Clydesdale Financial Services Ltd & Ors v Smailes & Ors

This case concerns challenges arising from a pre-pack style sale of the business, work in progress and retainers of a solicitors' practice (Alexander Samuel LLP) immediately before it went into administration. The court considered the administrators' conduct in negotiating and completing the sale to Jiva Solicitors LLP, issues of creditor consultation and compliance with SIP16, whether there was a sale at undervalue, and conflicts of interest. The claimants sought removal of the administrators under paragraph 88 and paragraph 74(4)(d) of Schedule B1 to the Insolvency Act 1986 and other interim relief including inspection of files.

The judge held that the circumstances of the sale and the close involvement of the administrators in negotiations gave rise to legitimate concerns warranting an independent investigation and justified removal of the existing administrators. The court ordered removal of the joint administrators and the appointment of a replacement administrator proposed by the principal creditor. The court refused to make the interim inspection order sought by Focus on the existing evidence and struck out parts of the proceedings which vested causes of action in the LLP rather than in the claimants (relying on Pickthall v Hill Dickinson LLP).

The proceedings arise from the insolvency of a high-volume personal injury practice carried on first by Alexander Samuel & Co and then by Alexander Samuel LLP. The practice was funded by lenders including the claimants Clydesdale Financial Services Limited (CFS) and Justice Capital Limited (JCL). On 2 April 2009 the LLP entered into an agreement selling its work in progress, retainers and disbursements to a newly formed purchaser, Jiva Solicitors LLP, immediately before the LLP went into administration. Completion followed quickly and the administrators were appointed. The sale was structured as an immediate sale with deferred payments and attributed most value to work in progress and disbursements.

Nature of applications:

• Applicants (CFS, JCL and Focus) sought interim relief: return of certain files, appointment of a practice manager, and an injunction restraining the administrators from completing the sale.
• CFS sought final relief removing the administrators and appointing a replacement under paragraph 88 and paragraph 74(4)(d) of Schedule B1, complaining of inadequate consultation, alleged collusion, sale at undervalue and failure to comply with SIP16.
• Focus sought an order for inspection of files held by Jiva, relying on ATE and financial guarantee insurance arrangements.
• The administrators sought strike out or summary judgment against parts of the claim including claims for breach of fiduciary duty.

Issues framed:

• Whether the administrators should be removed given their role in negotiating the sale and the concerns of major creditors.
• Whether the sale was at an undervalue and whether further investigation was required.
• Whether SIP16 had been breached and whether that or other conduct justified removal.
• Whether Focus was entitled to inspection of files in the absence of clearer evidence and given potential enforceability issues under the Financial Services and Markets Act 2000.
• Procedural standing and amenability of particular claims to strike out (including whether claims vested in the LLP rather than in creditors).

Reasoning and conclusions:

• The judge found the sale was a pre-pack in substance and that the administrators (in particular Mr Smailes) had been closely involved in negotiations and valuation. The valuation process (Littlejohn LLP desktop review) and the negotiation dynamics raised sufficiently serious questions about value and incentives to justify investigation by an independent officeholder.
• Although many allegations of impropriety were rejected on the available evidence (including assertions of deliberate secrecy or misleading correspondence), the proximity of the administrators to the negotiations and the fact that a substantial majority in value of creditors wished a change meant paragraph 88 gave a proper basis for removal. The judge emphasised that removal did not necessarily impute dishonesty but was justified to enable independent review.
• The court declined to order inspection of client files for Focus on the present evidence, noting complications about client consent and potential unenforceability of ATE policies if commissions or fees had not been properly accounted for under section 327 of FSMA and the prohibition in section 19. The court indicated Focus could renew a properly supported application.
• Parts of the claim alleging breaches of duties vested in the LLP were struck out for lack of standing of the claimants (applying Pickthall v Hill Dickinson LLP). Claims under paragraph 75 of Schedule B1 by creditors (notably CFS) were not struck out and may proceed.
• The court exercised its dispensing powers in relation to service requirements and appointed the replacement administrator proposed by CFS (Stephen Hunt) to enable an independent review and proposals to creditors.

First instance: the court ordered removal of the existing joint administrators and appointed a replacement administrator (to enable independent investigation of the sale and protect creditors' interests). The court refused Focus's application for mandatory inspection of client files on the present evidence, struck out parts of the claim that vested causes of action in the LLP rather than the claimants (following Pickthall v Hill Dickinson LLP), and refused to strike out CFS's claim under paragraph 75 of Schedule B1. The court adjourned the application for permission to continue certain proceedings to allow the new administrator to consider the position.