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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Coniston Hotel (Kent) LLP, Re [2014] EWHC 397 (Ch) (30 January 2014) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2014/397.html Cite as: [2014] EWHC 397 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Claim No: No 5129 of 2010 Rolls Building, 110 Fetter Lane, London EC4 1NL
		30 January 2014

MR JUSTICE MORGAN:

1. This is a case management conference in an insolvency application in which the applicants are Mr Bernsten and Mr Richardson, and the respondents are Mr Tait and Miss Rayment. Mr Bernsten and Mr Richardson were members of a LLP called Coniston Hotel (Kent) LLP. They say they were also creditors of that LLP. That LLP went into administration on 22 June 2010, at which time the respondents were appointed joint administrators. The LLP remained in administration until 12 December 2011 when, pursuant to an order of Vos J made on that day, the LLP was ordered to be wound up and placed in liquidation. I will refer in a moment to another part of the order made on 12 December 2011. The LLP had found itself under financial pressure in around June 2010. It is the financial state of the LLP at that time which has led to some of the allegations in these proceedings and indeed in other proceedings, to which I will refer. Put very shortly indeed, the position was that, by June 2010, National Westminster Bank plc had advanced substantial funds to the LLP, and also, as I understand it, to Mr Bernsten and Mr Richardson personally. Those funds were used by the LLP to carry out a development project at the Coniston Hotel in Sittingbourne. However, by early June 2010 the bank declined to provide further funding to the LLP, or at any rate it declined to provide further funding without personal guarantees from Mr Bernsten and Mr Richardson, and one, or perhaps both, of those gentlemen declined to provide the further guarantees. They appeared to have taken a strong view that the provision of personal guarantees was wholly inappropriate and the bank should not have asked for their provision. The result of that was that no further funding was provided.
2. As I say, the LLP went into administration on 22 June 2010. The administrators were Mr Tait and Miss Rayment. They were partners in the firm of BDO Hamlyn, and indeed that firm had entered into arrangements with the LLP prior to the administration to give advice on the appropriate course and what form of insolvency procedure, if necessary, would be adopted. During the course of the administration, the members of the LLP became critical of the conduct of the administrators. During that period the members brought the present insolvency application, relying on paragraphs 74, 75 and 88 of Schedule B1 of the Insolvency Act 1986. The members were critical of the administrators and wished to have the administrators removed, and other relief ordered against the administrators. That application was, in part at least, overtaken by the winding-up order made on 12 December 2011. On that occasion, the administrators asked the court to discharge them from their liabilities as administrators, and Vos J, being aware of the present insolvency application, wished to keep the matter open, and so the discharge of the administrators which he did order was expressly subject to the claims made in this application under paragraphs 74 and 75 of Schedule B1 to the Insolvency Act 1986.
3. I have been taken carefully through the procedural history of this application. What is of particular relevance is that it came before Norris J in November 2012. He had before him, amongst other things, an application by the respondents to strike out the application notice or give summary judgment in respect of all or part of it. Norris J reserved his judgment, and delivered judgment on 1 February 2013. He dealt with the matter, as one would expect, comprehensively. He referred to the statutory provisions, he described the operation of the statutory provisions in a way which has not been in any way qualified or criticised in the course of argument before me. He took various steps to reduce the scope of the claim which was made by this insolvency application, but he contemplated that the insolvency application, in a modified form, could go forward to later case management. The order which he made is a detailed one. I need not read all of it out. He separated out as inappropriate for this application claims based on the conduct of the administrators prior to their appointment as administrators. He made an order that all allegations in the statements of case of fraud by the respondents be struck out. He made that order for the usual reasons. He did not in any way preclude a properly pleaded and properly founded allegation of fraud, but what he held was not appropriate was an allegation of fraud which was not properly pleaded and properly founded. He dealt with that matter in paragraph 58 of his reserved judgment, which I think I need not red out more extensively. In his order he also paid close attention to what was in the current points of claim in support of the application notice, and he directed that there be particulars given of a large number of matters. He also directed that there be a case management conference. Finally, he made an order for an interim payment to be made by the applicants to the respondents. There was a later challenge to that order in the Court of Appeal, which failed.
4. The matter came before Arnold J on 14 June 2013, when he gave further directions. He directed matters such as disclosure and witness statements. The witness statements were to be served sequentially, with the applicants going first and the respondents following. That was not the usual course, but was justified in this case, because there was procedurally a real difficulty in knowing just exactly how the applicants put their case. There was further discussion before Arnold J as to whether the applicants could plead a properly founded case of dishonesty. It will be remembered that Norris J had addressed that matter, using the word "fraud" to describe the matter that could only be pleaded if it was properly pleaded and understood to be well founded. Arnold J indicated that when the word "fraud" was used, it should embrace allegations of dishonesty, or not acting honestly, and he ordered accordingly.
5. Today is the case management conference, as contemplated by the earlier orders. The parties have considered the directions which are appropriate. Further, the respondents have issued a separate application notice in which they seek interlocutory relief in various respects, and also directions for trial. What is important to note at present is that paragraph 1 of the application notice is to the effect that the applicants be prohibited from putting forward an allegation which is inconsistent with matters that had already been conclusively determined in these proceedings and in other proceedings, so that parts of their claim which make that inconsistent case should be struck out, or should be summarily dismissed under CPR 24. It is said that, in those respects, the applicants have no real prospect of succeeding on those parts of the claim, and there is no other reason why the matter should go to a trial.
6. I have been provided with draft directions from both sides. The respondents' directions are full and deal with the strike-out summary judgment application, but also deal with a large number of other matters designed to manage the case – the respondents would say actively manage the case – to get the case ready to be tried, as it was due to be tried in June of this year. The applicants have also provided draft directions, but it is fair to say that the applicants see this as a case which does not require management. What it requires is the bright light of a full court hearing at which everything they want to say can be said and ventilated, and then adjudicated upon. My reaction to the applicants' draft directions is that they are really not adequate. This is a case, far more than most, which requires careful analysis and active management, and a hands-off approach as advocated by the applicants will not do.
7. Before I turn to the decisions I reach, I need now to open up another front in relation to procedural matters. In parallel to these insolvency proceedings, the applicants, Mr Bernsten and Mr Richardson, brought a claim for damages against National Westminster Bank plc. It will be remembered that that bank had funded the LLP's development up to June 2010, and then withdrew its willingness to continue funding. What I have in relation to the claim against the bank, which was in the Queen's Bench Division, is the transcript of a decision given by Master Leslie, when he gave summary judgment for the bank, dismissing the claim. I have a transcript of the judgment of Mr Salter QC, sitting as a Deputy Judge of the Queen's Bench Division, when he dismissed an appeal from the Master's decision. Finally, I have a transcript of the decision of Briggs LJ, when he refused permission to the applicants to appeal to the Court of Appeal against the Master's decision or the Judge's decision. Curiously, the transcript of Briggs J's decision suggests that this is a judicial review matter, but I think that is just an error.
8. I do not have a complete set of proceedings, or indeed any pleadings put before me of the Queen's Bench claim. I also do not have the witness statements in the Queen's Bench claim. In particular, I do not have a witness statement which was served by a Mr Flannery, on behalf of the bank. That is of some materiality, as I will later explain.
9. As briefly as I can, I will indicate the parts of the judgment given in the Queen's Bench Division which are material for present purposes. It is pointed out, rightly, that the claim against the bank was not by the LLP, but was by Mr Bernsten and Mr Richardson personally. However, the allegation which they wished to make has within it the allegation that the bank was obliged to fund the LLP's development, and although the LLP was not a litigating party, that allegation within the claim was explored, the subject of evidence put in by both sides, and the subject of the judgments to which I will refer.
10. At paragraph 13 of his judgment, the Master refers to the question whether there was a concluded agreement that the bank would support the claimants in their venture to refurbish the hotel, to an unlimited amount and for an unlimited period until the refurbishment was completed. The Master recorded that that was said to be the agreement reached between the claimants and Mr Flannery on behalf of the bank. Put that way, the agreement is said to be between the claimants, who are the individuals, and the bank, but it is clear that the factual matters which were explored did not turn upon the identity of the parties to the agreement; it turned instead upon the question of whether there was an agreement by the bank to fund the development, prima facie to fund the LLP, which was carrying on the development. Master Leslie was in no doubt, for the purposes of Part 24, that the claimants had no real prospect of success in establishing the agreement binding the bank to fund the development. He said so in general, and he said so in particular. He also dismissed allegations that there was economic duress, or undue influence, or a fiduciary duty owed to the claimants. Central to his conclusion is that the bank did not commit itself to do more than it had done. There may have been discussions, there may have been negotiations, there may have been expectations. Those expectations may well have been well founded, but they stopped short of the bank coming under an obligation to fund, certainly to fund on terms where the members of the LLP did not provide security in the form of personal guarantees. The Master expressed the view that the claimants in that case could not properly have thought that the bank was under a contractual obligation to fund, even though they may have expected that the matter would continue. What is also relevant is that the Master refers to a witness statement or an explanation being given by Mr Flannery. In paragraph 22 of his judgment he confines himself to Mr Flannery's explanation on a particular point, but I think, from reading the judgment of Mr Salter, that Mr Flannery appears to have dealt with the matter more broadly, and in particular disagreed with what the claimants in that case had to say on a number of points.
11. My attention has also been drawn to the way in which the Master dealt with what was called the "VAT facility", or otherwise described as the "general purpose facility" (see paragraph 23 of his judgment), and what was described as the "Lombard loan" (see paragraph 27 of his judgment). Attention was given in argument today to the position as to the Lombard loan. What the Master held was that there was never any concluded agreement that the money was actually going to be made available, not least because the claimants declined "to be bullied into giving personal guarantees". The Master then gave summary judgment for the bank.
12. Mr Bernsten and Mr Richardson applied for permission to appeal to the High Court Judge. That was heard by Mr Salter, who gave permission and heard the appeal and dismissed the appeal. He gave a thorough judgment, extending to some 34 pages of transcript. He dealt with the various claims which were put forward. He effectively agreed with the Master's decision, save for one point as to the hedging and swaps and interest payments, which is not material for present purposes. The learned Deputy Judge referred in paragraph 45 to Mr Flannery challenging what the claimants had to say in a number of respects. In paragraph 49 he said that it was said to be common ground that the claimants knew that Mr Flannery had no authority to bind the bank to any particular lending. The Judge says that the claimants cannot reasonably have thought that those within the bank who were making the relevant decisions had undertaken to subordinate the bank's interests to those of the claimants and the LLP. The claimants are described as "experienced businessmen" (paragraph 52). The judge then considers the case as to the contract and rejects it. The judge says at paragraph 63 that a reasonable person in the position of the claimants would not have regarded promises by Mr Flannery as binding on the bank, because they knew full well that they were subject to sanction. It was also said, approving the Master's decision, that the detailed written terms of the arrangement between the bank and the LLP must be taken to have superseded the suggested prior oral agreement. The Deputy Judge then dealt with the claim in negligence, and dismissed it. He dealt with the Lombard loan (paragraphs 74-76). At paragraph 75 he approved the decision of the Master, for the reasons he gave, which included the reason that there was no concluded agreement that the money was going to be made available. In paragraph 76 he develops the point, this time by reference to the claimant's personal position. The Deputy Judge then dealt with undue influence and economic duress. He held that there was no case of that kind. Finally, he dismissed the arguments based on negligence.
13. So in a comprehensive and detailed and obviously careful and sensitive judgment the Deputy Judge found there simply was not anything in this case that the bank was under an obligation to fund the development past the date when it withdrew the funding. Indeed the Deputy Judge, as I understand it, heard submissions from Mr Miah of counsel on behalf of the claimants for a day and a half, and did not call upon leading counsel for the bank, which is something of an indication of the confidence and assurance the Deputy Judge felt in saying that there was just no case to go forward to a trial in the Queen's Bench Division.
14. Notwithstanding those setbacks, the claimants did seek permission to bring a second appeal to the Court of Appeal, and I have been shown the judgment given by Briggs LJ on 16 December 2013. That is a recent judgment. Briggs J had to deal with issues which arise only in relation to second appeals, but he also in a number of places indicated that he saw the case the same way as the Deputy Judge had seen it, and permission to appeal was withheld.
15. Standing back, there has now been a thorough investigation, on the evidence which both sides wished to put forward, of the issue as to whether the bank was under an obligation to continue funding the development. There has not been a trial, and there has not been a mini-trial of those issues, but, even more fatal to the position of Mr Bernsten and Mr Richardson, the courts have held that there simply is not anything worthy of investigation at a trial. The usual test for Part 24 is whether there is a real prospect of success, and the court says "Is the claim real, or is it wholly lacking in reality?" These courts have held that the claim is lacking in reality.
16. It is against that background that one now needs to consider the claims put forward in the present insolvency application. There appear to be three claims, although, with respect to the learned pleader, I have to say that the pleading is very far from a model of its kind. The first plea or issue appears to be that the administrators, following their appointment, failed to take steps that were open to them to rescue the business of the LLP. The particular and I think the principal if not only step that they failed to take was to obtain funding from the National Westminster Bank plc. I asked Mr Miah of counsel, who appears for the applicants, how he put the case, and he told me that the administrators' fault was that they had failed to obtain further funding from National Westminster Bank plc which had been approved by the bank and which was available from the bank. He says that the administrators could have required the bank to make the funding available, if that had been available, and all would have been well, so the allegation goes.
17. The second case which is put in the current pleading is that, instead of rescuing the business, the administrators sold the principal asset, namely the hotel, in advanced stages of redevelopment. It is said that it was sold (and this is admitted) for £4.25 million. That is said to be an undervalue. The true market value is said to be £6.9 million, and so the case is that the administrators did something, or failed to do something, to realise the true value of this important asset. However, when I asked Mr Miah at the beginning of today's hearing to explain what was the real challenge to the behaviour of the administrators, he made an allegation which nowhere appears in the pleaded case. He suggested that what happened here was that there was a predetermined arrangement. The parties to the arrangement were: Mr Tait, one of the administrators – Miss Rayment may not have been active in this arrangement; another party to the arrangement were the well-known surveyors and valuers, Knight Frank; the next party was the bank itself; and finally there was the intended purchaser of the hotel, West Register, which is closely associated, as I understand it, with the bank. Apparently the pre-determined arrangement (so it is said) involved Mr Tait explaining to the bank that the way forward was to sell the hotel at a known undervalue to West Register. That then happened. So Mr Tait, well understanding that £4.25 million was a significant undervalue, deliberately parted with the LLP's asset for much less than he must have appreciated it was worth. This was because, it is said, Mr Tait had a very close relationship with the bank. He felt that it would be a good thing to improve the position of the bank and give it, or its associate, an asset at a significant undervalue, and he did that, although he must have appreciated that he owed extensive duties as administrator to the LLP. That allegation, put that way, is a very serious one. Of course, people are entitled to make serious allegations, and courts must try them and when they are made, and sometimes they are abundantly proved and shocking misbehaviour is revealed. But there is a professional rule that counsel must not plead a case of fraud and dishonesty of that kind without a proper foundation for it. Indeed Mr Miah of counsel has been warned on two occasions, first by Norris J and then by Arnold J, that he must not plead these allegations without proper foundation. Mr Miah tells me that he has not pleaded it because he does not have a proper basis for it, but yet, when he is asked to explain the applicants' case, this is the explanation he gives. He also tells me that this is what Mr Richardson says in a witness statement Mr Richardson has put in in support of the claim. This is a wholly unsatisfactory state of affairs. The only case that goes to trial is a case that is pleaded. This allegation of serious dishonesty and fraud is not pleaded. Therefore, it will not go to trial. What a witness is doing making allegations which are not to go to trial, I cannot begin to understand and cannot begin to see how that was thought to be an appropriate way to put forward this case.
18. Putting this allegation, which at present, I have to say, should not have been made, on one side, I turn to consider what are the allegations which are pleaded as to sale at an undervalue. The courts are very familiar with claims as to sales at an undervalue. There are certain features that one expects to see as to what is said to have gone wrong. In fact, those features are almost wholly absent from the pleading of this case as to undervalue. There is a pleading in paragraph 11(3)(f) about a decision to appoint Knight Frank as agents for the selling party. It is said that decision was predetermined. There one sees the same word as used in Mr Miah's description of the serious dishonesty. But the predetermination pleaded is a relatively innocent matter. It is said that the creditors' statement gave the impression that the appointment of Knight Frank came at a particular point in time, whereas it had come at an earlier point in time. That does not convey any part of the serious allegation of dishonesty which Mr Miah has explained to me.
19. Then as regards the undervalue allegation, it is said that the administrators failed to heed the applicants' warnings that Knight Frank's valuation was not independent of the bank. The pleading goes on to say that the concerns expressed were acknowledged by Mr Tait. So it is not quite clear what was done in terms of failing to heed. If it is intended to say that the administrators should have taken a second opinion, what that second opinion would have said, should have acted in accordance with the second opinion, should never have appointed Knight Frank, should have appointed someone else, and what the consequences would have been, that should be stated. And failing to do as the applicants said is not itself a very relevant allegation of sale at an undervalue.
20. There is a further allegation, which was that the administrators failed to heed the applicants' warning not to sell the hotel. That is not so much as to the value achieved on sale, but as to whether there should have been a sale at all. If the case is that the applicants are not in a position to put forward any available case that the company should have been rescued, it seems to follow that the asset would have to be disposed of in an appropriate way.
21. The third matter which is raised in the amended points of claim is that the applicants wish to say that the costs incurred by the administrators should not be paid to the administrators, and, if they had been paid, they should be returned, not to the applicants of course, but to the LLP itself. Mr Miah, when addressing that part of the case, reminded me of the words of paragraph 75 of Schedule B1 of the Insolvency Act 1986. That gives the court power to examine the conduct of an administrator. An application for such an examination may be made by a creditor. And following the examination the court may order the administrator to pay monies to the LLP in full. When I asked Mr Miah whether there would be any monetary claim resulting from this, the response was that his clients had a statutory entitlement to have the conduct of the administrators examined so that even though no monetary claim would ensue, they were entitled to have their hearing, whether it took 5 days or 10 days. I find that approach a little surprising. I could well understand the applicants wanting an examination of the administrators' conduct in order to benefit by a payment to themselves or to the LLP. I am less clear as to whether the court should be ready, without having any ability to control the position, to examine the conduct of an administrator in any case where a member, or a shareholder, or a creditor – whatever it be – asks for it. It seems to me that it cannot be as of right. In this case there are in the pleadings allegations of fault by the administrators. Apart from the failure to rescue the business and the undervalue matters, which I have separately described, there appear to be a number of allegations, which indeed were summarised by Norris J in his earlier judgment. Some of those require one to explore whether the statement to creditors of 9 August 2010 contained inaccuracies and, if there were inaccuracies, whether the administrators were at fault in putting forward false statements. It is not said, I think, that they were knowingly false and fraudulent. They were innocently or carelessly false, that seems to be the allegation. I myself would take some persuading that I should allow there to be a 5 to 10 day trial of these matters, examining the conduct of the administrator if there was no monetary consequence for the applicants, who bring the matter before the court. Obviously if there were a public interest, if insolvency practitioners had been demonstrated to have acted in a way which engaged the public interest, that might be another matter. But I do not think that the applicants put the case that high.
22. Having described the three matters which are involved in these proceedings, I now come to my conclusions. The first allegation, that there was a failure to rescue the company because there was a failure to obtain funding from the bank, I consider to have no prospect of success. The question of the bank's obligations to the LLP have been fully examined, and the court has already held that there is no prospect of it being shown that the bank had an obligation to fund. The case today is not put on the grounds of issue estoppel, and a case of abuse of process is not pressed, but what is pressed is that I should give summary judgment, because there simply is not any real prospect of the applicants being able to get a different finding in a trial of this insolvency application. I asked Mr Miah to show me the evidence, in particular evidence that had not been before the Queen's Bench Division which might allow him to say that the case had gone wrong in the Queen's Bench Division and a further examination with new material would produce a different answer at a trial in this Division in June. As I understood his submission, he referred to the material that was unsuccessfully deployed in the Queen's Bench Division and not to new material. He suggested to me that things might be different because the applicants would cause Mr Flannery to come to court in June. He would be compelled to attend under a witness summons, and then the truth would come out. He did not show me any witness statement or witness summary from Mr Flannery that supports the applicants' case. I infer from the early mention I have made that Mr Flannery does not support the applicants' case. So if the applicants were to make progress, they would have to call Mr Flannery and then be given permission to cross-examine, and then possibly make progress when they cross-examine him. I can see no circumstances in which a court would allow that to happen in the case of Mr Flannery. So that is not new material that is going to transform the outcome in June of this year.
23. What causes me to pause on this question of summary judgment is that an application was made for summary judgment to Norris J, and he declined to grant this kind of summary judgment. Indeed, in his judgment at paragraph 72 he identified the type of case that might possibly be put by the applicants about the rescuing of the company. He prefaced his remarks by saying the case was "not promising". He then said that the argument would have to depend on establishing that the bank could have been persuaded to make the loan and would have permitted the loan to be used to support limited trading in administration. He also referred to the loan being made in circumstances where the required security, including a guarantee, would have been forthcoming. Norris J made those remarks in advance of the amended pleading and in advance of witness statements. In my judgment, having now seen the amended pleading and the witness statements, there is not any prospect of the applicants establishing the kind of argument which Norris J sketched in as a possibility, albeit not promising.
24. I also add to the fact that the matter has been explored in the Queen's Bench Division this further consideration. Mr Miah did not identify anywhere at any time any reason to think that the administrators could have achieved something which the applicants themselves tried to achieve and failed to achieve. I put to Mr Miah, "What magic wand did the administrators have to bring about a favourable funding decision from the bank when the two experienced businessmen, the applicants, had tried everything they could to persuade the bank, and had failed?" It seems to me that there is simply no answer that can be given to that question. It follows that I will give summary judgment for the administrators on the case which the applicants wish to put forward that the administrators failed to rescue the company.
25. Turning to the question of the sale at an undervalue, I have already described the wholly unsatisfactory state of affairs in relation to the applicants pleading of their case. In other circumstances I would take the view that their case should be struck out without more ado. They have already had more than one chance to put forward their case. They have heard two judges say that they are not to allege dishonesty and fraud unless they have a proper basis for it. Counsel has declined to plead fraud and dishonesty, and no other case worthy of consideration has been identified in the pleading. However, I am not pressed to take that view. I am encouraged by the respondents to give the applicants a further opportunity to put their case on some sort of arguable lines. A period of time within which that should be done has been discussed. I conclude that the applicants should have 14 days within which to deliver a draft pleading, removing all of the matters that fall away because there is no real prospect of success therein, and identifying, if possible, the steps which were taken, or the omissions to take steps, which resulted in the property being sold too cheaply. That draft pleading is to be available to the respondents and their solicitors within 14 days, and there will then be a further hearing, with a time estimate of 2 hours, when that and outstanding matters will be considered.
26. I turn from there to the third issue as to the costs of the administration and criticism of how the administrators went about their task. On the figures, which have been explained to me, it may very well be the case that, even if the applicants were right in all respects in their criticism of the administrators and £130,000 was returned by the administrators to the LLP, it would not have an impact on the financial position of the applicants. That is because the secured creditors would have by that time taken all of the monies returned to the LLP. As I indicated earlier, without a final decision on the point, I would be very loathe to direct a trial involving examination of the administrators' conduct, when it is not said there is a public interest in that examination, and it is not said, or cannot be said, that there is a monetary consequence for the applicants. That savours, to me, of litigating for the sake of litigating, perhaps litigating for the sake of causing difficulty and embarrassment, rather than for any proper purpose which the court would recognise. That point cannot be decided today and will have to decided as and when the court is able to assess the significance of the re-pleaded claim that the property was sold at an undervalue.
27. I will now review the directions I am asked to make to draw this matter to a close. Looking at the respondents' draft directions, there ought to be an order determining that there is no case to go to trial that the administrators failed to rescue the business of the LLP. I will direct the applicants, if they wish, to serve an amended pleading of the undervaluation case within 14 days. I will adjourn this case management conference to a convenient date after 14 days, with a time estimate of 2 hours. The consequential directions have been discussed. My understanding of the position we reached was that a certain consensus was achieved that orders should only be made when one gets to the end of this adjourned case management conference on the next occasion. Unless I have missed something, those are the orders I will make. There may be consequential matters which now need to be raised.