Nicholson v Hardy

The court struck out the s.212 application brought by Mr Hardy under section 212 of the Insolvency Act 1986 on the grounds that it disclosed no reasonable grounds and was an abuse of process pursuant to CPR 3.4(2)(a) and (b). The application sought an examination and compensation for alleged misfeasance but failed to plead any identifiable duty, breach and loss and amounted to a fishing expedition or an attempt to force disclosure of the liquidators legal advice. The judge held that the liquidator was entitled to decide not to pursue speculative claims where there were no realisations or funding and where advisers had concluded the claims were not commercially viable. The judge also found abuse of process on the basis of the applicants litigation history and conduct in these proceedings. Alternatively, summary judgment would have been granted because the application had no realistic prospect of success.

Background and parties.

The application arose from the liquidation of JEB Recoveries LLP. Mr Nicholas Nicholson was appointed liquidator and concluded, after investigations and with legal advice, that the potential outbound claims were not commercially worth pursuing. Mr Mark Hardy, a former member and creditor, applied under section 212 of the Insolvency Act 1986 for the court to examine the liquidators conduct and to order compensation for alleged misfeasance, breach of fiduciary or other duties.

Nature of the claim and relief sought.

• Mr Hardy sought an examination under s.212 and an order compelling the liquidator to contribute to the companys assets by way of compensation for alleged misfeasance and breaches of duty.

Issues framed by the court.

• Whether the s.212 application disclosed reasonable grounds: whether relevant duties, breaches and loss were pleaded; whether the application was merely an investigation to discover a cause of action.
• Whether the liquidator owed any duty to disclose legal advice to Mr Hardy or to pursue speculative claims in the absence of funds.
• Whether an alleged failure to apply mandatory insolvency set-off gave rise to a separate actionable claim.
• Whether the proceedings constituted an abuse of process given the applicants conduct and litigation history.

Relevant facts.

• JEB had no realisations; the only assets were potential claims against persons connected with the late Mr Binstock. The liquidator and his advisers concluded the claims were not viable and no fees were paid.
• Mr Hardy identified several potential claims (invoices, promissory notes, a Bentley, alleged transfer of shares, stolen assets and an asserted set-off asset) but produced little documentary evidence to support their viability.

Courts reasoning and outcome.

The judge applied the principles for striking out under CPR 3.4(2), emphasising that striking out is confined to plain and obvious cases where a claim is bound to fail. The s.212 application was held to be inadequately pleaded: it sought a court-led inquiry to discover whether a claim existed rather than setting out pleaded duties, alleged breaches and loss. The court distinguished cases where a liquidator who relies on legal advice places that advice in issue and so must disclose it, noting that here the liquidator had not put advice in issue and the Insolvency Rules did not require disclosure of legal advice to individual creditors. The mandatory set-off argument was rejected as circular: set-off requires evaluation of inbound and outbound claims and does not avoid the need to assess merits. On abuse of process the judge relied on the applicants extensive prior litigation and conduct in these proceedings to conclude the application formed part of a campaign and was intended to harass or pursue collateral objectives. The court concluded the s.212 application should be struck out under CPR 3.4(2)(a) and (b), and alternatively would grant summary judgment as the application had no realistic prospect of success.

Subsidiary findings.

• The liquidator had no duty to disclose legal advice to Mr Hardy in the circumstances.
• Where there are no realisations and no funding, a liquidator is not obliged to pursue speculative claims.
• The defects in the application were not capable of cure by amendment.

The s.212 Application by Mr Hardy is struck out. The court held that the application disclosed no reasonable grounds and was an abuse of the courts process under CPR 3.4(2)(a) and (b). The claim was an improper fishing expedition that failed to plead duties, breaches and loss and sought to force disclosure of the liquidators legal advice. The judge further found that, in any event, the application had no realistic prospect of success and summary judgment would have been granted.