This judgment was handed down remotely at 10.30am on 7 May 2025 by circulation to the parties or their representatives by e-mail.
ICC JUDGE GREENWOOD:
Introduction and Background
- This was the final hearing of two Applications, both made in the liquidation of Saville Foley LLP ("the LLP").
1.1. First, was an application dated 3 August 2023 ("the Sanrose Application") made by Sanrose Investments Limited ("Sanrose") for an order that the decision of Tyrone Courtman and Deviesh Raikundalia as the LLP's joint liquidators ("the Liquidators") to admit the proof of debt of Lawrence Foley and Jennifer Foley ("the Foleys") in the sum of £502,428 be reversed pursuant to rule 14.8(3) of the Insolvency (England and Wales) Rules 2016 ("the IR 2016"). In the event that its Application succeeded in respect of the Foleys' proof of debt, Sanrose also sought a personal costs order against the Liquidators.
1.2. Second, was an application dated 6 September 2023 ("the FWJ Application") made by FWJ Legal Limited t/a Francis Wilks and Jones ("FWJ") for:
1.2.1. an order that the decision of the Liquidators to reject FWJ's proof of debt dated 10 August 2023 be reversed or varied;
1.2.2. further or in the alternative, in effect, a determination of what sums are owed to Foley Investments Limited ("FIL") and/or to the Foleys as creditors of the LLP and/or are distributable to FIL and/or to the Foleys as members of the LLP, and a direction that such sums as would otherwise be payable to FIL and/or the Foleys be paid instead to FWJ up to the sum of its entitlement as assignee, chargee, lienee or otherwise.
- Save in relation to the issue of costs (in respect of which, in effect, they mounted a defence of both the process and substantive rationality of their decision) the Liquidators adopted a neutral position in relation to both applications.
- Ultimately, these disputes arose out of the relationship, both personal and commercial, between the Foleys and another couple, Mr Stephen Saville and his wife, Shirley ("the Savilles").
- The Foleys jointly owned and lived at a substantial property, of about 2.2 acres, known as "Brambles", 21 Seven Ash Green, Springfield, Chelmsford CM1 7SE, in Essex ("the Property"). Essentially, the Property comprised a house surrounded by land which I shall refer to as "the upper garden" (which included the house) and "the lower garden". In about 2011, the Foleys and the Savilles agreed that together they would develop the Property (or part of it in that respect, there has been a dispute) by seeking planning permission and building houses for eventual sale and, of course, anticipated profit, which was to be shared.
- On 8 June 2011, the LLP was incorporated as the intended medium through which the development and the joint enterprise were to be operated. On incorporation, its designated members were the Foleys and the Savilles personally; FIL (which was owned by the Foleys) was a member. On 26 July 2011, the Foleys entered into a contract of sale of the whole Property - comprised within a single title number (EX613991) at the Land Registry - to the LLP for £850,000, to be completed by 26 July 2013, or earlier if by mutual agreement.
- Although ultimately, no development was undertaken, there were, over time, three planning applications made in respect of the Property, each by or with the consent of the Foleys.
6.1. The first (Application Number 11/00773/OUT) was made on 9 June 2011 - the day after the LLP's incorporation - for the construction of seven houses on the lower garden, and one on the upper garden; it was refused on 25 July 2011. In an email sent by Mr Foley to Mr Saville on 16 October 2011, Mr Foley suggested a "structured way forward in either [sic] of three phases", the first of which was to separate upper from lower garden and apply for permission in respect of one house on the upper garden, the lower garden to be dealt with separately; the second was to apply for permission in respect of three houses on the upper garden ("and knock down Brambles"), the lower garden being dealt with separately; and the third was to appeal against the refusal of 25 July 2011.
6.2. In the event, the second application - reflecting the second of these suggested "phases" - was made on about 9 October 2012, in respect of the upper garden, and was approved on 30 November 2012, subject to various conditions; that application (for three houses) entailed the demolition of Brambles, the Foleys' pre-existing house, as indeed Mr Foley himself had proposed.
6.3. The third application was made on 19 December 2013, for the construction of three houses on the lower garden, and was refused on 21 January 2014.
- Between the first and second applications, on 16 August 2012, a number of important things happened:
7.1. the sale of the Property by the Foleys to the LLP was completed; the TR1 Deed of Transfer was signed by Mr Foley and Mr Saville on behalf of the LLP, and by the Foleys as transferors; it stated that the consideration, in the sum of £850,000, had been "received from the transferee"; in fact, it was common ground that no part of that money sum was paid to the Foleys at that time;
7.2. the Foleys and the Savilles ceased to be members of the LLP, designated or otherwise;
7.3. Sanrose, which was owned by the Savilles and had been incorporated shortly beforehand, on 26 July 2012, became a member of the LLP, as a result of which its only two members (both of which were designated members) were FIL and Sanrose, a circumstance which from that time remained unaltered;
7.4. Sanrose and FIL entered into a "Limited Liability Partnership Agreement" ("the Partnership Agreement") which provided that Sanrose and FIL had each contributed the sum of £1.00 to the capital of the partnership and that they would share any profits and losses equally.
- Although the events of 16 August 2012 were plainly connected, and seem to have taken place at a single meeting, it follows from the fact of their signatures on behalf of the LLP on the TR1, that Mr Foley and Mr Saville (and probably their wives also) did not cease to be members of the LLP until after the transfer of the Property.
- On 20 December 2012, shortly after the grant of planning permission on 30 November 2012 (for the construction of three houses on the upper land) two written "Loan Agreements" were made, one between the Foleys and the LLP, and the other (in identical terms) between the Savilles and the LLP, by which the Foleys and the Savilles each agreed to lend to the LLP the sum of £450,000, without security or interest, repayable "on demand at any time" ("the 2012 Loan Agreements"). The 2012 Loan Agreements were apparently connected with the grant of permission (and were intended as a means of funding the costs of construction) but, it was common ground, were never in fact acted upon.
- Unhappily, protracted and acrimonious disagreements arose between the two couples. Eventually, the relationship certainly their commercial relationship in respect of the joint development enterprise broke down completely. Indeed, it was on the contributory's winding-up petition of Sanrose, albeit ultimately with FIL's agreement, that on 13 January 2021, a winding-up order was made against the LLP.
- In that context, the Foleys and FIL were represented by FWJ: the Foleys personally instructed FWJ on 8 January 2019, and on 8 August 2019 it was instructed by FIL, by which time (according to Mr Stephen Downie, who gave unchallenged evidence for FWJ, of which he is a director) it had "become apparent that the dispute was more contentious", and that FIL was the party with "the interest in and rights over the LLP".
- According to Mr Downie's evidence, unchallenged, as I have said, the two sides agreed to instruct estate agents to value the Property and that on any sale the net proceeds would be divided between FIL and Sanrose in proportion to their respective entitlements as members. Accordingly, on 15 March 2019, a letter of instruction was sent to Strutt & Parker.
- A valuation was eventually achieved, and initial proposals were made to market the Property for sale. However, difficulties arose when the Foleys (who were still living at the house) failed to give access to the estate agents, and further disputes arose in connection with various claims against FIL, including in respect of rent said to be due in respect of the Foleys' occupation.
- In November 2019, following negotiations that failed, Birketts LLP (the solicitors to Sanrose) threatened to present a contributory's just and equitable winding-up petition against the LLP, based on the existence of a deadlock. It eventually presented such a petition on 22 April 2020.
- By June 2020, FIL and Sanrose had reached agreement on an offer by which Sanrose would purchase FIL's interest in the LLP, completion of which was set for August 2020, to allow for the Foleys to deliver vacant possession. In proposed form the settlement documents were agreed, and they were circulated for execution, with minutes removing FIL as a PSC of the LLP, and minutes of FIL and the LLP reflecting the acquisition of FIL's interest by Sanrose. The deal was incorporated into a deed of retirement of FIL which was agreed by Mr Foley on behalf of FIL.
- The deal was not however completed because, on the day of proposed completion, Mr Saville discovered that certain mature trees located at the Property and which had formed a "privacy screen" had been chopped down, which Mr Saville alleged was by or on the instructions of the Foleys and in breach of the Partnership Agreement; Sanrose therefore withdrew.
- FWJ continued to act for FIL and the Foleys, and they entered into a deed of assignment and charge dated 7 January 2021 ("the DOA") in respect of FWJ's fees for acting on their behalf. This was entered into in respect of unpaid legal fees which FWJ had, on terms, previously agreed not to pursue based on the expected imminent sale of the Property; it had been negotiated following the failure to complete the settlement in the previous year.
- It was FWJ's case that pursuant to the DOA, it was entitled to assert FIL's (and/or the Foleys') rights to payment of a dividend in the liquidation of the LLP.
- Amongst other things, the DOA contained recitals:
19.1. at (F), that FWJ had agreed to defer payment in respect of its services to FIL and the Foleys until after the sale of the Property;
19.2. at (G), the intention of the parties that the LLP would enter members' voluntary liquidation and that "Stephen Law and Abigail Shearing of RSM
will be appointed liquidators ("Liquidators")".
- It then provided:
20.1. at Clause 1.1, that "Distribution" was defined as "the sum payable to FIL by the Liquidators as a distribution of the assets of the LLP to its designated members";
20.2. that "Secured Assets" were defined as "all the assets, property and undertaking of the Foleys and FIL which are, or are expressed to be, subject to the Security created by or pursuant to [the DOA] (and references to the Secured Assets shall include references to any part of them";
20.3. that "Secured Liabilities" were defined as including "all present and future obligations and liabilities of the Foleys and FIL to FWJ, whether actual or contingent and whether owed jointly or severally, as principal or surety or in any other capacity, under or in connection with the Retainers, the [Retainer Amendments], or the DOA
";
20.4. at Clause 2.1, that FIL and the Foleys agreed on demand to pay the Secured Liabilities, and at Clause 2.2, an unconditional acknowledgement that FWJ's fees up to the date of the DOA (whether arising under the Retainers or the Retainer Amendments) were not and shall not be disputed;
20.5. at Clause 3.1, that "as a continuing security for the payment and discharge of the Secured Liabilities, FIL with full title guarantee assigns to FWJ absolutely
.: (a) the Distribution; and (b) all its claims arising in the liquidation of the LLP including its rights to payment of the Distribution";
20.6. at Clause 3.2(b), that the Foleys each assigned "to FWJ absolutely, subject to a proviso for reassignment on irrevocable discharge in full of the Secured Liabilities, all sums payable to each [of] them, as shareholder dividend or otherwise, by FIL";
20.7. at Clause 5.3, that the Foleys and FIL had not "received, or acknowledged notice of, any adverse claim by any person in respect of the Secured Assets or any interest in them. There are no covenants, agreements, reservations, conditions, interests, rights or other matters whatsoever that materially and adversely affect the Secured Assets";
20.8. at Clause 6.3, the Foleys and FIL each covenanted not to "do, or permit to be done, any act or thing that might depreciate, jeopardise or otherwise prejudice the security held by FWJ or materially diminish the value of any of the Secured Assets or the effectiveness of the security created by [the DOA]";
20.9. at Clause 6.5, the Foleys and FIL each covenanted to "ensure that all money payable to, or other property receivable by, any of them under or in relation to the Secured Assets is paid or delivered to FWJ";
20.10. at Clause 11.1, that "The Foleys and/or FIL shall, promptly on demand, pay to, or reimburse, FWJ and any Receiver, on a full indemnity basis, all costs, charges, expenses, taxes and liabilities of any kind (including, without limitation, legal, printing and out-of-pocket expenses) incurred by FWJ or any Receiver in connection with: (a) the negotiation, preparation, execution and delivery of this Deed; (b) the Secured Assets; (c) taking, holding, protecting, perfecting, preserving or enforcing (or attempting to do so) any of FWJ's or a Receiver's rights under this Deed; (d) any amendment, extension, waiver, consent or suspension of rights (or any proposal for any of these) under or in connection with this Deed; (e) any release of any security constituted by this Deed; or (f) taking proceedings for, or recovering, any of the Secured Liabilities."
- The day before the LLP went into liquidation, the Foleys gave an undertaking to FWJ in the following terms ("the Undertaking"):
This undertaking given is to confirm that Mr Lawrence Foley and Mrs Jennifer Foley, both directors of [FIL] hereby undertake to pay fees outstanding to [FWJ] by return upon cleared distribution from the liquidator and confirm that (FWJ) fees are agreed subject to due diligence being carried out by (FIL) upon receipt from (FWJ) of detailed monthly breakdown schedules.
- The DOA was made between the Foleys, FIL and FWJ. Mr Stephen Downie, a director of FWJ, gave evidence on behalf of FWJ, and said, amongst other things, "The DOA was entered into on the presumption or understanding that FIL and Sanrose, as members of the LLP, were solely entitled to any distribution. Further reinforcement of this is confirmed by the Undertaking provided by the Foleys. Both the Undertaking and DOA envisage a distribution to FWJ. The very presence and wording of those documents are emblematic of the agreed and understood position, in that it was FIL - not the Foleys who would share in any distribution from the LLP." Although the Foleys were given the opportunity to examine him, Mr Downie was not cross-examined, and so this evidence was not challenged.
- The construction of the DOA was in issue on FWJ's Application.
- In that regard, essentially, the Liquidators rejected FIL's proof of debt on grounds that as a matter of construction, in their view, although the DOA was made after the presentation by Sanrose of a petition, it only operated and provided for the assignment of rights to FWJ in the case of a members' voluntary winding-up, whereas the LLP is in compulsory liquidation, and in any event, because it did not assign the Foleys' personal rights as creditors in the LLP's liquidation (which by virtue of having accepted the Foleys' proof of debt, the Liquidators had acknowledged).
- FWJ's case was that even if otherwise not accepted that FIL was entitled to payment in the LLP's liquidation, the Foleys were nonetheless (by virtue of the DOA) contractually restricted or estopped from asserting their own competing claim to payment. In the further alternative, FWJ sought to rely on a solicitors' lien in respect of any distribution (whether made to FIL or the Foleys, regardless of capacity).
- On 13 January 2021, a winding-up order was made against the LLP on Sanrose's petition, with FIL's agreement. FIL did not agree to pay Sanrose's costs of the petition, but was ordered to do so. On 1 February 2021, Abigail Shearing and Tyrone Courtman were appointed as the LLP's joint liquidators; subsequently, on 15 November 2022, Ms Shearing was replaced by Mr Raikundalia as a joint liquidator. Mr Courtman and Mr Raikundalia were Respondents to both Applications; as I shall explain, Mr Courtman gave evidence.
- At the time of the liquidation, the Foleys were still in occupation of the house at the Property. The Liquidators wished to sell the Property, and to do so with vacant possession. The Foleys resisted; they instructed Solicitors, Messrs Backhouse, and through them alleged, in correspondence, that it had been agreed at the outset that their house (and the upper garden) was not intended to form part of the venture, and was to be transferred back to them (and indeed, that the Savilles and Sanrose had fraudulently taken their home and that part of the Property from them). In those circumstances, the Liquidators served a notice to quit, and the Foleys vacated the Property on 30 July 2021, albeit under protest, whilst maintaining their allegations. When the Liquidators' solicitors (Thompson Smith and Puxon - "TSP") responded to those allegations (for example, by their letter of 26 August 2021) that the Foleys' fraud allegations were neither particularised nor evidenced, the Foleys complained (for example, by email of 6 December 2021) that they were not carrying out their duties, and that the Liquidators were "party to accepting a case of fraud as fact, by refusing to respond to our many requests to carry out a review of the case presented by Sanrose Investments Ltd."
- The Foleys did not pursue their threatened or any claim for the return of the Property (or any part of it) and it was eventually sold by the Liquidators - in its entirety - on 17 March 2022, for £1,065,000.
- As I have mentioned, there was also a dispute between FIL and Sanrose as to whether FIL was in breach of the Partnership Agreement by failing to pay rent to the LLP in respect of the Foleys' occupation of the Property. That dispute was submitted to arbitration. On 8 November 2021, Sanrose presented a winding-up petition against FIL on the basis of a costs award made in the arbitration proceedings against FIL for arbitration fees. FIL, which was advised by Backhouse solicitors, resisted the petition against it on the basis that Sanrose would be paid as soon as the Property was sold, and FIL was paid its share of the proceeds.
- In that respect, in a witness statement dated 11 January 2022, Mr Foley said:
"The LLP agreement was dated 16 August 2012
which confirmed that both the petitioner and FIL were members of the LLP in equal shares. Mrs Foley and I therefore transferred the property known as Brambles to the LLP. It was never agreed that either the petitioner or FIL would wind up the other in an attempt to receive the full value of the assets and as such, this was the reason why the LLP was drafted in the manner it was to ensure both parties received 50% of the assets."
"Once the property has been sold, FIL will be in receipt of a balance far in excess of the value of the debt claimed by the petitioner and will therefore have assets. I, on behalf of FIL, have suggested that the balance due to the petitioner would be paid once FIL are in receipt of their share of the sale proceeds."
"
the petitioner is aware that the LLP is in the process of selling the property
and that FIL will be in receipt of a share of the sale proceeds once the property has been sold."
- In his statement, in addition, Mr Foley said that Sanrose's knowledge that FIL would receive its share from the sale of the Property, meant that the presentation of the petition may be abusive, and that in any event, the petition was unreasonable and disproportionate as it would allow Sanrose to have "the full assets of the LLP", and that FIL would be prejudiced in the event of a winding-up order as "FIL will be unable to receive their share of the proceeds of sale, upon sale of the property".
- In consequence, the petition was adjourned and the court directed FIL to file evidence as to whether the Property had been sold and whether a distribution had been paid, or if not, what the timetable was for a distribution.
- In a second witness statement dated 8 February 2022, Mr Foley said:
"The liquidator has reported that the LLP has collected a total of £923,463.00 to date, therefore if the funds were split equally this would equate to a distribution of around £461,735.00 to each member
it is clear that there will be sufficient funds available to enable FIL to make payment of the balance owed."
"I, on behalf of FIL, am intending to request a distribution drawdown to each member for an initial £75,000."
- In his evidence, Mr Foley was unable to reconcile that evidence with the position taken by the Foleys in the present proceedings.
- In the event, FIL went into compulsory liquidation on 29 March 2022 and Andrew Dix was subsequently appointed as its liquidator on 6 September 2022.
- On 31 May 2022, TSP (for the Liquidators) wrote to Birketts (for Sanrose) in relation to the Property's sale price, and in that regard said that, "It is our clients' position that each designated member is now a creditor of the LLP in liquidation and so each will have to prove for their debt to be repaid as a creditor, not as a member
". In his evidence, Mr Courtman said that on the material that the Liquidators then had, TSP's assertion had been correct; at that time, he said, no personal claim had been envisaged. The same conclusion was repeated in a letter dated 14 July 2022 and sent by TSP to FWJ: "Our clients would not be distributing any amounts to the Foleys directly as they are not creditors in the LLP liquidation. Therefore, in the event our clients were minded to make any distributions to a third party, this could only ever relate to moneys owed by FIL"; again, Mr Courtman agreed that "at that point in time yes", the statement was correct.
- The Liquidators advertised for proofs of debt in the LLP's liquidation to be submitted by 30 March 2023. They received the following:
37.1. two proofs of debt from Sanrose, one for the sum of £450,000 in respect of a loan owed by the LLP, and the other for the sum of £1,642; both proofs were accepted;
37.2. a proof of debt dated 19 October 2022 from FIL (by then in liquidation, and so acting by its liquidators) in the sum of £450,000 in respect of a loan debt said to have been incurred on 20 December 2012 (the date of the 2012 Loan Agreements) which was rejected on 13 June 2023; the reasons given by the Liquidators for their decision were: "(1) you have failed to provide any substantive evidence supporting the provision of any consideration in relation to the sum claimed and (2) you have failed to provide any evidence substantiating any formal assignment of any such claim arising from the introduction of the property by Mr and Mrs Foley to Saville Foley LLP";
37.3. from the Foleys personally - having not initially lodged proofs - a proof of debt dated 14 May 2023 in the sum of £511,970, which was accepted in the sum of £502,428 on 13 June 2023; it was this proof which was challenged by the Sanrose Application.
- The Foleys' proof was lodged following a meeting between Mr Foley and Mr Courtman on 9 May 2023. They claimed the sum of £511,970, and their proof was signed by Mr Foley, on behalf of himself and his wife. As regards the particulars of how and when the debt was incurred, it stated "In the investment & setting up of Saville Foley LLP, from 2011 to 2015"; it was accompanied by a document entitled 'Summary of Mr & Mrs Foley's Equity', and explanatory notes, as follows:
"SAVILLE FOLEY LLP
SUMMARY OF MR & MRS FOLEY'S EQUITY
| |
Foley Equity Note |
| Introduction Of Title by Mr & Mrs Foley |
850,000 |
(1) |
| Monies Paid to Mr & Mrs Foley from S & S Saville - Nov 2011 |
-15,000 |
(2) |
| Monies Paid to Mr & Mrs Foley from S & S Saville - Apr 2012 |
-10,000 |
(3) |
| Monies Paid to Mr & Mrs Foley from S & S Saville - Jun 2013 |
-15,000 |
(4) |
| Mortgage Repayment made by S & S Saville |
-122,874 |
(5) |
| Costs incurred by L and J Foley |
5,755 |
(6) |
| Monies paid by S and S Saville to L and J Foley to equalise the investment |
-190,453 |
(7) |
| VAT payment owed to Mr & Mrs Foley |
9,542 |
(8) |
| TOTAL Equity invested by Mr & Mrs Foley into Saville Foley LLP |
511,970 |
|
SAVILLE FOLEY LLP
SUMMARY OF MR & MRS FOLEY'S EQUITY
AS AT 30TH JUNE 2015
Note Description
(1) As per the agreement, Saville Foley were to purchase the Title of Brambles 21 Seven Ash Green for a consideration of £850,000 (Eight Hundred and Fifty Thousand Pounds). This was to be done by a transfer of 50% of the title by L&J Foley and a cash payment of £425,000 (Four Hundred and Twenty Five Thousand Pounds) from S&S Saville. The Land Registry shows the title absolute to Saville Foley LLP
(2) First Payment towards the £425,000.00 Contribution
(3) Second Payment towards the £425,000.00 Contribution
(4) Third Payment towards the £425,000.00 Contribution
(5) Fourth Payment towards the £425,000.00 Contribution
(6) Addition Contribution By L&G Foley ill invoices provided to RSM
(7) Fifth Contribution towards the £425,000.00
(8) Book debt in the statement of affairs is £9542. Adjusting this amount to £7104 is invalid as it was a debt owed to Mr and Mrs Foley."
- In the meantime, FWJ had notified the Liquidators that it was entitled to be paid its fees out of sums which would otherwise be payable to FIL (either by virtue of the DOA or by way of solicitor's lien there was no mention at that stage of the Undertaking). One of the LLP's joint liquidators, Ms Shearing, proposed that this be agreed between FWJ and FIL's liquidators, as she would otherwise have to seek directions from the Court. Following negotiations, and to minimise costs and delays in the liquidation of the LLP, although the amounts owed to FWJ were not agreed by FIL's liquidator, he nonetheless agreed that the first £170,000 of any dividend payable to FIL should be paid to FWJ for them to hold pending agreement with FWJ.
- After the Liquidators had told FWJ that they had rejected FIL's proof, FWJ lodged its own, dated 10 August 2023, in the sum of £145,107, as an alleged assignee (under the DOA) of the debt claimed by FIL. However, this also was rejected, on 17 August 2023. The reasons given by the Liquidators were: "(1) Your claim is by reference to a deed of assignment of all claims and interests of Foley Investments Limited - In Liquidation (Company number 07069436). (2) Foley Investments Limited - In Liquidation has no claim admitted in the liquidation of Saville Foley LLP." The rejection of this proof was the subject of the FWJ Application.
- In respect of the genesis of the Foleys' proof, and in respect of its admission, Sanrose and FWJ alleged that Mr Courtman had acted improperly, because:
41.1. first, the process was unfair notice ought to have been given to Sanrose and FWJ/FIL, and they ought to have been involved in (or their views sought in respect of) its determination;
41.2. second, Mr Courtman had, in effect, at his meeting with Mr Foley on 9 May 2023, raised and suggested a personal claim, which having (in his own mind) fashioned, he then decided to admit despite the admitted claim not having been the claim in fact advanced by the Foleys in the proof itself; and,
41.3. third, that in all the circumstances, including the overwhelming weight of evidence in favour of the conclusion that any distribution ought to have been to FIL, rather than the Foleys personally, the decision to admit the proof was irrational and unreasonable.
- Against that background, the two Applications were made, seeking the relief summarised at paragraph [1] above. Neither Application formally sought that the rejection of FIL's proof ought to be reversed, although it was implicit in both, that any right to payment vested in FIL rather than the Foleys.
- As to evidence, there were statements from Mr Saville on behalf of Sanrose; Mrs Andrea Kaley (an accountant, as I shall explain, at the relevant time employed by Fisher Michael Accountants, "FM") also advanced in support of Sanrose's case; Mr Foley on his own behalf, and that of Mrs Foley; Mr Courtman on behalf of the Liquidators; and Mr Downie on behalf of FWJ. Of those, to some extent, Mr Saville was cross-examined, as were Mrs Kaley, Mr Foley and Mr Courtman; Mr Downie was not. Where necessary to do so, I shall comment on their evidence, whether written or oral, below.
The Relevant Law
- The relevant provisions are at rule 14.8 of the IR 2016, and in particular, at rule 14.8(1)-(3):
"(1) If a creditor is dissatisfied with the office-holder's decision under rule 14.7 in relation to the creditor's own proof (including a decision whether the debt is preferential), the creditor may apply to the court for the decision to be reversed or varied.
(2) The application must be made within 21 days of the creditor receiving the statement delivered under rule 14.7(2).
(3) A member, a contributory, any other creditor or, in a bankruptcy, the bankrupt, if dissatisfied with the office-holder's decision admitting, or rejecting the whole or any part of, a proof or agreeing to revalue a creditor's security under rule 14.15, may make such an application within 21 days of becoming aware of the office-holder's decision."
- The Sanrose Application was made in respect of the Foleys' proof, and therefore, under rule 14.8(3); the FWJ Application was made under rule 14.8(1).
- The function which a liquidator performs when deciding whether or not to accept or reject a proof of debt for dividend purposes is quasi-judicial and is not different from that of the court itself: Re Menastar Finance Ltd [2003] BCC 404 at [43]-[47], per Etherton J (as he then was):
"43. There is a long line of authority going back to the nineteenth century establishing the principle that, on making a winding up order or a bankruptcy order, and, in the case of both personal and corporate insolvency, in considering whether to admit a creditor's proof based on a judgment debt, the court can in appropriate circumstances go behind the judgment to see whether the debt is truly due.
44. The power of a liquidator is, in this respect, no different from that of the court itself, since the liquidator, in deciding whether to accept or reject a creditor's proof in whole or in part, is acting in a quasi-judicial capacity: see Tanning Research Laboratories Inc v O'Brien (1990) 8 ACLC 248 at p.253, citing Re Britton & Millard Ltd (1957) 107 LJ 601. His statutory duty is to ensure that the company's property is collected in and applied in satisfaction of its liabilities pari passu among its proper creditors.
45. In deciding whether to go behind the judgment debt, and, if so, in appraising the validity of the creditor's claim, neither the court nor the liquidator nor the trustee in bankruptcy is limited to the evidence that was before the court when it gave its judgment: see Re Trepca Mines Ltd [1960] 1 WLR 1273.
46. The rationale behind the principle is that the duty of the liquidator is to ensure that the assets of the insolvent company 'are distributed amongst those who are justly, legally and properly creditors
': see Re Van Laun [1907] 2 KB 23 , at p.29, per Cozens-Hardy MR, and also Re Onslow, ex parte Kibble (1875) LR 10 Ch App 373 at pp.376377, per Sir W M James LJ. The same is equally true of the trustee of a bankrupt.
47. In Van Laun, the Court of Appeal approved the way the matter had been put by Bigham J at first instance, who said ([1909] 1 KB 155, at pp.162163):
'The trustee's right and duty when examining a proof for the purpose of admitting or rejecting it is to require some satisfactory evidence that the debt on which the proof is founded is a real debt. No judgment recovered against the bankrupt, no covenant given by or account stated with him, can deprive the trustee of this right. He is entitled to go behind such forms to get at the truth, and the estoppel to which the bankrupt may have subjected himself will not prevail against him. In the present case the trustee desires to satisfy himself that the claims for costs represent a real indebtedness. He can only do this by seeing and examining the bills. When he sees them, it may be that he thinks them fair and reasonable and, if so, he will probably admit the truth. But until Mr Chatterton furnishes him with the means of forming an opinion I think the trustee cannot do otherwise than reject the proof.'"
- On an appeal against rejection or acceptance of a proof by a liquidator, "the function of the court
is to decide the case in the light of the evidence which is before the court and not merely to express a view as to whether the liquidator was right or wrong in rejecting the proof on the evidence which was before him. The court must approach the question and decide afresh to what extent the claim ought to be admitted by the liquidator": Re Burnden Group Ltd [2017] EWHC 247 at [2.1] per HHJ Stephen Davies.
- As to the burden of proof on an appeal (see Re Farrer Construction Ltd [2022] EWHC 24, per Fancourt J, at [19]-[20]):
48.1. in the case of an applicant (such as FWJ, in the present case) appealing against the rejection of his own proof of debt, the burden of proof will be upon the applicant to establish his claim to the civil standard; it will not be on the liquidator to disprove the claim or to justify his rejection of it. The correctness of his decision is not the issue.
48.2. in the case of a challenge to the admission of a proof of debt of another creditor (such as that made by Sanrose) the burden of proof will lie on the creditor seeking to have their proof admitted to establish their claim.
- Accordingly, in the present case, it was agreed that the burden was on the Foleys to prove their (challenged) claim on the balance of probabilities, and on FWJ to prove its own (rejected) claim (which was in part dependent upon proof of FIL's claim).
- I shall deal first with the Liquidators' admission of the Foleys' Proof, which arose on both Applications, and which both Sanrose and (in effect) FWJ sought to reverse.
The Foleys' Proof of Debt
The Relevant Law
- In respect of LLPs (as in respect of companies) there is a clear conceptual distinction between working capital introduced by members as "equity", and working capital introduced or provided by way of "debt" or loan (whether introduced by the members or one or some of them, or by an outsider such as a bank).
- Whereas a loan will necessarily create a debt repayable on terms agreed explicitly or impliedly, a contribution of equity (or "capital", more properly so called) is an investment exposed to the risk of loss, which does not create a debt (subject perhaps to some term in the LLP agreement).
- Accordingly, in a liquidation, whilst a member is able to prove, with other unsecured creditors, for a debt created under a loan, he will not be able to prove for the return of capital, or any part of it (although he may be able to prove for an accrued but unpaid profit share, albeit not as a debt due under a loan: see The Law of Limited Partnerships, 5th Edition (2021), at 33.5-33.7); he will recover capital only to the extent of a distribution to members of any surplus after satisfaction of the LLP's debts, liabilities and expenses; there is thus a further distinction between the sum or amount of a members' invested "capital" and the actual, fluctuating value of the partnership's assets from time to time.
- As was said by Lindley LJ, in Lee v Neuchatel Asphalte Company (1889) 41 Ch D 1, at 23:
"
. there is a sort of notion that the company is debtor to capital. In an accountant's point of view, it is quite right, in order to see how you stand, to put down company debtor to capital. But the company do not owe the capital. What it means is simply this: that if you want to find out how you stand, whether you have lost your money or not, you must bring your capital into account somehow or other. But supposing at the winding-up of the concern the capital is all gone, and the creditors are paid, and there is nothing to divide, who is the debtor? No one is debtor to anyone. If there is any surplus to divide, then, and not before, is the company debtor to the shareholders for their aliquot portions of that surplus. But the notion that a company is debtor to capital, although it is a convenient notion, and does not deceive mercantile men, is apt to lead one astray. The company is not debtor to capital; the capital is not a debt of the company."
- Whether funds are introduced by a member as capital/equity, or loan/debt, is a question of fact. In the absence of an agreement that payments comprise a capital contribution, they will ordinarily be treated as having been made by way of loan, importing a simple obligation to repay a debt: Seldon v Davidson [1968] 1 WLR 1083.
- In principle, capital contributions may be reduced, or returned, or converted into debt, and conversely, debt may be converted into capital.
The Claims Advanced by the Foleys, and the Claim Accepted by the Liquidators
- On its face, the Foleys' proof (as set out above at [38]) and the claim it advanced, was unclear:
57.1. the stated particulars, that the debt was incurred, "In the investment & setting up of Saville Foley LLP, from 2011 to 2015", failed to identify the nature of the claim, or the source of the parties' alleged rights and obligations;
57.2. the attached "Summary" referred to the Foleys' "Equity", although they were not members of the LLP, and it referred to the calculation of that "Equity" as at 30 June 2015, which other than being the end of the LLP's accounting year (and thus the date to which its 2015 Annual Accounts were produced) was not a date of any obvious significance; apart from anything, it fell over five years before the LLP went into liquidation, and almost eight years before the date of the proof itself;
57.3. the attached "Notes" referred to a "transfer of 50% of the title", although title to the whole Property (registered as a single title) was transferred to the LLP alone; the reference to the "agreement" at Note (1) was unparticularised;
57.4. also in the "Notes", several payments made by the Savilles to the Foleys or for their benefit were referred to as components of their (otherwise unexplained) "£425,000 Contribution", and their payment of £190,453 was described as having been made "to equalise the investment";
57.5. the ultimate claim, according to the "Summary", was described as "TOTAL Equity invested by Mr and Mrs Foley into" the LLP.
- In his evidence, Mr Foley explained that neither he nor his wife had been the author of the proof, which had been written by one of his sons-in-law, an accountant (but from whom there was no evidence); he was unable to explain its terms or meaning with any real clarity. In their submissions however, the Foleys outlined their belief in the existence of two, possibly three, varieties of personal claim against the LLP.
58.1. The first, which appeared to be their principal claim, and was repeatedly emphasised, was that they had been the victims of the Savilles' fraud, and that the agreed joint venture had been in respect of the lower garden only, meaning that they were entitled either to the return of the upper garden and house (or its value) or were entitled perhaps, by virtue of the fraud, to unravel the entire venture, and claim the return or value of the whole Property. This was, essentially, the claim that had been raised previously, through their solicitors, and rejected by the Liquidators as unparticularised and unevidenced. It was plain from the evidence that the Liquidators' decision in that respect had never been accepted by the Foleys. Equally, it was not the claim made in their proof.
58.2. The second was that they were entitled to 50% of the net proceeds of sale of the Property, because "in [their] minds" they had been, throughout, the "legal owners" of (at least) 50% of the Property.
58.3. The third possibility was that they were entitled to 50% of the net proceeds of sale of the Property because they had been the original owners, and had sold it to the LLP.
- On behalf of each of the other parties including the Liquidators it was said that it was not possible to discern a single clearly articulated case advanced by the Foleys in support of their proof.
- Mr Webb suggested that in principle, there were four claims which conceivably the Foleys might have had in mind, or perhaps some combination of them:
60.1. first, was their claim in fraud and/or in respect of the value of the upper garden;
60.2. second, was a claim for the balance of the purchase price due under the contract of sale of the Property made on 26 July 2011, and completed on 16 August 2012;
60.3. third, was a claim under the 2012 Loan Agreement which they made with the LLP on 20 December 2012; and,
60.4. fourth, was a claim not as such as creditors, but in respect of members' invested capital, or "equity".
- Mr Deacock said that even in principle, only the second and fourth of those claims might be drawn from the language of the proof, but that realistically, the claim ought to be read as having been made (and therefore misconceived) as a claim in respect of members' rights or interests - their "equity"; in that regard, he referred to a letter from the LLP's accountant, Mrs Andrea Kaley, dated 5 November 2013 (which I explain below, and which referred to members' "capital accounts" each anticipated to be in the sum of £502,428) and to the LLP's 2014 Annual Accounts, which stated the "TOTAL MEMBERS' INTERESTS" comprising "Loan and other debts due to members" in the sum of £1,004,856 half of which (plus the sum in respect of VAT) was in the sum of the asserted claim. In any event, both Mr Webb and Mr Deacock submitted that however framed, the claim ought to have been (and ought now to be) rejected.
- Mr Courtman differed: in his evidence, he explained that whatever in fact might (or might not) have been in the minds of the Foleys, their proof was understood and accepted on the following basis:
62.1. that "in essence" this was a partnership between the Foleys and the Savilles; that it appeared to the Liquidators that the Foleys and the Savilles had agreed to make equal or equivalent contributions to the venture, in the case of the Foleys to be achieved by means of the sale to the LLP of the Property for £850,000, and in the case of the Savilles, by means of various payments to the Foleys, or for their benefit (to some extent, through the LLP);
62.2. that the benefit of the outstanding debt due to the Foleys under the sale contract had not been assigned by them to FIL, but was treated as a loan made by them to the LLP, and as such as their "investment in the LLP", or as their contribution to it; the parties' intention to recognise their contributions as loans made by the Foleys and Savilles personally, was "evidenced" by the 2012 Loan Agreements (which he referred to as "facilities"); it was not limitation barred because it was either repayable on demand under the 2012 Loan Agreements (and no demand had been made) or was a "long term" loan, not (previously) presently payable in substance, it had been agreed to defer repayment pending the Property's sale;
62.3. essentially, the Liquidators accepted that the Foleys themselves had a claim, as creditors, for repayment of their personal investment in the LLP, which they had made by way of loan, in a sum (mathematically) equal to the purchase price under the sale contract, to the extent that it had not been satisfied by payments made to them by the Savilles (or Sanrose).
- Three immediate issues arose.
- First, was whether or not the claim as accepted by the Liquidators, was within the terms of the Foleys' proof. In my judgment, although the proof was certainly not drafted in wholly satisfactory terms, it was sufficient to raise the claim adjudicated (amongst others), to payment in respect of the Foleys' personal investment in the LLP, albeit described as "equity" - the "particulars" referred to "the investment & setting up of Saville Foley LLP", and the Summary to the "TOTAL Equity invested by Mr & Mrs Foley into Saville Foley LLP", following the sale by them personally of the Property to the LLP for £850,000, and the various payments (less than £850,000) received by them personally to equalise the two families' investments. However, the proof did not raise their claim in fraud and/or in respect of the value of the upper garden, or any claim to payment under the 2012 Loan Agreement; insofar as it might be said to have claimed a distribution qua member, it was plainly misconceived.
- Second, was whether or not the claim as accepted whether or not it was contained in the proof was the claim asserted by the Foleys at the hearing (the burden being on them to prove their claim, as I have explained, certainly on the Sanrose Application). By their own admission, the Foleys found it very difficult to articulate their claim, or indeed, to confine it to any one variety of expression; they are not lawyers or accountants, and they acted in person; they did not advance any detailed submissions or argument in support of their proof, or claim; their position was thoroughly confused. Nonetheless, one iteration of their case - at least as I understood it - was that they were entitled to a 50% share of the net sale proceeds of the Property (or the remaining financial "pot") because they personally had contributed to the LLP. Although obviously not described in the terms explained by Ms Kyriakides (in her defence of the process undertaken by the Liquidators, which inevitably entailed argument in support of the proof itself, albeit not for that purpose) it seemed to me that this version of their claim bore sufficient similarity to that accepted by the Liquidators (as described above at paragraph [62]) to be treated as having been advanced in support of the Liquidators' decision: both entailed a claim to payment in respect of the Foleys' personal investment or contribution, made (by virtue of the Property's sale) in a sum equal or equivalent to that of the Savilles/Sanrose.
- Third, was whether or not the claim, as accepted, was even in principle capable of being validly advanced. In my view, it was: as I have explained, an "investment" may be made by way of loan, and may be made by a person who is not, as in the present case, a member; although the parties' original rights and obligations were under the contract of sale of the Property, they may have been refashioned or recharacterised, or treated as the Foleys' personal investment; that claim would not be for the "purchase price" as such under the sale contract, although superficially similar. In particular, in principle at any rate, and subject to the facts, that would be an answer to the argument raised by Mr Webb, that the claim was barred by the Limitation Act 1980.
The Evidence of a Personal Claim
- The Savilles and the Foleys initially intended that the latter would transfer the Property to the LLP (valued at £850,000) and the Savilles would then fund the development up to £850,000, the aim being to ensure that both sides contributed equally to the project.
- The position changed so that the Foleys transferred the Property to the LLP (still valued at £850,000) and the Savilles made payments to the Foleys, or for their benefit, of £425,000, such that both sides contributed equally to the venture: the Foleys providing £425,000 by means of the transfer of the Property and the Savilles providing £425,000 by means of payments to the Foleys.
- It was not disputed that the sole members of the LLP since 16 August 2012 have been FIL and Sanrose, and that the Property was transferred to the LLP in August 2012 for a stated consideration of £850,000 which was stated in the TR1 to have been received by the Foleys.
- It was not in dispute that the Savilles (whether or not through Sanrose) had contributed to the venture in sums sufficient to "equalise" the contribution made by the Foleys (whether or not made through, or to the benefit of FIL). The position was set out as follows in correspondence from the LLP's accountant, Mrs Kaley, from whom the court heard evidence at the hearing.
- On 5 November 2013, in a letter addressed to Mr Saville and Mr Foley (without reference to FIL or Sanrose, albeit that they were in fact the members at the time) she explained that in order to "equalise" the "capital accounts", Mr Saville needed to introduce the sum of £190,453, and that "this sum should then be withdrawn by Larry [Mr Foley] meaning the capital accounts will each stand at £502,428 and expenditure on the development going forward will then be split fifty-fifty". As I have said, £502,428 was the amount of the Foleys' claim accepted by the Liquidators, and was half the amount of the value of the members' interests stated in the LLP's 2014 Annual Accounts.
- A table, further breaking down the position, was attached to the letter. It showed how the arrangement was structured, with the Foleys providing £850,000 by the transfer of the Property, and, as part of their contribution, the payment of certain costs and cash by the Savilles. In conclusion, taking account of additional costs that the Foleys had incurred, a further payment by the Savilles of £190,453 was required in order to equalise the position (to ensure that on each side, an equivalent contribution had been made), after which both the Savilles and the Foleys would have contributed £502,428; it stated that "Each capital account represents" half the value of the Property, and half the development costs thus far incurred. Mr Saville confirmed, and it was not disputed, that the required equalising payment was made in November 2013 (to the LLP, and then withdrawn by the Foleys, or perhaps FIL).
- During the course of 2013, the Foleys explained (in their closing) that they had withdrawn their agreement to the demolition of their house, and presumably, to any possible use of the upper garden for the purposes of the development; they said that they had come to think that the venture would not generate enough money for them to buy a new or replacement property; in any event, they had lived at the Property for some 40 years, and for whatever reason had come to regret their agreement to the venture. This decision - in certain senses, quite understandable - appears to have been the origin of much of the protracted conflict that has since unfolded, and of their case that part only of the Property, excluding their house and the upper garden, was intended to be subject to the venture. That case was not included in the Foleys' proof, or raised by the Applications (unless perhaps implicitly so on the FWJ Application); in any event, it was unsupported by any document, and indeed, ran contrary to the evidence (for example, that the whole Property was sold and transferred to the LLP, and that the second, approved planning application, was for a development that entailed the use of the upper garden and the demolition of the house).
- On 21 December 2015, in a further letter to the Foleys, Mrs Kaley explained that the original intention (that the Savilles would introduce £850,000, equivalent to the Property's value, by meeting the costs of development in that sum) had changed as a result of the Savilles making contributions which the Foleys had withdrawn, "so the capital in the LLP, which is matched by the value of the land, is equal between the two families". She attached two appendices which illustrated the position, and in particular, that if the Savilles were still to meet the costs of development, the distribution of the proceeds of any eventual sale would have to be used in the first instance, before the equal distribution of profits, to reimburse the costs of development incurred by the Savilles.
- On 14 November 2016, in an email to Mr Foley, Mrs Kaley explained again how the Savilles had paid "the £425,000 half share of Brambles", by means of three lump sum payments (£15,000, £10,000 and £15,000 the three sums referred to in the Foleys' Proof, at Notes (1)-(3)); by the payment of the outstanding balance on the mortgage in respect of the Property (in the sum of £122,874, in January 2012, before the transfer to the LLP - this was the sum referred to at Note (5) of the proof); by the equalising payment of £190,453 described above, and paid on 21 November 2013 (referred to at Note (7) of the proof); and by the equal division of various costs previously met by both families, and the deduction of the excess paid by the Savilles (£71,673) from the sum otherwise due from them. She attached another schedule, to show "the balance of the capital accounts after the equalisation payment £190,453. This includes the value of Brambles and all of the costs incurred at that point by you and Sam personally. You will see they are equal." The schedule broke down and itemised each component of the calculation.
- The LLP produced both Abbreviated and in certain years, full, albeit unaudited Annual Accounts in respect of the years to 30 June 2013 2018; up to and including the 2017 Accounts, they were produced by FM, who were the accountants to the LLP, FIL and Sanrose. Those Accounts - none of which referred specifically to a debt owed to the Foleys personally, or indeed, to the Savilles personally - showed as follows.
- In respect of the year to 30 June 2013 (which postdated the transfer of the Property), the Abbreviated Accounts incorrectly referred to Mr Saville and Mr Foley rather than FIL and Sanrose as the designated members, and recorded the LLP's current assets at £994,281, which included the value of the Property which had been transferred to it; this was also the figure for "loans and other debts due to members", and for "total members' interests"; they were signed on 25 October 2013, by Mr Saville.
- Similarly, the Abbreviated Accounts in respect of the year to 30 June 2014 incorrectly referred to Mr Saville and Mr Foley as the designated members; they recorded the LLP's current assets at £1,004,856 (which was, as I have said, the figure explained in Mrs Kaley's letter of 5 November 2013); again, this was also the figure for "loans and other debts due to members", and for "total members' interests"; they were signed on 30 March 2015, again by Mr Saville.
- There was therefore a degree of ambiguity in the 2013 and 2014 Abbreviated Accounts, as to whether they were intended to express the value of the actual members' interests (FIL and Sanrose) or those of the (incorrectly) stated members, Mr Saville and Mr Foley. Having said that, the full, unaudited Accounts in respect of those years recorded accurately that FIL and Sanrose were the LLP's members, and included the same values in respect of the members' interests, and in respect of loans and other debts due to members.
- The Abbreviated Accounts to 30 June 2015 correctly stated, for the first time, that FIL and Sanrose were the designated members the error made in respect of previous years seems to have been nothing more meaningful or significant than a simple mistake; again, they recorded the LLP's current assets at £1,004,856; again, this was also the figure for "loans and other debts due to members", and for "total members' interests"; they were signed on 23 March 2016, by Mr Saville.
- Similarly, the Abbreviated Accounts to 30 June 2016 correctly stated that FIL and Sanrose were the designated members; again, they recorded the LLP's current assets at £1,045,185 including "stocks" at £1,045,185, in respect of which the Notes said, "Work in progress represents the development land at historic cost together with development costs incurred to date. The total cost is less than the current realisable value." The figure for "loans and other debts due to members", and for "total members' interests" - £1,042,081 - was equal to the sum of current assets, including stocks, minus creditors owed sums due within one year (£3,232); they were signed on behalf of the corporate members, by Mr Foley and Mr Saville, on 5 December 2016, at a meeting held that day, of which the Minutes were in evidence. On the same occasion, the full Accounts were also signed. They contained the same figures, and also included (in some further detail) a "Capital Accounts Schedule" as at 30 June 2016, which stated the composition of the total sum of the members' interests, by reference to the balance as at 30 June 2015, the loss incurred in the year since then, and a sum introduced in the year since then. Under the heading, "Loans and other Debts due to Members", the total amount was described as "Amounts owed to members in respect of profits".
- The meeting at which the Accounts were approved was attended by the Foleys, the Savilles, Mrs Kaley and Ms Michelle Burlong (who kept a note, as I understood it); the Minutes were prepared by FM, and referred to those present as having included the Foleys as "(Foley Investments)", and similarly, the Savilles as "(Sanrose Investments"). Also present was "Nick Cervini", who was assisting the Foleys and was recorded as having asked various questions in order that "his accounting records" could be reconciled with those of FM. The evidence was that over time, and certainly by about 2016 and the time of this meeting, the Foleys had come to lose confidence in FM and/or Mrs Kaley, and wished to scrutinise the LLP's records and accounts with particular care. It was for that reason that Mr Cervini was present.
- Ultimately, as to the 2016 Accounts, the Minutes of the meeting recorded as follows: that the Balance Sheet as at 30 June 2016 had been explained by Mrs Kaley, and that it showed the "net balance" split between the corporate members; that there had been "No questions from either Mr and Mrs Saville or Mr and Mrs Foley on the accounts and so the accounts were agreed and signed by both parties"; both Mr and Mrs Foley duly signed the Accounts, explicitly on behalf of FIL.
- In his oral evidence, faced with these documents, Mr Foley said that after the meeting he had been advised to withdraw his consent to the 2016 Accounts (albeit on a basis which he could not recall or describe) and that he had in fact done so in an email (not in evidence) sent to Mrs Kaley (who was not cross-examined by the Foleys, and to whom therefore the allegation was not put). Without hesitation, I reject that evidence, never previously mentioned and not documented: apart from its belated appearance, it was inconsistent with the agreement given by the Foleys and FIL to the following year's Accounts, to 30 June 2017.
- The Abbreviated Accounts to 30 June 2017 (which again, correctly referred to FIL and Sanrose as the designated members) recorded the LLP's current assets at £1,060,899. The "total members' interests" were recorded at £153,853, and (for the first time) under "creditors", a new entry was made, of £900,000 marked as falling due after more than one year. The same amount, of £900,000, was also stated in the figures included for 2016, which had the effect of reducing the previous figure of total members' interests (stated as at 30 June 2016) from £1,042,081 to £142,081. The Notes recorded that the Accounts were the first (of the LLP) to comply with FRS 102 section 1A for small entities (the date of transition having been 1 July 2015). They also recorded that there had been no impact on the "company's equity or profit", no "transitional adjustments", and that the accounting policies previously applied had not been materially different.
- The full Accounts for the same period recorded the sum of £900,000 as comprising "loans", and referred to "loans and other debts due to members" as "amounts owed to members in respect of profits" in the sum of £153,853; accordingly, the members' capital accounts schedule showed a reduction, to £153,853.
- On 30 April 2018, Mr Foley wrote an email to Mr Nigel Shaw at FM, and said, "I have read the accounts and I am happy in principle for them to be filed electronically at company house, in my position as a principle [sic] director (Foley Investments)". The Abbreviated Accounts recorded that they had been duly approved on that date. Contrary to what he said in his email, Mr Foley said in his oral evidence that he had not in fact read the draft Accounts. Again, without hesitation, I reject that evidence; the email was simple and clear: Mr Foley approved the Accounts. His denial was a somewhat transparent attempt somehow to avoid the conclusion that he had agreed to the truth of the position that they stated.
- As I have mentioned, the Foleys came to lose confidence in FM. Accordingly, they were replaced, and the LLP's next set of Accounts, to 31 December 2018, were the first to be produced by their replacements, Edmund Carr Accountants ("ECA").
- In a letter dated 16 October 2019, FM wrote to ECA, said that there were no reasons why ECA should not accept their appointment, and enclosed various items of financial information. In respect of the loan of £900,000 first stated in the Accounts to 30 June 2017, they said, "The loan
is owed equally to [FIL] and [Sanrose], the two members. The loans were re-designated from each member's general capital account on 20 December 2012. No interest is payable on the loans." In due course, the Accounts produced by ECA again recorded the existence of these loans, and said in the Notes, "At the year end the company owed related companies £900,000
which is shown amongst creditors due more than one year". In a letter dated 25 October 2019, ECA wrote to the members and said, of this debt, "we believe that this is attributable to both corporate parties". Those Accounts were apparently approved at the time by the Foleys, for FIL.
- The Accounts in respect of the periods to 30 June 2017 and 31 December 2018, as well as FM's letter to ECA dated 16 October 2019, all therefore appear to have recorded the conversion of £900,000 of (members') capital into (long-term) debt owed to "related companies" (FIL and Sanrose) thus the change, for example, in the capital accounts schedule. That redesignation was confirmed in an email sent on 6 April 2022, by Mrs Kaley to the Liquidators.
- As to the source of the decision to re-designate capital, the evidence was unsatisfactory. Mrs Kaley appears to have thought (on her own evidence, "erroneously") that there was a connection with the 2012 Loan Agreements (dated 20 December 2012, the date referred to in her letter to ECA of 16 October 2019), although more broadly, she also said that it was based on her understanding that it was intended and agreed by the Savilles and the Foleys, and that the Foleys had expressed that intention in discussions with Mr Shaw. More certain was her evidence (unchallenged) that she had at all times understood that all relevant rights and obligations in the LLP were vested in the corporate members, appointed on 16 August 2012; her evidence was that at no time had the Foleys asserted or raised a personal claim or right.
- Notwithstanding her own confusion, the Accounts were in this respect adequately clear, as I have said, and they were approved on behalf of FIL and Sanrose, which therefore expressed their agreement to their content: they recorded a partial redesignation or conversion of capital to debt owed to members. I understood that in the circumstances of the present case, even if that redesignation were to be ignored or reversed, it would not in substance materially affect the outcome, since it would affect FIL and Sanrose in the same fashion and to the same degree (both in that case having rights as members not creditors); similarly, even if one were to treat the members' contributions as having been made by means of long-term debt, albeit only separately recognised in the Accounts from 2017, their positions would be substantially unaffected.
Discussion
- On the evidence, in my judgment, the best description of the events of 16 August 2012, is that together they comprised a composite, binding arrangement made between the Foleys, the Savilles, the LLP, FIL and Sanrose that, or at least, including that:
93.1. the Foleys would complete the sale and conveyance of the Property to the LLP, and would thereafter cease to be members, to be replaced by FIL (as the Savilles were to be replaced by Sanrose);
93.2. FIL and Sanrose therefore both agreed to become and to assume the rights and obligations of members, and so entered into the Partnership Agreement which provided for the equal contribution by members of capital, and an entitlement to share in profits in the same proportions;
93.3. insofar as it remained outstanding, to the extent of the sum agreed to be paid to the Foleys under the contract of sale of the Property, FIL was to be treated as having made a capital contribution to the LLP, and as was stated in the signed TR1, the Foleys were therefore treated as having been paid (and thereafter owed and entitled to nothing more, their direct relationship with the LLP having ended).
- I acknowledge that the LLP Agreement itself referred to initial capital in the sum of £2, but that was before the first set of Accounts were produced (at which time, there would necessarily be a valuation of capital contributions), and in any event, Clause 9 provided for subsequent contributions in accordance with the agreed (equal) proportions, which is essentially what happened. In any event, the precise order in which these steps were effected was not material they were parts of a composite whole: the Foleys expressly agreed that they had been "paid" for the Property (and explicitly recorded that fact) because it had been agreed that in due course FIL (which they owned) would be treated by the LLP (and the other parties) as having made a capital contribution in the sum otherwise outstanding under the sale contract.
- It follows that albeit raised as a possible explanation of the outcome, there was neither an assignment of the Foleys' debt to FIL, nor any need for an assignment. Indeed, FIL assumed obligations and acquired rights qua member, not creditor - rights and obligations of a quite distinct character, as I have explained; the debt owed to the Foleys was thus treated as having been discharged, not transferred. Similarly, although potentially more appropriate, there was no real need to discover or infer (or characterise these events as) a novation (although, if necessary, I would have done so): FIL's position was not that of a simple substitute for the Foleys.
- At some point, as to £900,000, FIL and Sanrose (and the LLP) agreed to redesignate or convert members' capital into debt owed to the same members (albeit not in that capacity, but as loan creditors): the parties' agreement was reflected in their consistent agreement to the Accounts from that time and subsequently. But even if that redesignation was ineffective, or indeed, even if I am wrong, and the members were substantial creditors from the outset (albeit not explicitly or separately recognised as such until the Accounts to 30 June 2016, possibly as a result of the changed accounting basis) the outcome would be essentially similar, as noted above. However understood, the event of conversion or redesignation was not such as to create or record an interest in favour of a previously uninterested party: it involved the relationship between the LLP, SIL and FIL, but nobody else.
- These conclusions, that on the balance of probabilities, the described arrangements were in fact made, and that therefore FIL has rights both as a creditor (in the sum of £450,000), and member (in half the sum of the amount available to members after payment of all other prior debts and expenses in the liquidation) was based on the following evidence, more fully described above.
- First, the LLP's Accounts, as I have described (produced both by FM, and subsequently, by ECA) consistently characterised the LLP's members as holding valuable interests in the LLP, first as members in respect of capital, and from 2016 (if not before) as members in respect of capital, and also as creditors as to £900,000. The fact that the Foleys and Savilles personally were wrongly identified as the partners in the Abbreviated (but not full) Accounts to 30 June 2013 and 2014, does not affect the objective reality of the LLP's membership; in any event, the mistake was not made consistently, and was eventually rectified (without comment or reaction from the Foleys or any other person, the absence of which suggests that the error was nothing more than the result of a simple mistake).
- The Accounts were approved by the Foleys acting for FIL, and they were approved by the Savilles and Sanrose. Moreover, in respect of the year to 30 June 2016, they were approved following the meeting held on 5 December 2016, at which the Foleys were accompanied and assisted by Nick Cervini (who seems to have maintained his own, separate "accounting records" for the Foleys' benefit) and at which they were given explanations which they found satisfactory, notwithstanding that they had at that time to some degree lost confidence in FM and Mrs Kaley and therefore had particular reason to consider very carefully what they were told. Had the Foleys personally been owed £450,000, or some other sum, it would be remarkable not to know or mention that fact.
- Second, in Mrs Kaley's correspondence with the parties (and with ECA) referred to above, she described the position as it was reflected in the Accounts, as indeed, did ECA in 2019. Her evidence, unchallenged, was that the Foleys at no point raised or asserted any variety of personal claim, or challenged the accuracy of the Accounts on the basis that they failed to do so. Again, the fact that informally she addressed her correspondence, or some of it, to the Foleys and Savilles personally, does not affect the objective realities of the LLP's membership, or the plain meaning of the Accounts, and neither was that informality wholly surprising in the context of a family owned joint venture.
- Third, Mr Foley's own evidence in the winding-up proceedings against FIL, made with a statement of truth, was explicit and unambiguous: FIL would (whether as creditor or member) be entitled to benefit from any distribution of the LLP's assets in liquidation, not the Foleys personally. It was on that basis that the petition was formally opposed. At the time, nobody expressed any doubt about that point.
- Fourth, Mr Downie's evidence referred to at paragraph 22 above in other words, the evidence of the Foleys' and FIL's own solicitor (again unchallenged) - was to the same effect, that the Foleys raised no personal claims or rights; it was on that basis that the DOA and the Undertaking were made and given neither even purported to assign or deal with the Foleys' personal rights in or against the LLP, for the simple reason that nobody (not even the Foleys) considered that they held any.
- Fifth, although I have said that the claim as accepted by the Liquidators might in principle be said to have fallen within the terms of the Foleys' proof, nonetheless the most obvious and natural reading of its language (of "Equity" as at 30 June 2015, and indeed, the fact that its amount and composition reflected the LLP's Accounts to 30 June 2015, which recorded the figure for "loans and other debts due to members", and for "total members' interests" in the sum of £1,004,856) suggest to me that its author intended to advance what was, in truth, the claim of FIL, as a member, measured as at 30 June 2015, the LLP's accounting year end.
- Although I acknowledge and have weighed in the balance, that inconsistently with my conclusions, FIL's own accounts (also produced, until 2015, by FM) recorded assets of only £1.00, that fact does not change my conclusion or my overall assessment of the evidence: FIL was dormant, and the venture was operated through the LLP (the Accounts of which were therefore of particular significance); the Accounts of the two companies were inconsistent, and cannot be reconciled; both cannot be correct; given the evidence otherwise available, in my judgment, FIL's accounts were simply wrong.
- Finally, the arrangements that I have found to have been made were commercially rational, and not inherently improbable: although the advice was not described in any detail, it would appear that the decision to own and operate the LLP through the medium of FIL and Sanrose was a result of tax advice, or at least, considerations of possible tax mitigation.
- In conclusion therefore, I agree that the Liquidators decision to admit the Foleys' proof of debt ought to be reversed; the Foleys personally had no direct right or interest in the LLP; FIL was a creditor as to £450,000, and entitled as a member to share (with Sanrose) in any surplus that might remain following payment of the LLP's other debts and the expenses of the liquidation.
- Whether or not FWJ's proof ought to have been accepted raises further issues, to which I now turn.
FWJ's Rights Against the LLP
- Given my conclusion that FIL was entitled to claim as a creditor and member, there was no need to consider FWJ's case that the Foleys were estopped or otherwise contractually restricted, as against FIL and/or FWJ, from asserting the personal claim which they would otherwise have held (although I was not persuaded that any such restriction on the Foleys' rights as creditors would have affected the Liquidators' decision not to accept FWJ's proof). Furthermore, the Undertaking was not material to the decision in respect of the proof it was a personal undertaking on behalf of FIL to make payment to FWJ, but it was not material to the Liquidators' decision to reject FIL's proof, or that of FWJ (other than as evidence that the relevant parties believed FIL to be the LLP's creditor, not the Foleys).
- Accordingly, FWJ's right to claim in the liquidation as an assignee of the debt owed to FIL depended on the meaning and effect of the DOA. As I have explained, in that regard, the issue was whether the DOA had effect (or was to have had effect) only in a members' voluntary liquidation, and was therefore irrelevant in the context of the compulsory liquidation that in fact eventuated, albeit ultimately without opposition from FIL, and premised on the LLP's solvency (without which Sanrose would not have had an interest as a contributory in seeking and securing the order).
- In that regard, Ms Kyriakides referred to recital (G) which recorded that the parties intended a members' voluntary liquidation, and to the definition in that context of the "the Liquidators" and "the Distribution". Mr Deacock relied on the assignment to FWJ by FIL not only of its rights to the "Distribution" (which was by definition a reference to payment to members in that capacity, not as creditors) but also, at Clause 3.1(b), of "all its rights and claims arising in the liquidation of the LLP, including its rights to the Distribution" (emphasis added); "the liquidation" was undefined, and was capable, he submitted, of referring to any liquidation, or more to the point, was capable of referring to the liquidation which had in fact occurred.
- In my judgment, in the context, as a matter of language and common sense, Clause 3.1(b) is applicable to the present circumstances, in which FIL is entitled to payment in the LLP's liquidation, although it is not a members' voluntary liquidation.
111.1. As at the date of the DOA, Sanrose's petition was extant; it was part of the known context, even if unmentioned in the DOA; an order on the petition must therefore have been in the contemplation of the parties, at least as a possibility.
111.2. There was no reason to think that the variety of liquidation was in any sense significant to the parties (any more so, for example, than the identity of "the Liquidators", albeit that as part of the definition of that term, they were identified by name in the DOA); although not advanced as an implied term, it would I think have "gone without saying" that whether the LLP was wound up voluntarily or compulsorily, on an order made on the Sanrose petition, the rights of FIL, the Foleys and FWJ were to be affected and governed by the DOA. To interpret the contract differently would be to defeat the parties' obvious objective commercial intention, in circumstances where FWJ had agreed to continue to act for FIL and the Foleys, but with payment deferred until after the sale of the Property, in circumstances where liquidation was effectively inevitable.
111.3. Furthermore, one variety of liquidation might be converted into another for example, a winding-up order might be made against a company in members' voluntary liquidation, or a members' voluntary liquidation might become a creditors' voluntary liquidation, which might in turn become a compulsory liquidation; in such a case it would be surprising were the DOA to cease to apply. As I have noted, the LLP's liquidation, although compulsory, was by unopposed order, and was premised on solvency, much like a members' voluntary liquidation. Mr Courtman's evidence was that he had assumed, when he took office, that the LLP's liquidation would be much the same as if it had gone into members' voluntary liquidation.
111.4. Clause 3.1(b) refers simply to "the liquidation", which was not a defined term. In all the circumstances, I consider that the LLP's compulsory liquidation, commenced by unopposed order made on the extant Sanrose petition, fell within the scope of that term, which was broad enough to encompass it.
- In conclusion, in the circumstances, on the basis of its rights under the DOA, FWJ was entitled to prove in the LLP's liquidation.
- Finally, it follows that there was no need to consider in any detail whether or not FWJ would have been entitled to assert an equitable lien, on the principles explained in Bott & Co Solicitors Ltd v Ryanair [2023] AC 635 (at [86] and [154] in particular), on the basis that it was instructed by the Foleys and FIL in respect of the settlement of their interests in the LLP which it was proposed would occur by the sale of the Property, and that their work contributed to the point at which it was accepted that the LLP should be wound up. Having said that, I was not persuaded that the asserted lien would have made any difference to the Liquidators' decision whether or not to accept FIL's proof, or that of FWJ, and in any event, I was not persuaded that on the evidence, there was a sufficient relationship between FWJ's work and the "recovery of a fund" by FIL (which made no claim in the present proceedings, and was not represented by FWJ).
- The final issue concerned the claim against the Liquidators for a personal costs order. Although other aspects of costs will be dealt with following this judgment, I heard evidence and argument in respect of this issue, in respect of which I shall therefore make findings and explain my conclusions.
The Claim for Costs Against the Liquidators
- Sanrose and FWJ (albeit not by its Application) alleged that Mr Courtman acted improperly, and that in consequence the Liquidators ought to bear the costs of these proceedings personally, because:
115.1. first, the process by which the Foleys' proof was admitted was unfair notice ought to have been given to Sanrose and FWJ/FIL, and they ought to have been involved in its determination;
115.2. second, Mr Courtman had, in effect, at his meeting with Mr Foley on 9 May 2023, raised and suggested a personal claim, which having (in his own mind) fashioned, he then decided to admit despite the admitted claim not having been the claim in fact advanced by the Foleys in the proof itself; and,
115.3. third, that in all the circumstances, including the overwhelming weight of evidence in favour of the conclusion that any distribution ought to have been to FIL, rather than the Foleys personally, the decision to admit the proof was irrational and unreasonable.
The Principles
- In the event that a creditor's appeal is successful, pursuant to rule 14.9(2) of IR 2016, a liquidator will not be personally liable for the costs incurred by the any person in respect of the application unless the court orders otherwise.
- From the language of the rule itself, and from the decisions of HHJ Stephen Davies sitting a judge of the High Court in Re The Burnden Group Limited [2017] EWHC 406 (Ch) at [15] to [17], and of Chief ICC Judge Briggs in Nimat-Halal Food Limited and others v Nimesh Patel and others [2020] EWHC 734 (Ch) at [12] to [14], the following principles can be derived:
117.1. the default position under rule 14.9(2) is that a liquidator will not be personally liable for the costs of a successful appellant, unless the court so orders; something more than merely unsuccessfully resisting an appeal is needed for the court to make an order for personal liability;
117.2. that something more must relate to the conduct of the liquidator;
117.3. the variety of conduct deserving of a personal costs order will depend on the circumstances of the case: a mere mistake or acting in a neutral manner in an appeal against a rejection of proof are unlikely to be sufficient. However, a personal costs order may be made where the liquidator has acted for his own personal advantage or has acted irrationally or unreasonably.
- At [14] of his judgment in Nimat-Halal Food Limited, Chief ICC Judge Briggs said:
"Where the conduct complained of relates to a decision made on a proof of debt, the court will take account of the duties imposed upon an office holder to investigate the proof. It has long been the law that an office holder is under a duty to examine every proof and consider the validity of the debt which is sought to be proved: Re Home and Colonial Insurance Co [1930] 1 Ch 102. He should require satisfactory evidence that the debt on which the proof is founded is a real debt: Re Fraser, ex parte Central Bank of London [1892] 2 QB 633, CA. And the obligation is not negated even where the proof is based on a judgment: Re Van Laun, ex p Chatterton [1907] 2 KB 23, CA."
- In addition, as proceeding on similar principles, the court was referred to the judgment of Mr Richard Snowden QC (as he then was) sitting as a deputy judge of the High Court in Re Capitol Films Ltd [2011] BPIR 334 at [100] in respect of the circumstances in which an office-holder might be deprived of his right of recoupment in a liquidation, where guilty of "misconduct" or a "serious mistake", or of having acted in a manner which was "irrational and misconceived".
- In assessing his conduct, the court must take care not to treat unduly harshly an office-holder who has sought to fulfil his duties in good faith, but nonetheless erred in his conclusions. Potentially, that would be to inhibit the fulfilment of the duty to act impartially and with appropriate (inevitably time-consuming and therefore remunerated) care, by too readily treating the office-holder as having a personal interest in the outcome of a process in which he is to act dispassionately in a quasi-judicial capacity. The office-holder is expected to exercise his own professional judgment, which necessarily means that he be given some degree of latitude, of unpunished freedom to err. Although a liquidator acts in a quasi-judicial capacity in this context, he is nonetheless not a judge, and is not necessarily expected to conduct a process that reflects in every respect that which would govern court proceedings.
- Thus, the court must guard against the hazards of judgment with all the benefits of hindsight: in the present case, for example, the court heard oral evidence from four witnesses (and a fifth, Mr Downie, was not cross-examined) and argument from three counsel over several days, both in respect of events in fact, and of their proper characterisation in law; these were not advantages available to the Liquidators.
- For example, Mr Webb raised as explanations of FIL's rights, both novation (albeit even then, with an acknowledged degree of "reverse engineering") and assignment, but these were not arguments developed to the Liquidators; further, in the event, there was a degree of disagreement in this respect between the case advanced by Mr Webb (which bore a relationship with the Liquidators' approach, which was to ask whether there had been an assignment by the Foleys of their rights under the sale contract) and that advanced by Mr Deacock (which was essentially the explanation which I accepted as explained above at paragraphs [93]-[97] and which proceeded without either assignment or novation). That there was a difference of analysis between Sanrose and FWJ tends to suggest that the position was not without at least some difficulty.
Findings and Discussion
- In my judgment, on those principles, and although ultimately I have reached different conclusions about the rights and interests of FIL, the Foleys and FWJ in the LLP's liquidation, the decision of the Liquidators to accept the Foleys' proof, and their conduct of the determination process, was not such as to warrant that they personally should bear the costs.
- Three points can be made at the outset.
- First, as I have explained, the Foleys' claim as accepted by the Liquidators was within the terms of their proof the Liquidators did not accept a claim that had not been made; further, the proof was not drafted or made with the benefit of professional legal assistance; it was not unreasonable of the Liquidators to seek to understand what was being said by lay people, and to use professional judgement and some common sense in doing so.
- Second, the claim accepted was a claim in principle capable of being advanced.
- Third, there was no suggestion that the Liquidators acted in bad faith, or with anything like conscious bias they did their best to give the correct answer. Moreover, given the order sought against them by Sanrose in particular, they cannot be criticised for the extent of their participation in these proceedings, appearing by counsel and explaining their process and approach.
- Turning to the elements of the case against them, first, as to the process itself, the position was as follows.
- The Foleys had raised allegations of fraud against the Liquidators and against the Savilles; they had threatened to report the Liquidators to their professional body, and to complain to their MP (threats which were to some extent acted on); it appeared that following the replacement of Ms Shearing as joint liquidator in November 2022, the Foleys had renewed their complaints. Indeed, in one form or another, they continued tenaciously to advance these allegations at the trial of these Applications, albeit not obviously in issue, and not supported by evidence. Although it was said, correctly, that by May 2023, the Foleys' claims had been dealt with (and firmly rejected) by the Liquidators' solicitors in correspondence, and that in the meantime, no additional supporting materials had been produced by the Foleys, it was not unreasonable of Mr Courtman nonetheless to consider that the Foleys remained in a state of confusion, and was not unreasonable to suggest a meeting, at least in the hope that in person, he might be able to explain to their satisfaction why their previous claims had been rejected, such that the matter might (as he said) be "put to bed", distributions made, and the liquidation concluded. It was not the purpose of the meeting to consider new material. The decision to hold a meeting was a matter of reasonable, professional judgment.
- In those circumstances, there was no need or reason to invite the Savilles, or any representative of Sanrose, to attend the meeting, or to give them notice of it. The meeting was of no immediate concern to them, or to their claims. As I have said, its purpose was to meet Mr Foley, and to explain the Liquidators' position in respect of the Foleys' previously articulated complaints. Mr Webb suggested that this approach was inconsistent with that taken previously by the Liquidators in August 2021, when they had suggested a meeting with both families. There was nothing in that point that meeting had been for a different purpose, to explain the liquidation process, not to deal with a particular person's claim or individual position.
- There were no notes or minutes of the meeting held on 9 May 2023. But on the evidence, Mr Courtman appears to have told Mr Foley no more than that albeit not in fraud, as previously alleged, the Foleys "might" in principle have some sort of personal claim (having transferred the Property to the LLP) and that if that was what they believed, they should lodge a proof which would be duly considered. He did not explain to Mr Foley the nature of any such claim, and indeed, Mr Foley gave clear evidence that he had not taken from the meeting any particular or suggested variety of claim, and that there was no connection whatever between the substance of the proof (which in any event, he had not drafted) and anything said to him by Mr Courtman at the meeting: on the evidence, it cannot be said that the proof reflected a claim which Mr Courtman himself had formulated. At most, it might be said that no proof would have been lodged had it not been for the meeting and for Mr Courtman's words, but that would not support an allegation of breach of duty, or a conclusion that he acted improperly.
- Whilst it may be that Mr Courtman had some personal sympathy for the Foleys (who had, after all, lost their home as a result of their involvement in the unsuccessful venture) and even if that sympathy was undeserved (as was suggested), that circumstance was not such as to render the meeting or process improper.
- Second, as to the outcome, the actual decision to admit the proof, whilst I disagree, for the reasons explained above, it was not a decision which was in substance so unreasonable or irrational, or so plainly contrary to the evidence as to attract an adverse costs consequence.
- I have already referred to the dangers of judgment with the benefits of hindsight, and to the greater availability to the court of both detailed evidence and argument which was unavailable to the Liquidators.
- Although I have come to a clear conclusion, it must be acknowledged that there were inconsistencies in the evidence, which had to be weighed against that which supported the conclusion which ultimately I reached (or which had to be accounted for). For example, the (essentially unexplained) mistaken references to the Foleys as the LLP's members in certain of the LLP's Accounts (which might have suggested an understanding that they continued to be creditors); the fact of correspondence having been addressed to the Foleys and the Savilles personally by Mrs Kaley, a professional accountant; Mrs Kaley's apparent (but now said to be erroneous) reliance on the 2012 Loan Agreements, which were made with the Foleys (and Savilles) personally; the obscurity in respect of the source of the decision to redesignate or convert capital to debt; the fact of FIL's Accounts, which (again, by virtue of an essentially unexplained mistake made by FM) did not record any substantial interest in the LLP, and did not record any debt owed to the Foleys in return for the creation of its interest in the LLP; the inclusion of the Property as an asset in the LLP Agreement, but nonetheless the reference to initial members' capital in the sum of only £2; and the absence of any written assignment of the debt due under sale contract, combined with the Foleys' denial of an assignment. As made plain by the authorities, an office-holder is bound to examine a proof critically, and to weigh the materials; he is not bound even by a judgment, let alone, for example, by a company's accounts.
- Furthermore, it cannot realistically be said that the overall approach of the Liquidators, explained above at paragraph [62], which was to start with the outstanding sum owed in return for the Property, and to ask whether, and if so how, that right to payment might have been transferred to FIL, was irrational or unreasonable indeed, it was the approach (or one of the various approaches) suggested by Mr Webb and Mr Deacock on behalf of Sanrose and FIL (albeit, as was said in respect of novation, with a degree of "reverse engineering"). Whilst true that the claims made previously by the Foleys had been rejected, and that no additional evidence had at that point been produced, the claim as understood and adjudicated by the Liquidators in 2023 was not the claim previously made; the evidence was therefore considered in a different context, to a different end.
- It was for the Liquidators to adjudicate the Foleys' proof, which comprised a claim made by the Foleys against the LLP, which was represented in this regard by the Liquidators. As I have said, an office-holder must consider a creditor's claim and the supporting materials, and no doubt he must act fairly and in good faith - as did the Liquidators in this case - but he is not under an obligation to replicate the processes of formal court proceedings; he is entitled to act proportionately, matching the process to the issue. In this case, it was not necessary, to avoid a costs order, to involve Sanrose, or FIL (or indeed FWJ) in the decision making process, or to seek their evidence or comment. The Liquidators reasonably considered that they had all relevant materials (indeed, that was part of the case against them, that there was nothing new, and yet they reached a different conclusion from that previously stated).
- Finally, Mr Courtman gave evidence that he had considered the Foleys' proof "in conjunction with" his lawyers. Although privilege was not waived, and no detail of that advice was provided (or of any instructions given) that evidence was not directly challenged. It was not a decisive point, and I would reach the same conclusion in respect of this costs issue in any event, but I would assume that the Liquidators did not act contrary to legal advice.
- In conclusion, to displace the default position that an office-holder will not be personally liable for the costs of a successful appellant, something more than merely unsuccessfully resisting an appeal (or being reversed on appeal) is required; that something will depend on the office-holder's conduct in the circumstances of the case; something more than a mere mistake is required; something serious.
- In the present case, for the reasons given, the Liquidators' decision to accept the Foleys' proof (and indeed, a fortiori, their decision to reject FWJ's proof, which also depended on a contentious issue of contractual interpretation) was not unreasonable or irrational, and there was no evidence of bias; the claim accepted was not a claim formulated by Mr Courtman himself; it was the claim understood by the Liquidators to have been advanced by the Foleys. Although in my judgment, their decision was wrong, it was reached by means of a process which was itself neither unfair nor irrational, and it took into account the evidence. There is therefore no basis upon which to order that the Liquidators be personally liable for the costs of the decision-making process, or indeed, of these proceedings. That is not of course to say that there might not be a challenge to the amount of those costs, and their remuneration; that is a different matter.
Dated: 7 May 2025
