Sanrose Investment Limited v Lawrence Foley & Ors

A liquidator deciding whether to admit a proof of debt acts in a quasi-judicial capacity. On an application under rule 14.8 of the Insolvency (England and Wales) Rules 2016, the court determines afresh the extent to which the claim should be admitted.

Members’ capital is not a debt provable in a liquidation, whereas money advanced by way of loan may be. The character of funds contributed to an LLP depends on the parties’ agreement and the facts. A contractual assignment of rights arising in an LLP’s liquidation may apply to a compulsory liquidation where the wording and commercial context support that construction.

A successful challenge does not ordinarily make a liquidator personally liable for costs. Serious misconduct, bad faith, irrationality or unreasonableness is required beyond an honest mistake.

Two applications arose in the compulsory liquidation of Saville Foley LLP. Sanrose challenged the liquidators’ admission of a proof of debt lodged by Lawrence and Jennifer Foley personally. FWJ Legal Limited challenged the rejection of its proof, lodged as assignee of rights said to belong to Foley Investments Limited, and alternatively relied on contractual and equitable rights.

The dispute concerned whether the Foleys retained a personal claim arising from the transfer of property to the LLP, or whether the relevant rights belonged to Foley Investments Limited and Sanrose as the LLP’s corporate members. The court also considered whether the deed of assignment applied to the compulsory liquidation and whether the liquidators should bear costs personally.

1. The Foleys’ proof. The court reversed the admission of the Foleys’ proof. A member’s capital contribution is exposed to the risk of loss and is not a debt provable in the liquidation. The evidence established a composite arrangement under which the Foleys transferred the property to the LLP, ceased to be members, and Foley Investments Limited assumed the relevant membership rights and obligations. The outstanding value of the transfer was treated as Foley Investments Limited’s capital contribution, not as a debt owed personally to the Foleys.
2. The later agreement to redesignate £900,000 of members’ capital as debt operated between the LLP and its corporate members. Foley Investments Limited was entitled to prove as creditor for £450,000 and, with Sanrose, to participate as a member in any surplus after payment of prior debts and liquidation expenses.
3. FWJ’s proof. The deed of assignment applied to the compulsory liquidation. Although the deed contemplated a members’ voluntary liquidation, clause 3.1(b), assigning all claims arising in the LLP’s liquidation, was broad enough to encompass the liquidation actually ordered. The known existence of Sanrose’s petition and the commercial purpose of deferring FWJ’s payment supported that construction. FWJ was therefore entitled to prove as assignee of Foley Investments Limited’s rights.
4. The court did not need to decide the alternative estoppel, undertaking or equitable-lien arguments. The asserted lien would not have altered the decisions on the proofs and, on the evidence, there was insufficient connection between FWJ’s work and recovery of a fund by Foley Investments Limited.
5. Costs. The liquidators’ decisions were wrong but were reached honestly, fairly and within the latitude allowed to office-holders exercising professional judgment. They had not acted in bad faith, with bias, irrationally or unreasonably. Rule 14.9(2) therefore remained applicable and no personal costs order was made.