Davidison v Finnan & Ors

On a summary judgment application, the court must decide a short legal point where appropriate, but should not resolve substantial factual disputes or conduct a mini-trial. Where a member seeks payment on leaving a limited liability partnership whose business is nearing completion, reasonable enquiry may be required into contingent liabilities. The resulting liabilities should be suitably provided for when assessing solvency. The court need not apply the full solvency declaration test applicable to a members’ voluntary liquidation unless an improper informal winding up is alleged. Where the evidence leaves open the value of the contingent liability and the effect of the payment, summary judgment should be refused.

Anthony Peter Davidison, as liquidator of Finnan Developments (Raynes Park) LLP, brought misfeasance proceedings under Insolvency Act 1986 against Paul Capra and others. The claim challenged a payment of £1.35m made to Mr Capra under a settlement agreement when he retired as a member of the LLP.

Mr Capra applied for reverse summary judgment under CPR 24.2. The central issue was whether the LLP was insolvent, or likely to become insolvent because of the payment, after making suitable provision for its contingent liability in arbitration proceedings brought by G&S Construction Ltd.

1. Application substantially dismissed. The Liquidator had a real prospect of establishing that the LLP was insolvent, or likely to become insolvent, as a result of the £1.35m payment. The evidence did not justify a safe final determination on summary judgment.
2. The summary judgment principles in Easyair Ltd v Opal Telecom Ltd and AC Ward & Sons Ltd v Catlin (Five) Ltd required the court to consider evidence reasonably expected at trial, avoid resolving substantial factual disputes, and refrain from conducting a mini-trial. A short point of law could nevertheless be decided summarily.
3. Where an LLP’s business is close to completion and a member seeks payment on exit, reasonable enquiry should be made into outstanding liabilities. For a construction dispute lacking sufficient in-house expertise, this would likely require advice from a construction industry professional, most likely a lawyer. The resulting estimated liabilities, including the contingent liability to G&S, should be suitably provided for.
4. The court distinguished this enquiry from the test under section 89 of the Insolvency Act 1986 for a members’ voluntary liquidation. Since no improper informal winding up was alleged, it was unnecessary to determine whether the LLP would be able to pay all debts in full. The relevant question was whether suitable provision had been made for liabilities estimated after reasonable enquiry.
5. The evidence concerning the members’ loan accounts, the value of the G&S claim, arbitration costs and the LLP’s assets remained materially incomplete. Further documents and expert evidence could alter the result. The possible relevance of what Mr Capra knew about Mr Sean Finnan’s intended conduct also raised factual issues unsuitable for summary determination.