Equilift Ltd, Re

Where liquidators hold funds and potential proprietary claims are doubtful, the court must balance the need for a conclusive determination against the proportionality of further litigation. Costs normally follow the event in hostile disputes between rival claimants. A pre-emptive order funding representative parties from the fund is exceptional and appropriate only where necessary for the proper administration of the liquidation. It should not be made where the likely costs would consume a substantial part of a modest fund. In such circumstances, liquidators may be directed to act on a reasoned legal opinion, provided affected persons are notified and given a reasonable opportunity to challenge the proposed distribution. Trustees acting honestly and reasonably on experienced legal advice may be relieved from liability under the Trustee Act 1925.

The joint liquidators of Equilift Ltd sought directions concerning bank accounts containing customer deposits, stage payments and prepayments. The arrangements might have created trusts, but the funds had been mixed and used in the company’s business. The accounts held £171,784.35 and involved 484 customers in three classes.

The court considered whether representative customers should be joined so that the proprietary issues could be determined, and whether their costs should be protected by a pre-emptive costs order. The central issue was whether further adversarial litigation was justified when the likely expense could substantially deplete the fund.

1. Costs and representative parties. In disputes about beneficial ownership, the ordinary expectation is that costs follow the event because the litigation is between rival claimants. A pre-emptive costs order for representative parties is exceptional. It may be justified where a determination is necessary for the proper execution of the liquidator’s duties and the representative party could not reasonably fund the litigation.
2. Proportionality. The court should not fund litigation from the property merely to obtain certainty where the claim is weak or where the costs of joining and representing the relevant classes would exhaust, or substantially diminish, a modest fund. The court applied the approach in Re Westdock Realisations Ltd [1988] BCLC 354 and accepted the principle illustrated by Re Joshua Shaw & Sons Ltd [1989] BCLC 362.
3. Directions in the present case. The opinion obtained for the liquidators was balanced and well reasoned. It concluded that the arrangements introduced after 1 October 2008 probably failed to create trusts. Further litigation would be disproportionate. The liquidators were directed to waive privilege in the opinion, notify all affected customers, and give them two months to seek a different distribution. In the absence of an application, they were authorised to treat the funds as company assets available for distribution.
4. Trustee relief and earlier deposits. Liquidators acting honestly and reasonably on experienced counsel’s opinion, and seeking the court’s directions, would be entitled to relief from any inadvertent breach of trust under section 61 of the Trustee Act 1925. The liquidators were also sanctioned to repay the one unexpended pre-1 October 2008 deposit of £516.09. No representative parties were appointed. The application costs were payable out of the liquidation.

First-instance directions application. No earlier decision or appeal is stated in the judgment.