Carillion Construction Ltd v Hussain & Anor (Liquidators of Simon Carves Ltd) & Anor (Rev 1)

Leave for a victim to bring proceedings under section 423 of the Insolvency Act 1986 requires more than proof that the applicant may have been prejudiced. The applicant must show a realistic prospect of establishing both a transaction within section 423 and the statutory purpose, together with good reason for bringing the proceedings where the office-holder declines to do so.

A parent company’s letter of support is construed objectively in its commercial and factual context. A letter addressed to the subsidiary’s board, issued for going-concern accounting purposes, and containing no contractual consideration or operative obligations may provide evidence for the directors without creating an enforceable obligation owed to the company. A speculative allegation of an arrangement to release such an obligation cannot satisfy the realistic-prospect threshold.

Carillion Construction Ltd, a subcontractor of Simon Carves Ltd, sought leave under section 424(1)(a) of the Insolvency Act 1986 to bring proceedings under section 423 against Simon Carves and its ultimate parent, Punj Lloyd Ltd. Simon Carves had entered administration and was later placed into creditors’ voluntary liquidation. Its liquidators declined to pursue the proposed claim.

The proposed claim alleged that Simon Carves and Punj Lloyd had arranged that three letters of support would not be enforced, or that the parent’s breach would be waived, in connection with a pre-packaged sale of Simon Carves’s business and assets. The central issues were whether the letters created enforceable obligations and, if so, whether there was a transaction at an undervalue entered into for the statutory purpose.

1. Application dismissed. The court refused leave under section 424(1)(a) of the Insolvency Act 1986.
2. Under [1994] BCC 119, a victim seeking to proceed where the liquidator or administrator declines to do so must show a realistic prospect of establishing that the transaction falls within section 423, that the applicant is a victim, and that there is good reason for the applicant to bring the proceedings. The statutory scheme makes proceedings by a victim an exception to the ordinary position that the company, acting through its office-holder, is the proper plaintiff.
3. The enforceability of the letters of support depended on objective construction, including their terms and surrounding circumstances. Their being addressed to Simon Carves’s board, and their connection with preparation of the annual accounts, indicated that their purpose was to enable the directors and auditors to assess whether the company could properly be treated as a going concern. The letters did not purport to be contracts with Simon Carves, identified no consideration, and imposed no condition that the company continue trading or assume other obligations.
4. The court rejected as extravagant the proposed construction that the letters immediately committed Punj Lloyd to fund all liabilities then due or falling due during the relevant period. The letters therefore provided evidence for the directors’ going-concern assessment but imposed no enforceable obligation on the parent. There was no realistic prospect of proving otherwise.
5. In any event, the alleged arrangement that Simon Carves and Punj Lloyd agreed not to enforce the letters, or released liability under them, was based entirely on speculation. The evidence did not support its existence. Since the alleged transaction could not realistically be established, the statutory purpose under section 423(3) could not be established either.

The related application under section 112 was before the court only for directions and depended on the outcome of the leave application.