Bloomsbury International Ltd & Ors v Holyoake & Ors

A court deciding whether to fortify a cross-undertaking supporting a freezing order should take the course least likely to cause ultimate injustice. It should make an intelligent and realistic estimate of the risk and scale of loss, while considering the value of the existing undertaking and any harm which fortification would cause the claimant.

A professional’s fiduciary duty of undivided loyalty ordinarily ends when the retainer ends. The continuing obligation is to preserve confidential information. Additional administrators are not justified merely by a former conflict which termination has cured, particularly where effective institutional barriers remove any real risk that relevant confidential information will reach the administrators.

Four insolvent seafood companies, acting through their administrators from Deloitte LLP, alleged a substantial fraud by former directors and associated companies. After worldwide freezing and search orders were made, the defendants sought fortification of the companies’ limited cross-undertakings.

Two former directors separately sought the appointment of additional administrators. They relied on Deloitte’s previous tax-advisory retainers for one director and related entities, alleging conflicting fiduciary duties, an appearance of insufficient independence and possession of relevant confidential information.

The court had to determine whether the risk of loss under the freezing orders required fortification and whether the former professional relationship provided good cause to appoint additional administrators.

1. The fortification application was granted. A cross-undertaking is the normal price of interlocutory coercive relief and enables the court to remedy loss if the order should not have been made. Its lack of value does not invariably prevent an injunction. The court should take the course least likely to produce ultimate injustice.

2. Liquidators and administrators should not ordinarily be required to provide open-ended personal undertakings. The court may nevertheless require a limited undertaking or external fortification. It should make an intelligent and realistic estimate of potential loss, although exact quantification is impossible at the interlocutory stage. Relevant considerations include the existing undertaking’s value, the risk and scale of loss, the availability of an indemnity from substantial creditors and whether fortification would stifle the proceedings.

3. The companies were heavily insolvent and had not established that their undertakings would retain value. The extensive worldwide freezing order created a real risk of substantial loss to a defendant with assets worth millions of pounds. Delay in obtaining consent to transactions and the order’s incremental effect on commercial standing were also material. Fortification would not stifle the action, and substantial creditor banks could realistically be approached for an indemnity. A £4 million bank guarantee represented an appropriately realistic, though necessarily unscientific, estimate.

4. The conflict application was dismissed. Assuming without deciding that Deloitte had owed fiduciary duties which initially precluded proceedings against its client, those duties ordinarily ended with termination of the retainers. The former conflict and any resulting perception of insufficient independence had therefore been cured. Appointment of additional administrators was neither necessary nor proportionate.

5. A former client relying on confidential information must establish that the professional possesses confidential information disclosed without consent and that it is or may be relevant to a new matter involving adverse interests. The tax advisers had received confidential information relevant to the fraud proceedings. Knowledge was not, however, automatically imputed to other partners. The tax and administration teams operated in separate offices and groups, with no material personnel crossover and barriers protecting electronic and hard-copy information. No real risk of transmission was shown and therefore no good cause existed to appoint additional administrators.

• High Court (Chancery Division): Worldwide freezing and search orders were made during March 2010. The court subsequently ordered the claimants’ cross-undertakings to be fortified by a £4 million bank guarantee and dismissed the application to appoint additional administrators.

• High Court (Chancery Division): The four companies had been placed in administration by order dated 19 February 2010.