Ward v Aitken and Others ; Re Oasis Merchandising Services Ltd
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE PETER GIBSON |
| Judgment Date | 09 October 1996 |
| Judgment citation (vLex) | [1996] EWCA Civ J1009-5 |
| Docket Number | CHANI 95/0971/B |
| Court | Court of Appeal (Civil Division) |
| Date | 09 October 1996 |
[1996] EWCA Civ J1009-5
Lord Justice Peter Gibson
Lord Justice Otton
Lord Justice Hutchison
CHANI 95/0971/B
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM ORDER OF MR JUSTICE ROBERT WALKER
Royal Courts of Justice
Strand
London WC2
MRS E TALBOT-RICE (Instructed by Messrs Ingledew Brown Dennison, London EC1) appeared on behalf of the First Appellant
MR R DICKER (Instructed by Messrs Ingledew Brown Dennison, London EC1) appeared on behalf of the Second Appellant
MR R WRIGHT QC (Instructed by J Denning Levine & Partners, London W1) appeared on behalf of the Respondent
This is the judgment of the court.
In English law maintenance (the giving of assistance or encouragement to a litigant by a person with no interest in the litigation nor any other motive recognised by the law as justifying his interference) and champerty (maintenance of a plaintiff bringing an action in consideration of a share in the fruits of the action) are no longer crimes or torts. But the abolition of such criminal and tortious liability in 1967 has left unaffected any rule of law that a contract involving maintenance or champerty is to be treated as contrary to public policy or otherwise illegal (s.14(2) Criminal Law Act 1967). This appeal raises the question of the validity of a prima facie champertous agreement, entered into by a liquidator in purported exercise of a statutory power of sale, to assign to a purchaser the fruits of an action brought by the liquidator in exercise of a statutory power conferred on him alone in respect of alleged wrongful trading by directors.
It is an appeal by the Sixth Respondent, London Wall Litigation Claims Ltd. ("LWL"), with the leave of Robert Walker J. from his order of 7 June 1995. By that order the Judge on the application of the First, Second, Fourth and Fifth Respondents stayed proceedings brought under s.214 Insolvency Act 1986 ("the s.214 action") by the Liquidator of Oasis Merchandising Services Ltd. ("the Company") against the First to Fifth Respondents, who had at some stage been directors, or are alleged to have been shadow directors, of the Company. Before instituting those proceedings the Liquidator had on 18 November 1991 entered into an agreement ("the Agreement") with LWL whereby LWL would fund the s.214 action. On 16 October 1991 the Companies Court gave the Liquidator authority to enter into the Agreement. The Judge set aside the order of Mr. Registrar Pimm giving that authority. The Liquidator was given leave to appeal but after serving a Notice of Appeal he has taken no part in the hearing before this Court.
The Company was incorporated in 1985. It traded in video and audio cassettes and associated products. It went into administrative receivership on 9 November 1987 and, being insolvent, was compulsorily wound up on 17 January 1988. The Liquidator came to the conclusion that there was a prima facie case against the First to Fifth Respondents for wrongful trading. On 12 October 1992 he commenced the s.214 action by issuing an originating application against those Respondents, claiming relief under s.214. The s.214 action is being contested by them. It is unnecessary to say anything further about the issues in it. LWL on its own application was joined as the Sixth Respondent shortly before the hearing before the Judge.
S.214 allows the liquidator of a company in the course of the winding up to bring proceedings against a person who is a present or former director (including a shadow director) of that company if it appears to the liquidator in the course of the winding up that subsection (2) applies. It applies in relation to a person if (i) the company has gone into insolvent liquidation, (ii) at some time before the commencement of the winding up that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, and (iii) that person was a director of the company at that time. The relief which may be granted is in this form:
"the court, on the application of the liquidator, may declare that that person is to be liable to make such contribution (if any) to the company's assets as the court thinks proper" (S.214(1).
S.215(2),(3) and (4) provide that where the court makes a declaration under s.214(1) it may give certain further directions, including, where it makes a declaration in relation to a creditor, that any debt owed by the company to the creditor and interest thereon be postponed.
The Company had no assets which could be utilised to fund wrongful trading proceedings because on 12 September 1986 the Company created a debenture in favour of Beaverbrook Investment plc which as a secured creditor has been entitled to realise the entire assets of the Company. Nor are the creditors of the Company, none of whom is owed more than £30,000, able or willing to fund such proceedings.
The Liquidator obtained the consent of the liquidation committee as well as of the Companies Court before entering into the Agreement 5 weeks after the commencement of proceedings. LWL is not a creditor of the Company. Its main business is described in its accounts as "the provision of specialist litigation support service for liquidators". The Agreement recited that due to the statutory basis of the s.214 action it had to be brought by the Liquidator in his name and not by the Company, that the Liquidator was unwilling to incur liability for the costs and expenses of pursuing the proceedings against the First to Fifth Respondents and that LWL had agreed to finance the proceedings. Recital (G) was in this form:
"The Liquidator considers it desirable that he himself and/or [the Company] by him should sell and assign to LWL all the "Fruits" of the Section 214 Action and (as provided in….Clauses 2 and 3 below) his or [the Company's]" rights in respect of the Fruits of any other action or actions upon the terms hereof and in this Agreement or the Schedules hereto the said "Fruits" shall mean any sum or sums of money (including any amount or amounts which shall have been received in respect of interest costs charges disbursements and expenses) received by the Liquidator as Plaintiff or as Liquidator of [the Company] or by [the Company]
(i) under and by virtue of final judgment in or compromise or settlement of….the Section 214 Action or
(ii) in any way received from all or any of the [First to Fifth Respondents] (whether directly or indirectly) or from any other defendant or defendants or from any third person or persons on their behalf in settlement of any such claim or claims against all or any of them and whether before or after any proceedings shall have been issued or commenced".
By cl. 2 of the Agreement:
"In consideration of the undertakings by LWL herein contained to the Liquidator [the Company] acting by the Liquidator and the Liquidator himself in respect of his rights in respect of….the Fruits of the Section 214 Action hereby sells and assigns to LWL absolutely all of the said rights of himself and [the Company] respectively:
(i) in the Section 214 Action to be brought by the Liquidator on behalf of [the Company] against the [First to Fifth Respondents] or any one or more of them…."
That assignment was expressed to be an equitable assignment of the Fruits.
By cl. 4(a) the Liquidator was to institute, carry on and prosecute the s.214 action and to do all such lawful acts and things as LWL might require for the purpose of instituting carrying on and prosecuting the s.214 action. Cl. 4(b) required him to retain named solicitors to conduct the s.214 action. By cl.5 the Liquidator was to conduct the s.214 action and in particular any settlement negotiations in accordance with the requirements and directions of LWL and in making such requirements and directions LWL was to be entitled to have regard to its own best interests as it should think fit. By clause 6 the Liquidator was to compromise or settle the action and take out of court any monies which had been paid into court as LWL advised and upon such terms as LWL considered fit. This clause was subject to the following proviso:
"Provided further that notwithstanding the foregoing the Liquidator shall be entitled to compromise settle or withdraw from [the s. 214 action] and to decline to commence any proceedings or to take any such monies out of Court without the agreement of LWL if the Leading Counsel having the conduct of the relevant case and approved or chosen by LWL shall have advised that any such compromise or withdrawal or taking of monies out of Court should be made in the best interests of the Liquidator and/or [the Company] and before giving any such advice Counsel shall be instructed to assume that [the Company] has adequate financial resources of its own with which to finance [the s. 214 action] without recourse to LWL and to ignore the financial effect of this Agreement."
Cls. 7 and 8 contained detailed undertakings by LWL to finance litigation. Much of the remainder of the Agreement was concerned with the division between the Company and LWL of the fruits of the litigation. As the Judge said:
"The general effects of these provisions….is in substance for [LWL] to be reimbursed for its expenditure on the litigation and….for the excess to be divided in varying percentages for different tranches of excess, with the Liquidator's percentage rising from 10% to a maximum of 50% on any excess of £500,000. As a matter of form, however, this is expressed as additional consideration for the purchase by [LWL] of all the fruits".
By a further agreement dated 19 May 1992 the sole shareholder of LWL was to...
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