Our Insolvency Litigation specialists succeed in resisting a £6.3 million WFO application

The NDP Insolvency Litigation Team have during October 2021 successfully opposed an application for a £6.3 million WFO against our client, brought by a Litigation Funding Company (‘the Funder’).  The Funder had purchased the claims now pursued by it, against our client, from the Liquidator of the company of which our client had been the controlling Director. The Funder was very well resourced.

On the face of it, the Funder held all the cards.  In achieving this great outcome for our client, reliance was placed not only on a forensic and detailed analysis of the facts of the case, but also on the very recent and important changes to the applicable law in this specialist area of work.

Background to this Insolvency Litigation case

NDP’s route to the case was via another Solicitor, who recommended our Solicitors specialising in insolvency law claims from Liquidators and in dealing with WFO claims both for Claimants (such as the Funder) and also (as here) for Respondents to such applications.  The underlying High Court claim issued by the Funder against NDP’s client, sought repayment to the Funder of an eye-watering £6.3m. A life changing claim for our client to deal with.

WFO application against NDP’s Client

Having issued the High Court claim and by doing so, then further raising the stakes, the Funder then made an application to the High Court for a WFO, seeking an Order from the High Court that our client’s assets, worldwide, be frozen to the tune of £6.3m, such Order if made to last until Trial/final hearing in this case – probably 18 months away.

What to do?

That WFO application was whole-heartedly opposed by our client employing NDP and an experienced Insolvency Barrister.  The WFO application was heard and determined by the Court over 2 days in October 2021. We had to move fast as we had only 5 working days from receiving the WFO application, to prepare and respond by detailed written evidence to it.

The outcome – The Court dismissed the WFO application

The application for the WFO, after a day and a half of argument in Court, was dismissed by the Court.  The Funder was also ordered to pay our client’s legal costs incurred in successfully opposing the WFO application. An outstanding result for our client.

The WFO application was, unusually for a WFO application, heard ‘on notice’ to our client as the Respondent to the application.  The first that the Respondent usually hears about a WFO made against him/her, is when the WFO as granted, is served on him/her, together with 12 inches  of supporting paperwork.

On the facts of this case, NDP’s client had the opportunity to be heard on the WFO application, for reasons beyond the scope of this article.  We had pushed for that to happen. It proved crucial.

The effect and consequences of a WFO

Freezing Orders have historically been (accurately) described as the ‘nuclear weapon in the Claimant’s armoury’. If granted, a WFO can and does have a dramatic effect on the targeted person’s life, their ability to trade and may cause enormous reputational damage. Notice of the granting of a Freezing Order is invariably given by the Claimant to the target’s Bankers, for example.

In this case

The well-resourced Funder employed a national firm of Solicitors to pursue its case. They did so aggressively and persistently.  On NDP receiving notice of the WFO application by the Funder, there were only 5 working days for NDP to consider the detailed written evidence relied on by the Funder in support of the Application, to take detailed instructions on the Funder’s written evidence and discuss strategy and tactics with the client and his Counsel.

Written evidence in answer had to be prepared in response to the WFO application.  That proved a significant task.  Attention to detail is everything in such matters.  We and the client had to instruct and meet with Counsel ahead of the hearing and then attend the hearing itself.   It was a frantic week.   There was a huge amount to do.   There were lots of late nights and early mornings, to get the job done.

Four members of the NDP Team, led by Neil Davies and supported by Solicitor Thomas Riley, Solicitor Suky Mann and Paralegal Chloe Collins, represented the client.

Martin Budworth of Counsel was retained. He (as ever) morphed into and became a seamless part of the client’s Defence Legal Team.

Change in the Law

The Funder had to leap 2 legal hurdles if it was to persuade the High Court Judge to grant the WFO, as follows:

1. It had to try and demonstrate a good legal case, ‘A stronger case must be shown than would justify relief of a less stringent kind’. On the facts of this case, the Claimant Funder was unable to satisfy the Court of that matter, on significant parts of its claim.
2. Evidence had to be adduced by the Funder, that our client intended to ‘unjustly dissipate his assets’. Again, the Court decided that the Funder was unable to satisfy the Court that such a risk existed on the facts of this case.   The recent Court of Appeal decision in Les Ambassadeurs Club Ltd v Yu [2021] EWCA Civ 1310 has raised the evidential threshold that a Claimant such as this Funder must meet to satisfy this legal test.

The decision of the Court of Appeal in that case included the following statements, which are a timely reminder of some basic principles:

‘(a)     A freezing injunction “is not intended as a safeguard against insolvency, nor as a means of providing security for a claim, however strong that claim may be and however large a sum of money may be involved”.

(b)       In view of the drastic interference with a person’s right to do as they please with their own property that a freezing injunction entails, (quite apart from the reputational damage that it may cause), the courts must remain vigilant to ensure that such orders will only be granted in cases in which the evidence suffices to establish that there is a real risk of the judgment going unsatisfied by reason of what Gloster LJ in Holyoake v Candy [2017] EWCA Civ92, [2018] Ch.331 (“Holyoake”) elegantly termed “unjustified dissipation,” and where it is just and convenient to make the order.”

(c)      In order to avoid the undesirable situation in which, as Gloster LJ put it in Holyoake at [58] “the nuclear remedy of a freezing order would become a commonplace threat”, there must be cogent evidence from which it can at least be inferred that” the defendant falls into the category of those so determined not to pay that they would take active steps to frustrate the recovery of sums due. (The Funders) ruminations do not put (NDP’s client) in that category at all (and certainly not by cogent evidence).’

Outcome

The Funder failed (in part) to demonstrate point 1 (‘a strong legal case’) on the largest part of its overall claim and failed miserably on the second hurdle (evidence of ‘unjustified dissipation’).

The decision to oppose the WFO application

This decision was not made lightly by the client.  Factors influencing the decision included:

• The significant legal cost of opposing the WFO application.
• The adverse costs consequences for the client of failing in that opposition. He was likely to be ordered to pay the Funder’s legal costs, if his opposition to the WFO failed.
• The evidential strength of the Funder’s application for a WFO and the prospects of successfully opposing it.
• The wider legal strategy of the case.

The decision (to oppose or not to oppose) had to made quickly.  Time limits were short.

The Legal Team had to come together and we, Counsel and the client had to commit dozens of hours of time, in a short-time period, to prepare for the WFO hearing.  That was done.

NDP’s take on the case

NDP Solicitor, Director and Insolvency Litigation specialist, Neil Davies commented:

“This was a great outcome for the client. Had the WFO been granted with the above consequences, our client would likely have had to swear an Affidavit and disclose to the Court and the Funder all of his assets, their location and their values.  That would have been highly advantageous to the Funder as Claimant. It is long established by the Court, that such a potential benefit should not be used as the reason to bring such a WFO claim.”

Conclusion

Our Insolvency Litigation team is highly experienced and expert in this area of law. Understanding the facts of the case, working out a defence and a strategy and doing so quickly and thoroughly are the key to a successful outcome, as was the case here.

Contact us or call us on 0121 200 7040.

How our team of Commercial and Insolvency Litigation Solicitors can help when faced with a section 447 investigation

Much of the case work undertaken by the 12 strong Team of insolvency litigation solicitors here at NDP involves dealing with company and insolvency related problems, including acting for Insolvency Practitioners in carrying out their instructions on company insolvency matters. The company is, by definition, dead by this point. As with the Team’s significant Commercial and Insolvency Litigation caseload and its pre-insolvency advice caseload, Section 447 Investigations give the NDP Team members the opportunity to advise Directors and their company, during the life of the company, albeit in often distressed circumstances.

In this article we look at Section 447 Investigations by the Insolvency Service’s Criminal Enforcement Team. These usually happen unannounced, sometimes at dawn, with little or no advance warning for the company involved and can have very serious consequences for companies and directors personally. We detail what they are, what their implications are (and these can include compulsory winding up, director disqualification and even criminal proceedings) and how we can help directors in what can be a highly stressful situation.

The purpose of this article

1. To explore the nature, powers and extent of a Section 447 Investigation into a company.
2. The potential implications of that 447 investigation; and
3. What value NDP can add to the client faced with that investigation.

What is a Section 447 Investigation?

The Secretary of State has far-reaching investigative and interrogative powers under section 447. The main provisions read as follows (with our emphasis added):

‘447 Power to require documents and information:

• The Secretary of State may give directions to the company requiring it –
• to produce such documents (or documents of such description) as may be specified in the directions;
• to provide such information (or information of such description) as may be so specified.

(5)      A requirement under subsection (2) or (3) must be complied with at such time and place as may be specified in the directions or by the investigator (as the case may be).

(7)      The Secretary of State or the investigator (as the case may be) may take copies of or extracts from a document produced in pursuance of this section.’

Comment

The legislation further provides that the Investigator in the case has the same powers, so that the Investigator can deal with the moving feast that is the investigation.

The stated goal of the Secretary of State is:

‘Regarding insolvency related fraud and associated corporate misconduct, working to deter fraud in companies by investigating and prosecuting breaches of insolvency and company law.’

The brief is thus clear. To eradicate fraud and misconduct. Most company investigations are carried out under section 447.  The department for Business, Energy and Industrial Strategy (‘BEIS’) via the Insolvency Service Criminal Enforcement Team, initiate Section 447 Investigations.

What type of matters are investigated?

Investigations (based on NDP’s extensive insolvency litigation experience) might typically take place because there are grounds for one or more of: a suspicion of fraud, misfeasance, misconduct, fraudulent trading, theft or that the company is involved in an illegal pyramid selling scheme.

Who initiates complaints?

The Insolvency Service investigates complaints from several sources to include the Police, Trading Standards and members of the public.  It is unlikely that the Investigator will disclose the source or nature of the complaints that lead to the Section 447 Investigation.

The unannounced knock on the Company Front Door – Little or no advance notice

The Insolvency Service’s powers under section 447 are administrative, in the sense that they are not encumbered by the rules of natural justice in relation to, for example, advance warning.

However, a notice given under section 447 must not be excessively wide or in unreasonable terms and those giving the notice must have acted fairly. As a matter of administrative law, the Secretary of State must have good reason for acting.  Section 447 Investigations are not commenced lightly.

Scrutiny of the terms and extent of the Notice is always needed, by an experienced, critical eye. NDP’s Team of insolvency litigation solicitors are well used to doing that.

How long will the investigation last?

The Secretary of State aims to complete section 447 enquiries within an average of 90 days. That time is often exceeded in our experience.

What can be investigated and sought?

An Investigator may give Directions to the company requiring it to produce such documents as the Investigator may specify or provide such information as the Investigator may specify (section 447(3)).

A requirement to produce documents or information must be complied with at such time and place as may be specified in the Directions or by the Investigator (section 447(5)) or within such further time as may be agreed.  Extended time for compliance by the company can be and is often agreed by negotiation.

However, failing to comply with such a Direction is not an option for the company or its Directors.   There are serious consequences – see below.

If the company refuses to co-operate, the Investigator can obtain a Search Warrant and attend at the premises with the Police to search for and seize documents.

The Secretary of State or the Investigator is entitled to take copies of or extracts from a document produced (section 447(7)) and, for this purpose, a document includes information recorded in any form (section 447(8)).

Consequences that may flow from a Section 447 Investigation

Consequences may flow not only for the investigated company but also for the Directors of the company, personally.  The Secretary of State could potentially (by way of hypothetical example) act on produced documents and information by deciding to present a Winding-Up Petition against the company on the public interest ground that it is just and equitable to wind-up the company, under section 124A(1) of the Insolvency Act 1986. In an appropriate case, a provisional Liquidator may also be appointed to the company.

Less serious sanctions can be agreed or imposed by negotiation.  Serious stuff indeed.

Director Disqualification

By way of another typical example, information or documents obtained under section 447 could and do form the basis for a decision by the Secretary of State to apply for a Disqualification Order against the company’s Directors in the Public Interest, on the grounds that the Directors have engaged in ‘unfit conduct’.

Such consequential action can be (and often is) opposed by the company and its Directors.  That however can be a legally expensive road to follow, albeit one that must be followed out of practical necessity.  The objective of the client and the appointed legal team must be to prevent matters reaching that stage.

The role of NDP as the Solicitor is to assist the company and its Directors from that point being reached. Achieving that objective is an art not a science.  The response and strategy of the targeted company approach in each case is always tailored to the particular circumstances of the case.

Criminal Proceedings

It is also possible for information disclosed in a Section 447 Investigation to be deployed in criminal proceedings against individuals involved in the company under investigation.

Any statement made by a person who complies with a requirement under section 447 of the Companies Act 1985 may be used in evidence against him (section 447A(1)). However, in criminal proceedings in which that person is charged with a relevant offence, no evidence relating to the statement may generally be adduced by or on behalf of the prosecution and nor may a question relating to it be asked by or on behalf of the prosecution  unless evidence relating to it is adduced or a question relating to it is asked in the proceedings by or on behalf of that person (section 447A(2)).

Comment

Great care therefore must be taken by the Director and the Legal Team advising the Director in such circumstances.

Reputational Damage

Section 447 Investigations are civil (not criminal) in nature. Investigations are confidential and conducted in a way that need not prejudice the business of the company.

The sting in the tail is, however, that the Investigator can (and often does) contact suppliers and customers of the company.  Employees and former employees may also be contacted.   There are steps that can be taken to minimise the need for such contact and to thus protect the company.

Non-compliance by the Director

There are serious penalties for failure to comply with requests for information during a Section 447 Investigation. Where there has been a failure to comply with a section 447 request, an Inspector, the Secretary of State or an Investigator may certify this fact in writing to a Court (section 453C(2)).  If this happens, the Director and the company is in potentially very deep and dangerous water.

The consequences of non-compliance

If (after hearing any witnesses and any statement offered in defence) the Court is satisfied that that the offender failed without reasonable excuse to comply, it may deal with him as if he had been guilty of a Contempt of Court (section 453C(3)).  Potential penalties for the company and/or a defaulting Director thus include a fine or imprisonment.

Consequences for the Director if the investigated company goes into Liquidation

Consequences may include a Director Disqualification investigation for the Director and also consequential financial recovery action from the Liquidator against the Director, to include the setting aside of improper antecedent transactions in the relevant period prior to liquidation or even a prosecution for Fraudulent trading.

If a company were to be wound-up on the just and equitable/public policy ground referred to above, under Insolvency Act 1986 section 124A(1), there would be a high likelihood of a Director disqualification investigation and Director Disqualification proceedings following against one or more of the Directors.

In short, a Section 447 Investigation can have very serious consequences indeed, for both the company and its Directors.

What value can NDP add to Director interviews in the Section 447 investigation?

• Assistance in preparing for, and during, the interview

The Director(s) will be interviewed (often more than once) by the Investigator as the investigation progresses.  It is vital that the company and its Directors are best represented in such meetings.  It is important to try and establish a rapport with the Investigator to avoid the risk of misunderstanding or of the Director being misled, whether inadvertently or otherwise.

Interventions in such interviews/meetings, on behalf of the Director, are vitally important.  Such interventions ensure (for example) that there is clarity as to whether any criminal proceedings are in contemplation. The presence of a full Legal Team (perhaps including Counsel) on behalf of the company and its Director(s), is likely to act as a restraining influence on the Investigator, discouraging the Investigator from exceeding his/her remit and powers or otherwise acting improperly or unfairly.

It is vital that the Director is fully represented when meeting the Investigator, to ensure both that the Director complies with his statutory obligations under section 447 and so that the Director is protected to the maximum extent properly permissible in law against any possible repercussions.

• Ensuring compliance with the provision of information and documents

As explained above, the repercussions for non-compliance are potentially very extensive and very serious.  It is important that such legal representation should include both attendance in Director interviews and a supervisory watch over all documents and information disclosed.

That ensures proper and lawful compliance and allows us to guard against any difficulties which might arise from the release of documents.  Experience counts for everything in such cases.

• Communicating with the Insolvency Service on the Client’s behalf

This is an extremely important function for the specialist insolvency litigation Solicitor. It can shape and guide the direction and outcome of the investigation process.  It puts needed distance between the very focused and targeted Investigator and the company.

• Ensuring company and Director rights and entitlements are protected

This applies in relation to the investigation process itself, in relation to dawn raids on premises that are occasionally carried out and in relation to any enforcement action that might ensue.

• Our Insolvency Litigation Solicitors’ experience in Section 447 and related cases

The NDP Team is usually involved in advising on 447 cases, at any point in time. We are presently advising on such an investigation into 11 companies.

We have advised in relation to many such cases in the past.  The Insolvency Service know us and our reputation in this field of work.

We know how to deal with such cases, through experience.  We have within the Team over 120 years of combined experience of dealing with insolvency and company law related work, both in civil law and criminal law. There is not much, if indeed anything, we won’t have seen before.

• Insurance cover

Individual Directors and ex-Directors should retain records of potentially responsive insurance cover – most likely Directors and Officers (‘D&O’) cover.  If such insurance is in place, then it often responds to section 447 investigations.

If you or one of your clients/contacts, are facing a Section 447 Investigation, then please contact our insolvency litigation specialists: Neil Davies, David Hanman, Sukhbir Mall or Suky Mann of our experienced Team of insolvency for assistance and guidance.

We offer free initial consultations for Section 447 Investigations and all business and insolvency crime cases.