CENTENARY 6 LIMITED v TLT LLP: LESSONS FOR LIQUIDATORS

Introduction

At first blush the May 2023 decision of Lord Ericht in this case may not seem required reading for Office Holders. However, it is worth a read, because underneath the preliminary layer of a professional negligence dispute, there are lessons for those holding office as liquidators.

Centenary had previously pursued proceedings under s.212 of the Insolvency 1986 Act against the joint liquidators of a company they had ultimately owned the shares of (their ownership of the shares was the result of a complex transaction, beyond the scope of this briefing, that had brought about the liquidation of the subsidiary). The defenders acted for Centenary in the s212 note, which sought payment of a sum of over £22 Million from the liquidators, to be paid to the company in liquidation. This sum was said to represent damages for their breach of duty.

TLT admitted providing negligent advice about Centenary’s requirement to comply with a court order to lodge caution for expenses. There was a failure to comply with this order by Centenary and ultimately the s212 action was dismissed. The present litigation concentrated on the loss resulting to Centenary from the negligence. Lord Ericht required, amongst other things, to assess the “loss of chance” by Centenary in their case against the liquidators.

The Decision

Not all of the arguments are directly relevant to insolvency practitioners. However, the court decided that there were two exceptions to an analysis purely based on loss of chance. The first was whether the claim against the liquidators in the s212 note was time barred. The Court decided that it would not have been. Properly understood the court concluded that the claim under s.212 provided a mechanism by which the shareholder could enforce an obligation to make reparation to the company. In this case it was an obligation by the liquidator to the company. The Court followed Dryburgh v Scotts Media Tax Ltd and concluded that for the purposes of the Prescription and Limitation (Scotland) Act 1973 fraud can include breach of duty by a liquidator the company. Therefore while the liquidator is in office “the company is not in a position to act independently of the liquidator and therefore cannot discover the fraud”. In this case the s.212 Note had been brought while the liquidator was in office. This means that claims against liquidators for breach of duty could conceivably therefore be brought until at least 5 years following liquidators ceasing to hold office.

The Court then decided there was a 65% possibility that Centenary would have established a breach of duty against the joint liquidators. This was connected with the joint liquidators compromising a landlord’s claim in the liquidation. In this case the liquidators agreed a surrender of a lease with the landlord and as part of the agreed surrender accepted a claim in the liquidation at around £28 million. However, the claims were accepted at that level regardless of the period which the property involved might actually remain unsold or occupied. The landlord then sold the property for some £47 million. It was also significant that the joint liquidators had included no “anti-embarrassment clause”. Substantial damages were therefore awarded against TLT.

Advice

This case is a salutary tale for liquidators. Underneath the professional negligence case, is a story of a court looking with hindsight at the liquidators’ decision. In particular, in the cold light of day the liquidators’ compromise of a claim was hard to explain in some ways (and that in complicated circumstances we have not gone into where it seemed to be said that the transactions putting Centenary in control of the shares of the company in liquidation may well have given risen to challenge). The practical lessons must include the following: (a) when liquidators compromise creditor claims they must consider carefully how that will affect dividend prospects and potential effect on contributories; (b) particularly where creditors or contributories are going to be “in the money” care must be taken that the compromise is objectively reasonable; and (c) it may well be wise to evidence at least an attempt to obtain an anti-embarrassment clause.

 

BBM Solicitors specialise in advising IP’s in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal (emb@bbmsolicitors.co.uk).This briefing note is current as at 10 May 2023 and is our understanding of the position described at that date. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).