 2007

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

COMPANIES COURT

Royal Courts of Justice

Strand, London, WC2A 2LL

Mr Gabriel Moss QC and Miss Hilary Stonefrost (instructed by Messrs Hammonds) for the Applicant

Mr Andrew Sutcliffe QC (instructed by Messrs Gorvins) for the Respondent

Hearing dates: 13th,16th,17th, & 20th, July 2007

Judgment Approved by the court

for handing down

Mr Justice Warren

Introduction and overview

1

This is an application by Hammonds, solicitors, for an administration order in relation to Pro-Fit USA Ltd (“ USA”). Hammonds apply as an alleged creditor of USA in respect of unpaid fees (including work in progress not yet the subject of any invoice) in respect of legal services rendered. The application notice is dated 20 April 2007.

2

In order to avoid confusion, I should explain that USA was previously called Pro-Fit International Ltd. I shall refer to it throughout as USA, even in respect of times when it was in fact operating under its previous name. There is also a company which is now called Pro-Fit International Ltd, an off-the-shelf company previously called Bondmor Ltd. I shall refer to it throughout as International, even in respect of times when USA was in fact operating under the name Pro-Fit International Ltd.

3

At the outset I should say that there has been a large amount of evidence to digest. I shall refer to some of it. I have, however, read or re-read all of the affidavits and witness statements filed and the exhibits where relevant. I have taken it all into account in reaching the conclusions which I do. The fact that I do not refer to all of the evidence, and in particular that of Mr Clay, does not mean that I have overlooked it. Mr Clay, I should say, is the partner at Hammonds who principally dealt with the affairs of USA over the relevant period.

4

USA is one of a number of companies in which the Morris family are concerned. The relevant members of the family are David Morris and his sons Philip and Paul. I hope that they will not object to my referring to them by just their first names. They all have knowledge and experience of the design and use of interlining, strips of fabric that are used in waistbands and other parts of garments to provide strength and support and to improve appearance. USA owns (subject to certain licences which I will come to) a wide portfolio of intellectual property rights (“IP rights”) and related know-how and confidential information relating to that use, which Mr Andrew Sutcliffe QC (who appears for USA) summarises as “relating to imparting stretch to fabrics” and which IP rights have “a variety of commercial applications, including waistbands, lingerie, shirt collars, tapes, industrial shrinkage and finishing”. Philip himself considered this to be a rather inadequate description of the technology when Mr Clay used similar language pointing out that the technology is also used in the production of shrink free applications in the production of a branded product used in underwired bras. Philip also points out that USA has other technologies and know-how for applications such as pucker free tapes, shrink free shirt collars and shrink free elastic applications among others.

5

The IP rights include two US patents which I will refer to as 721 and 285. 721 concerns an invention relating to a method of imparting stretch to a strip of rigid fabric and the locking it in by affixing a suitable fusible interlining. The same patent covers the resulting stretch waistband and the process for manufacturing it. 285 relates to graduated fusible interlinings; this technology has application, among others, to stretch waistbands for trousers and other clothing

6

David Paul and Philip are all directors of USA. The shareholders of USA are now Pro-Fit Holdings Ltd (“Holdings”) and Red Kite Capital Partners Ltd (“Red Kite”), although prior to Red Kite's investment (which took place in the autumn of 2006), USA was a wholly owned subsidiary of Holdings. Holdings is owned and controlled by David, Paul and Philip and other Morris family interests. Red Kite has two directors, Geoffrey Stuart Pearson (“Mr Pearson”) and John Stewart Ross (“Mr Ross”). Red Kite is ultimately owned by Mr Ross.

7

USA has an association with International in that (a) the directors of International are David, Paul, Philip and Mr Pearson and (b) the owners of the shares in International are Philip, Paul and Montpelier Capital Ltd (“Montpelier”) of which Mr Pearson is a director and he his wife and family are shareholders.

8

Hammonds were instructed by USA in February 2004 in succession to other English solicitors. The only contract of retainer is with USA but USA and Holdings say that Hammonds owed a duty of care to Holdings as well in relation to certain litigation in the United States. I will come to that litigation and the circumstances giving rise to the alleged duty of care in due course.

9

Most, but not all, of the work in respect of which fees are claimed by Hammonds relates to a dispute with a US corporation called Tag-It Pacific Inc (“Tag-It”) USA had granted a licence to Tag-It (“the 2000 Licence”) to details of which I will come to, in respect of certain intellectual property rights (“IP rights”) known as Straight Stretch Technology to enable Tag-It to make waistbands and certain related items and to sub-license other to do so. The work done by Hammonds also included commercial work relating to licensing deals and advice concerning a dispute between Tag-It and another company called Narroflex.

10

Hammonds claim to be owed £556,450 in respect of (a) outstanding invoices raised between February 2005 and April 2006 and (b) unbilled work in progress. The breakdown is this, in round figures:

a. Tag-It v Narroflex file: £6,257. A costs order was made against Tag-It which has been paid. The invoices for this work are more than 2 years old. There is no complaint or allegation of negligence in relation to this work.

b. Tag-It file: invoiced amounts are £334,336 and unbilled work-in-progress is said by Hammonds to amount to £147,453. All invoices are more than 1 year old.

c. IP General: invoiced amounts total £60,338 and unbilled work-in-progress is said by Hammonds to amount to £8,070 for commercial work in relation to licensing deals.

11

Until comparatively recently, no complaint whatsoever had been raised by USA (nor by Holdings, International and the individuals involved) about the advice and service provided by Hammonds. Indeed, the obligation to pay fees (and to pay certain other creditors) appears to have been recognised since, during the course of 2006, USA entered into negotiations with Hammonds and other professional advisers and with a Mr Roup to restructure its debts with a view to repayment of these debts over a period of 4 years. These negotiations failed, so far as Hammonds are concerned, because Hammonds required security for the debt to be given which USA was not willing to provide. It is only after taking separate advice from Mr Dunnill of Gorvins that USA and Holdings have come to realise that there might be criticisms of the advice which Hammons have given.

12

The negotiations having broken down, Hammonds indicated that it would have no option other than to invoke some sort of insolvency process. It was at about the same time that complaint was made about the advice which Hammonds and given. A substantial claim has now been commenced against Hammonds in the Leeds Mercantile Court which, according to USA, will result in a set-off or damages of an amount in excess of the fees owing to Hammonds. Hammonds say that this claim is not a genuine claim but has been trumped up in an attempt to stave off administration. In support of their case. Hammonds point out that numerous allegations of negligence were made but only two of these have found their way into the actual claim in Leeds. It appears that the other claims have been abandoned. USA says that the claim is perfectly genuine. It explains the timing of the claim by reference to its instruction of new lawyers who have reviewed Hammonds advice and conduct, reaching their conclusions and advising USA only at about the time when, as it happens, negotiations broke down. One of the main issues for me is the genuineness of the claim.

13

During the course of the negotiations to which I have referred, USA granted a licence of certain IP rights to International. It is said by Hammonds (a) that these IP rights are very valuable and (b) that the licence was at a substantial undervalue. Mr Moss (who appears with Ms Stonefrost) for Hammonds relies heavily on this transaction as demonstrating the need for the involvement of an independent office-holder through the mechanism of administration. Mr Moss also says that the evidence shows perfectly clearly that USA in unable to pay its debts as they fall due. He says that the cross-claim is spurious so that there is no disputed debt or genuine cross-claim sufficient to bring the case within the practice which applies in relation to winding-up petitions (as to which see in detail below in the discussion of the law). But even if there cross-claim would bring the case within that practice, it is not a practice which applies in relation to administration applications so that my discretion should be exercised, especially in the light of the licence to International, in favour of granting the order.

14

Mr Sutcliffe who appears for USA says that USA is in fact solvent and able to pay its debts as they fall due. He says that the claim against Hammonds is genuine. He says that the practice which applies in the case of winding-up petitions should apply in administration and applications. He says that the transaction was not at an undervalue and was very much in the interests...

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