Nicholson v Hardy

A misfeasance application under section 212 of the Insolvency Act 1986 must identify the relevant duty, the alleged breach and the loss said to result. The provision does not permit a creditor to require the court to investigate whether a claim might exist or to obtain a liquidator’s privileged legal advice.

A liquidator is not obliged to pursue claims which the liquidator and legal advisers consider commercially unviable where there is no funding. Insolvency set-off does not avoid the need to assess the merits of the claims said to be available to the estate. An application which is wholly without merit and forms part of a campaign against the respondent may also be an abuse of process.

JEB Recoveries LLP was wound up after adverse costs orders. Nicholas Nicholson acted as its sole liquidator. Mark Hardy, a creditor and former member, applied under section 212 of the Insolvency Act 1986, alleging misfeasance and breach of duty in failing to pursue potential claims, apply insolvency set-off and provide information.

Mr Nicholson applied to strike out the application under CPR rule 3.4(2)(a) and (b), alternatively for summary judgment under CPR rule 24.2. The central issues were whether the application pleaded a legally recognisable misfeasance claim, whether the alleged defects could be cured, whether the claim was an abuse of process, and whether it had a realistic prospect of success.

1. Strike out under CPR 3.4(2)(a). The section 212 Application did not plead a misfeasance claim. It failed to identify the duties allegedly owed by the liquidator, the breaches relied upon or the loss resulting from them. Instead, it sought an investigation to discover whether a claim might be maintainable, or disclosure of the liquidator’s legal advice.
2. The defects could not be cured by amendment. The liquidator owed no duty to Mr Hardy to disclose his legal advice, and no duty to pursue claims where there was no available funding and the liquidator and legal advisers had concluded that the claims were not worth pursuing.
3. The complaint concerning mandatory insolvency set-off was misconceived. Set-off may produce a net balance due to or from the estate, but its operation depends upon evaluating the inbound and outbound claims. It is not a shortcut which removes the need to assess the merits or commercial viability of those claims.
4. Abuse of process under CPR 3.4(2)(b). The application was wholly without merit and, having regard to Mr Hardy’s litigation history, conduct towards the liquidator and partners, unsupported assertions, excessive material and disregard of the court process, represented a further step in a campaign and an abuse of process.
5. Alternative summary judgment. The application had no realistic prospect of success. The liquidator’s decision not to pursue the alleged claims was a commercial decision and would constitute breach only if it involved an error which a reasonably skilled and careful insolvency practitioner would not have made. The evidence fell well short of establishing that standard. The section 212 Application was struck out in its entirety under CPR 3.4(2)(a) and (b). Had that not been the conclusion, summary judgment would have been granted for Mr Nicholson.