Berntsen v Tait

The Court of Appeal considered whether summary judgment under CPR 24.2 was appropriate to dismiss the appellants' claims against the administrators of Coniston Hotel (Kent) LLP brought under paragraphs 74 and 75 of Schedule B1 to the Insolvency Act 1986. The court applied the real-prospect test (as explained in The Royal Brompton Hospital v Hammond and Swain v Hillman) and concluded that the appellants had no real prospect of success on (i) the rescue claim that administrators failed to obtain funding to save the business, (ii) the undervalue/conspiracy claim that the hotel was sold at an undervalue in a pre-arranged deal, and (iii) the limited examination claim under paragraph 75.

Key subsidiary findings: the proposed Lombard funding required personal guarantees and so was not an immediately available source of funding; the appellants had accepted BDO's terms which recognised a primary duty to the bank and authorised disclosure to the bank; the Knight Frank valuation was not shown to be improper and substantial marketing was undertaken; and any recovery of administration costs would advantage secured creditors rather than the appellants. On those grounds Morgan J's summary disposal was upheld.

Background and parties. The Coniston Hotel (Kent) LLP, whose two members were the appellants, experienced a cash crisis shortly after opening. NatWest (RBS group) was the lender. BDO Binder Hamlyn LLP (BDO) were engaged to conduct an independent business review. The respondents, two BDO employees, were appointed administrators. The hotel was sold to West Register (an RBS group company) and a substantial deficiency remained, leading to liquidation.

Procedural history and relief sought. The appellants sued the administrators under paras 74 and 75 of Schedule B1 to the Insolvency Act 1986 seeking relief for alleged unfair harm and to have administrators examined for misconduct, arguing among other things that administrators failed to secure funding to rescue the LLP, sold the hotel at an undervalue in a pre-arranged transaction and had conflicts of interest. Earlier applications were considered by Norris J (1 February 2013) who permitted limited amendment; there were further case management hearings and summary judgment applications before Morgan J (orders of 30 January and 8 April 2014). The appellants appealed to the Court of Appeal.

Issues framed by the court.

• whether the appellants had a real prospect of success on the rescue claim that administrators should have obtained funding (including Lombard financing and other sources) so as to avoid administration;
• whether there was any evidential basis for the allegation that the hotel was sold at an undervalue in a pre-arranged conspiracy to advantage West Register;
• whether the appellants had sufficient interest to pursue an examination under para 75 and whether any remedy would benefit them.

Court’s reasoning. The Court of Appeal held that under CPR 24.2 the real-prospect test required examination of evidence likely to be available at trial. On the rescue claim the court accepted that Lombard funding would have required personal guarantees which the appellants would not have given, that VAT receipts were contractually applied to reduce facilities, and that other suggested sources (MacDonald lease, Swale Borough Council) were not immediate or secure sources of funding; prior proceedings and disclosure had given the appellants opportunities to identify evidence but they failed to do so. On the undervalue/conspiracy claim the court found no evidence that the respondents had a pre-determined arrangement: Knight Frank’s lower valuation was on a different basis to Savills and extensive marketing was undertaken; speculation about West Register’s ultimate purchase did not supply evidential support. On para 75 examination the court observed any recovery would benefit secured creditors, not the appellants, and the appellants lacked sufficient interest. Given these factors the court concluded there was no other compelling reason to proceed to trial and that summary judgment was appropriate.

The Court of Appeal granted permission to appeal but dismissed the appeals. The court concluded that, applying the CPR 24.2 real-prospect test and having regard to the evidence and prior proceedings, the appellants had no real prospect of success on the rescue claim, the undervalue/conspiracy claim or the para 75 examination claim; accordingly summary judgment and strike-out orders below were upheld.

The claims were first the subject of applications before Norris J (High Court, Companies Court) who on 1 February 2013 struck out parts of the pleadings but permitted amended particulars and limited the scope under Schedule B1 (issues in [2013] proceedings were partly the subject of a prior appeal dismissed in part on 2 October 2013 [2013] EWCA Civ 1520). Morgan J later gave summary judgment and strike-out orders (hearings and orders in January and April 2014). The appellants appealed to the Court of Appeal, which delivered judgment on 13 October 2015 ([2015] EWCA Civ 1001) dismissing the appeals.