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BVI Liquidators Battle Lawyers Over Legal Costs In London Court

The recent case of Crumper v Candey Ltd [2017] EWCH 1511 (Ch) delivered an updated analysis of the operation of section 245 of the Insolvency Act 1986 (“s245”). Although the insolvency proceedings (and much of the litigation before and after the insolvency commenced) originated in the British Virgin Islands, they were recognised in England and Wales under the Cross Border Insolvency Regulations 2006. Accordingly, the BVI liquidators were entitled to apply for the same relief as would have been available had the liquidation been an English one. Indeed, it was the High Court in London which determined the central issues in the case, namely (1) the category and classification of certain charges, (2) the treatment of monies paid into court and (3) the interpretation of the constituent parts of s245.

The facts of the case are largely immaterial save to understand that Peak Hotels and Resorts Ltd (“Peak”) was placed into liquidation in the BVI substantially because of litigation in which it was involved with its immediate and ultimate joint venture (“JV”) partners and shareholders. As a result of this protracted litigation, Peak was unable to pay its solicitors Candey Ltd (“Candey”) and agreed with Candey that their outstanding invoices would be paid in three instalments with Candey charging a fixed fee of £3.8m for all future legal work. Payment of this fixed fee was deferred until the JV proceedings were settled or determined, unless Peak was able to discharge the fixed fee earlier or entered into an insolvency process.

As payment of the fixed fee was deferred, unsurprisingly, Candey insisted on a charge being registered against Peak in the BVI. This was done by way of a Deed of Charge and Security dated 21st October 2015. Peak went into liquidation less than four months later, at which point Candey’s work in progress amounted to £1.2m. Candey claimed security over two main assets belonging to Peak:

1. £1.5m held on trust for Peak in a bank account (“the Bank Monies”);

2. c$11.66m paid out of court to the liquidators of Peak following settlement of the litigation (“the Court Monies”).

The liquidators of Peak accepted that the Bank Monies were secured by the Candey’s charge but argued that Candey did not have any interest in the Court Monies until they had been paid out of court and that such payment out only came about as a result of the liquidators’ actions. Moreover, the liquidators argued that any charges that did exist were floating and therefore subject to s245, which provides that when a floating charge is granted within 12 months of a company going into liquidation, it is invalid except to the extent of the value of money paid or goods or services supplied after the charge was created.

Candey argued that both Bank Monies and Court Monies were subject to fixed, not floating, charges and that Peak was not insolvent at the time the charge was granted (nor did it become insolvent as a result of the charge).

The court held that both the Bank Monies and the Court Monies were secured by the charge and that the charge was floating, not fixed.  The court then had to consider the status of the Court Monies which in turn relied upon a consideration of the reasons why the Court Monies were paid into court in the first place. In this case, the reasons were twofold:

1. to provide security for costs following an order obtained by the Defendant in the litigation;

2. to support a cross undertaking in damages for an injunction obtained by Peak.

The Court held that Peak had an interest in the Court Monies (and could therefore charge such monies) because it could administer the fund comprising the Court Monies and was entitled to the remainder of the Court Monies after the purpose for which the monies had been paid into court had been satisfied. Moreover, whilst the liquidators had indeed settled the proceedings and successfully obtained payment out of the Court Monies, they did not become a new asset of Peak recovered as a result of the fruits of the liquidators’ labour.

Insofar as s245 was concerned, the court outlined the constituent parts of the section and set out clearly the principles determining whether a charge was fixed or floating. Having done so, and for the reasons outlined earlier, the Court held that both the Bank Monies and the Court Monies were subject to a floating charge. Further, there was no question that Peak was insolvent at the time it entered into the charge since it only did so given its inability to pay Candey’s outstanding fees in full.

Unfortunately, there was not enough material before the court for it to determine the value of the service provided by Candey (i.e the value of the legal work it carried out) – this being the final constituent part of s245. The court held that whilst this valuation could be calculated by reference to a fixed fee at a later date, more evidence was required to assess the quantum of this fixed fee and in particular, to determine whether it was less than the £3.8m fixed fee agreed at the outset.

In conclusion, the case provides a useful summary of the constituent parts of s245. It also outlines the process and factors to be taken into account in determining the status of payments into court and the ability of such monies to be subject to valid fixed and/or floating charges.

© Copyright 2017 Squire Patton Boggs (US) LLP

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About this Author

Devinder Singh, Squire Patton Boggs, Contentious Insolvency Lawyer, UK Attorney
Partner

Devinder leads the Restructuring & Insolvency Group based in our Birmingham office. Devinder's clients include the major clearing banks, asset based lenders, insolvency practitioners, corporates and creditors.

He advises on all aspects of corporate restructuring and insolvency, with a particular specialism in contentious work.

Squire Patton Boggs Restructuring and Insolvency Team is ranked in Tier 1 in the 2014 editions of Chambers UK and Legal 500 where Devinder is described as “commercial” and “a team...

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