Insolvency litigation briefing - September 2014

11 minute read
30 September 2014


Wragge Lawrence Graham & Co's dedicated Insolvency Litigation team bring you their monthly update on the cases and issues affecting the insolvency and fraud investigation industry.

Directors will be responsible for breaches of accounting practice, irrespective of whether they are aware they are occurring

The case of RD Industries Ltd [2014] (Secretary of State for Business Innovation & Skills v (1) Roger Lionel Dymond (2) Michael William Dymond) provides a subtle reminder that directors cannot delegate accounting practices to others and then expect to have no liability when things go wrong.

RD Industries was a stationery manufacturer which had for a number of years been a very successful company. It was badly affected by the downturn in 2008 and in particular by the administration of Woolworths at the end of that year.

In May 2009 the company entered into an Invoice Discounting Agreement (IDA), which was signed by two of the company's directors, Mr Roger Dymond (R) and Mr Timothy Dymond (T). Mr Michael Dymond (M) was also a director, who co-signed the company's balance sheet along with R.

During the first half of 2010 the bank had some concerns as to the way in which the IDA was operated. Investigations took place and the bank subsequently became aware that the company was in breach of its terms. In particular, the company re-aged invoices to prevent them from falling outside the IDA's lending criteria, unreasonably delayed the issue of credit notes, assigned invoices before delivery of goods and failed to notify the bank promptly of a rebate to a customer.

The bank terminated the IDA and the company entered into administration on 22 July 2010. Disqualification proceedings were then brought against R and M; against the former for causing or allowing the company to breach the terms of the IDA and against the latter for allowing the breaches to occur. T provided a disqualification undertaking.

R and M claimed the company's finance manager - and he alone - had been responsible for breaching the terms of the IDA.

In the case of R the court held that he was responsible for ensuring the accounts department was run in accordance with the company's best interests. It was accepted that the finance manager was responsible for the way in which the finance systems operated but the court did not accept that he was "off on a frolic on his own". R had authorised the procedures that permitted pre-delivery invoicing and the netting off of credit notes, he knew credit notes would be issued late and he knew the company was pushing the limits of what was permissible under the IDA although he did not necessarily appreciate that what was being done was in breach of the IDA terms.

R caused the company to commit the breaches in question and allowed them to happen because he failed to make enquires or ensure internal controls were in place so that the breaches would not be committed.

In the case of M, he accepted he had a responsibility to keep himself appraised of the company's financial situation and he was a co-signatory on the company's accounts. M's case was that when he became aware of concerns raised by the bank in relation to the IDA, he was satisfied that R and T were dealing with the matter and he assumed they would sort out the bank's concerns.

The court found that M's conduct in this regard fell far short of the minimum duties of a director - the extent to which he stood back amounted to a total abrogation of responsibility in relation to matters which he was required to understand in order to carry out his basic duties as a director. M therefore allowed the breaches of the IDA to occur.

R and M were disqualified from acting as directors for six and three years respectively.

Things to consider

No new principle is established here but the case is a useful reminder that directors cannot escape liability for breaches of accounting practice simply because they say someone else is to blame. This is especially so when a director has knowledge of, and even encourages the practice(s) in question, notwithstanding he may not appreciate breaches are being committed.

Officeholders should not therefore be fobbed off by directors seeking to apportion blame on others and by those who state that dealing with the company's finances was not within their remit. Ultimately, they are the directors and responsible for the company's financial health.

Varying a part 36 offer does not give an offeree a new 21 day period to consider the varied offer made

The court has looked at whether a party, faced with a part 36 offer (made under Part 36 of the Civil Procedure Rules (CPR)) that has been varied in accordance with CPR36.3(6), has a second 21 day period within which to accept the new, varied offer made.

CPR36.10(1) provides that where a part 36 offer is accepted within the relevant period, the claimant will be entitled to the costs of the proceedings up to the date on which notice of acceptance is served on the offeror. Where the offer is made not less than 21 days before trial, the relevant period will be specified by the offeror - but it must be at least 21 days. If an offer is not accepted within the relevant period the claimant will be entitled to the costs of the proceedings up to the date when the relevant period expired. The offeree will be liable for offeror's costs from expiry of the relevant period to the date of acceptance.

In the case of Burrett v Mencap Limited [2014] the defendant made a part 36 offer in July 2013. In January 2014 they gave notice to the claimant that the offer had been changed (or varied) in accordance with CPR36.3(6). The offer was subsequently accepted and the question that came before the court was whether a new relevant period applied to the varied offer, i.e whether the claimant had a fresh 21 day period within which to accept the varied offer with the cost consequences that would follow, or whether the original 21 days still applied, in which case the relevant period had long since expired.

CPR 36.3(6) provides that 'after expiry of the relevant period and provided that the offeree has not previously served notice of acceptance, the offeror may withdraw the offer or change its terms to be less advantageous to the offeree without the permission of the Court.' CPR 36.3(7)(1) goes on to say that the varied offer is made when the offeror serves 'written notice of the withdrawal or change of terms on the offeree'. CPR36.3(7)(2) confirms that a change in the terms of a Part 36 offer will be effective when the notice of the change is served on the offeree.

The court held that CPR 36.7 was entirely silent as to any extension or renewal or replacement of the time for acceptance when an offer is varied. It simply confirms when a varied offer is made and when it is effective.

If parliament or the draughtsman had intended a varied offer to have attached to it a further amount of time for contemplation - and consequently a new 'relevant' period - that would have been made clear in the rules. It was not and, as a result, the court held that the terms of the original offer stood and the relevant period stated in the original offer was the one that applied.

Things to consider

In circumstances where the relevant period for acceptance has long expired, it may be worth considering, tactically, whether any Part 36 offer on the table should be revised, as opposed to being drafted in new terms, in order to provide the increased cost protection from expiry of the initial relevant period, rather than from expiry of what would be a new 21 day period.

Insolvency proceedings will be governed by the Jackson funding reforms from April 2015

The implementation of the Jackson reforms in April 2013 brought about an end to the general provisions which allowed recovery from the losing party of after the event (ATE) insurance premiums and success fees in conditional fee agreements (CFAs).

The changes implemented by the Jackson reforms meant that;

  • for CFAs entered into after 1 April 2013 the success fee can no longer be recovered from the losing party. Base costs can still be recovered but the success fee now needs be paid by the funded party itself.
  • a party can still obtain ATE insurance but, for policies entered into after 1 April 2013, the party obtaining the insurance has to meet the premium. It is no longer possible to recover the cost of the premium from the losing party.

The new rules governed all cases with the exception of certain specified 'exemptions', those being the recovery of both the success fee and insurance premiums in insolvency, publication and privacy (including defamation) proceedings and diffuse mesothelioma (asbestos related) claims.

However, in recent weeks there have been a number of suggestions in the press that the exemption will no longer apply to insolvency proceedings from April 2015.

On the one hand there are concerns that creditors of insolvent companies will suffer financially once the exemption is removed while on the other, questions have been raised as to why there should be a difference between almost identical claims brought by insolvent companies and those brought by solvent companies - where a losing defendant could be faced with a vastly increased cost liability.

Things to consider

It is very likely that the exemption will end for insolvency proceedings in April next year. In the meantime, insolvency practitioners who are intending to make claims on behalf of insolvent companies should consider whether a CFA and/or ATE insurance will be appropriate in the circumstances, and can be put in place before the exemption expires.

It should be noted that it will still be possible to engage lawyers on CFAs and put in place ATE insurance post April 2015, but the "uplift" and any ATE costs will have to be paid by the funded/insured party, they will not be a litigation cost.

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