By Area of Practice
By Barrister
By Date -

Crumpler v Candey Limited [2017] EWHC 1511 (Ch): The operation of Section 245 of the Insolvency Act receives a fresh analysis - Kate Rogers

In liquidation proceedings originating in the British Virgin Islands ("BVI"), recognised before the High Court in London as foreign main proceedings pursuant to Schedule 1 of the Cross-Boarder Insolvency Regulations 2006 ("CBIR 2006"), the High Court was required to consider three main questions on an application by the joint liquidators:

(1) Whether certain property was capable of falling, and did so fall, within charges allegedly created;

(2) To the extent that property did fall within the relevant charge, whether the charge was fixed or floating;

(3) To the extent that any charge was floating, whether s.245 of the Insolvency Act 1986 ("IA 1986") applied so as to limit the sums secured.

A BVI incorporated company, Peak Hotels and Resorts Limited ("Peak"), was placed into liquidation in the BVI by order dated 8 February 2016. By virtue of the liquidation proceedings being recognised in the English courts, the liquidators were entitled to apply for the same relief as if it were an English liquidation, accordingly s.245 IA 1986 applied. The joint liquidators of Peak ("the Joint Liquidators") sought to challenge the reliance of Peak's former solicitors, Candey Ltd ("Candey") on a charging deed executed in their favour.

Peak's operations were ultimately in the hotel industry: Peak was a holding company, holding 32% of the shares in a joint venture vehicle, Peak Hotels and Resorts Group Limited ("the JVV"), which in turn owned the Aman Group, a boutique luxury hotel group ("the Aman Group"). The JVV held 100% of the shares in the Aman Group. The Aman Group in turn held 100% of the shares in Silverlink Resorts Limited ("Silverlink"). Silverlink held the hotel assets.

The Aman Group was purchased by the JVV for approximately US $358 million in about January 2014. Shortly thereafter Peak became involved in a series of litigation, primarily concerning the breakdown in relations between the joint venture partners. Peak's main partner in the joint venture was Tarek Investments Limited ("Tarek"), another BVI incorporated company, which held approximately 64.8% of the shares in the JVV. Candey acted for Peak in that litigation, extending to litigation in the High Court in London; an arbitration under the Hong Kong International Arbitration Rules; and proceedings in the BVI courts.

During, and seemingly as a result of, the litigation in which Peak found itself, it also found itself unable to pay its legal bills. In October 2015 Peak and Candey reached agreement as to payment for legal services: the arrears due to Candey would be cleared in three instalments; and going forward, Candey would be entitled to a fixed fee of £3.8 million for all legal services ("the Fixed Fee"). There was no requirement to make payment of the Fixed Fee until the proceedings with Tarek either settled or judgment on liability was given, unless Peak were to either obtain 'cash' from elsewhere or to enter an insolvency process, upon which the Fixed Fee would become payable. That Fixed Fee was secured by a charge, registered in the BVI, by way of a 'Deed of Charge and Security' signed by Peak on 21 October 2015 ("the Charging Deed").

By the time Peak entered liquidation, Candey had carried out about £1.2 million worth of work on a time costs basis.

Candey claimed to have security over two main assets:

(1) The sum of US $1.5 million held on trust for Peak in an account with Standard Chartered Bank ("the SCB Monies"); and

(2) A sum of approximately US $11,663,000 which was paid out of Court to Peak ("the Court Monies").

The Joint Liquidators accepted that the SCB Monies were charged by way of the Charging Deed, but did not accept that the Court Monies were so charged, on the basis that Peak did not have an interest in the Court Monies until they were recovered and that recovery was 'the fruits of the labours of the Liquidators'. It was argued that any charges in existence were floating and were therefore subject to the effects of s.245 IA 1986.

Candey took the position that both sums of money were subject to fixed charges and consequently s.245 did not bite. Alternatively, if any charge were found to be floating, Candey argued, perhaps ambitiously, that Peak was not insolvent at the point of, or immediately after, the granting of the charge.

The Court did not agree with either the Joint Liquidators or Candey. The Court took the view that both sums of money were charged by way of the Charging Deed, but that such charges were floating and not fixed.

The judgment provides a helpful analysis of the relevant considerations when dealing with monies held in court. The previous authorities and their different outcomes were considered in detail. Peak had paid monies into court for two reasons: firstly on the back of an order to provide security for the defendant's costs in its on-going litigation, and secondly, to fortify a cross-undertaking in damages given when obtaining injunctive relief. On that basis, the Court determined that Peak had an interest in the Court Monies to the extent, firstly that it could apply for the proper administration of the fund, and secondly, as the owner entitled to any remainder after the purpose for which the monies were there had been satisfied (e.g. after defendant's costs). Therefore Peak could charge this interest. It is correct to say that the opposing party to the litigation, for whose benefit the fund was held, would also have a security interest in the Court Monies.

The Joint Liquidators had settled the proceedings and had the monies paid out to Peak, but that did not create a new asset obtained by them any more than when they enforced an existing cause of action the company had. Therefore the Court Monies were not the fruits of their labour as the Joint Liquidators suggested.

The Court turning its attention to the questions under s.245 IA 1986: whether the charges over the SCB Monies and the Court Monies were floating; whether Peak was insolvent at the time of, or became insolvent as a consequence of, the transaction under which the charge was created; and whether the value of the services supplied, at or after the date of the creation of the charge, was less than the sum otherwise secured by the charge.

After re-capping the applicable principles in determining whether a charge is fixed or floating (helpfully summarised at paragraph 104 of the judgment), it was clear to the Court that the SCB Monies were subject to a floating charge. Further, on the basis that the charge over the Court Monies was regarded as charging the right to administration of the funds in court and any balance to which Peak may be entitled after the defendants in the said litigation had received their proportion of the Court Monies, then the charge was deemed to be a floating one.

The Court took little time over the insolvency issue. It concluded that Peak was both cash flow insolvent and balance sheet insolvent at the date of entry into the Charging Deed. Peak was of course unable to pay Candey's bills at the time of entering into the Charging Deed.

However the Court could not conclude its determination under s.245 IA 1986 because there was insufficient evidence on the issue of value of services provided by Candey for the purposes of s.245(6). Therefore, the final conclusions of the Court were therefore that both sums of money (the SCB Monies and the Court Monies) were subject to floating charges in favour of Candey. The conditions of s.245 IA 1986 were met, such that the effect of the charge could be limited to the extent of the value of the services supplied by Candey after entry into the Charging Deed. The Court concluded that this valuation could be determined by reference to a fixed fee, but more evidence was needed as to what that fixed fee should be, and indeed whether it was less than the Fixed Fee.

Although the Court was unable to complete the final calculation, the judgment works through the steps of s.245 IA 1986 and provides a helpful reminder of its operation. It also deals neatly with the status of monies held in court and the ability to charge the same.

Share article