Valuing loss of chance in a liquidation

Overview

In this case, the Court was tasked with valuing a loss of chance claim against a law firm that had failed to lodge caution against the joint liquidators of a company. The joint liquidators had entered into a settlement that was not in the best interests of the company, in breach of their duties to the company.

Background

In 2016, Centenary 6 Limited (“Centenary”) raised proceedings against the Joint Liquidators of Centenary Holdings III Ltd ("CHIII"), a Scottish alcoholic beverages company and a subsidiary of Centenary. Centenary sought damages under section 212 of the Insolvency Act 1986 for breach of duty in connection with the Joint Liquidators' decision to enter into a compromise agreement with Deka Immobilien Investment GmbH ("Deka") settling Deka's claim as creditor in the liquidation. TLT LLP (“TLT”) acted as Centenary’s solicitors. The proceedings were ultimately refused due to the Centenary’s failure to lodge caution. Centenary then sued TLT for breach of contract and professional negligence in respect of the failure to lodge caution. Liability was admitted and the issue in this case was the quantum of Centenary’s damages. The Court was tasked with determining the value of Centenary’s lost chance of securing a favourable outcome in the proceedings against the Joint Liquidators.

Centenary sought payment of three sums of money: (1) £35,169,133.90, being the amount Centenary sought from the Joint Liquidators in the proceedings, plus interest; (2) £228,435.31, being the costs incurred in the reclaiming motion in respect of the refusal of the proceedings and in seeking permission to appeal to the Supreme Court; and (3) £253,358.47, being the expenditure incurred by Centenary for solicitor and counsel fees in connection with the proceedings.

The Court began its decision by highlighting that it is very difficult to predict the outcome of a case with any certainty. The outcome of a case will depend not only on the strength of the legal arguments, but also on practical matters such as the parties' willingness to settle, the strength of their bargaining positions in any settlement negotiations, and their ability to fund the case to its conclusion.

Deka was CHIII’s landlord. It submitted a claim in the liquidation of £38,286,271, comprised of: (1) arrears of rent and service charges with interest (£3,116,511); (2) dilapidations (£1,407,845); and (3) future rent service charges and interest for the periods until the break options in the leases could be exercised in 2010 and 2011 (£33,761,914). In or around November 2005, the Joint Liquidators agreed with Deka that, in consideration for Deka accepting a renunciation of the leases, Deka’s claim in the liquidation would not amount to less than £28,000,000 (the precise figure being dependent on Deka’s costs and expenses).

In compromising Deka's claim in the sum of around £28,000,000, the Joint Liquidators acted in breach of their duties to CHIII. The sums due to Deka amounted to around £4,500,000 only. Further, the compromise made no provision for an "anti-embarrassment" clause, which would have reduced Deka’s claim in the liquidation in the event that Deka was able to sell the building as a result of having obtained vacant possession following CHIII’s surrender of the leases. Deka was, in fact, able to sell the building for around £47,000,000 shortly after the agreed surrender of the leases and having obtained vacant possession, securing a sizeable windfall.

In entering into a compromise agreement with Deka in these terms, and in failing to include an "anti-embarrassment" clause, the Joint Liquidators failed to exercise the skill and care reasonably to be expected of ordinary competent liquidators. Ultimately, however, the proceedings against the Joint Administrators were refused due to TLT’s failure to lodge caution.

The Court’s Decision

The Court found that the issues raised in this case fell to be resolved on a loss of a chance evaluation, with two exceptions. The first exception was the issue of prescription, which was a matter of law which could be determined by the Court. The second was the issue of whether Centenary would have funded the proceedings against the Joint Administrators out of its own funds up until the court ruled on the question of prescription. That was an issue which depended on what Centenary would have done and fell to be assessed on the balance of probabilities.

Prescription

Prescription is a legal principle pursuant to which a debtor’s liability to pay an outstanding debt is extinguished after the passing of a prescribed time period. The Joint Liquidators argued that, if their actions in entering into the compromise agreement with Deka were negligent in 2005, a concurrence of injuria and damnum existed then and had prescribed before the proceedings were brought on 1 April 2016. The Joint Liquidators further argued that Centenary had knowledge of its loss prior to April 2011 or, at the very least, could with reasonable diligence have become aware of the loss over five years prior to the raising of the proceedings against the Joint Liquidators.

The Court began its analysis by stating that the key to resolving this dispute was to be found by going back to the basic principles of Scots law on prescription. In Scots law, prescription is a substantive matter which operates by extinguishing an obligation. That can be contrasted with the position in other legal systems, such as England, where time bar is a procedural matter which operates to bar the bringing of an action.

The obligation which was sought to be enforced in the proceedings against the Joint Administrators was an obligation on the Joint Liquidators to make reparation to CHIII. As a matter of practicality, CHIII was not able to enforce that obligation itself, being in liquidation. Where, as here, an action is to be raised against those in control of a company, section 212 of the Insolvency Act 1986 provides a procedural mechanism whereby the action can be raised by a shareholder.  The wording of section 212 makes clear that the section does no more than provide a mechanism by which the shareholder, as a contributory, can enforce an obligation on a liquidator to make reparation to the company under his control. It does not change the nature of the obligation so that the obligation ceases to be an obligation due by the liquidator to the company and becomes instead an obligation due by the liquidator to the contributory.

The prescription issues which would have required to be determined by the Court in the proceedings against the Joint Liquidators would have been:

(1) When the prescriptive period started to run: The Court found that the proceedings were raised more than five years after the date when loss, injury or damage occurred. Accordingly, unless section 11(3) or section 6(4) applied, the obligation to make reparation had prescribed prior to the raising of the proceedings against the Joint Liquidators under section 6(1) of the Prescription and Limitation Act 1973.

(2) Whether the starting date for prescription had been postponed under section 11(3) of the 1973 Act: The starting date for prescription of an obligation can be postponed due to lack of awareness. There was a dispute between the parties as to whether what mattered was lack of awareness on the part of CHIII or Centenary. The Court found that section 11(3) applied when "the creditor" (CHIII) was not aware.

(3) Whether the prescriptive period had been extended under section 6(4) of the1973 Act: Section 6(4) of the Act provides in part that any time during which the creditor is induced to refrain from making a claim by reason of fraud on the part of the debtor is not computed for the purposes of prescription. The Court found that “fraud” in section 6(4) can include breach of duty by a liquidator to the company under his control. While the liquidator is in office, the company is not able to act independently of the liquidator and therefore cannot discover the fraud. The company cannot make its own independent decisions.

Accordingly, the Court found as a matter of law that the obligation on the Joint Liquidators to make reparation to CHIII had not prescribed by the time that the proceedings against the Joint Liquidators were brought. That conclusion was a matter of law and so it was not necessary for the Court to assess the loss of a chance on the prescription issue.

Funding for the remainder of the litigation

Centenary submitted that it was a virtual certainty that it could have funded the proceedings against the Joint Liquidators through to a proof on prescription and afterwards.  

TLT argued that, had litigation funders been approached and been made aware of a judgment of Newey J, which concerned another settlement involving the Joint Liquidators (the “Vivendi Settlement”, described below), they may not have funded the litigation.

The Court accepted the evidence of Centenary that Woodsford Group would have funded the proceedings against the Joint Liquidators if they had survived the preliminary proof on prescription notwithstanding the related case, which was in the public domain.

Having ruled on these preliminary issues, the Court then turned to the issues which fell to be resolved on a loss of a chance evaluation.

Loss of chance

Centenary argued that there was a very high chance that the Joint Liquidators would have been found negligent in the proceedings against them, while TLT took the position that the Centenary’s chances of establishing a breach of duty were 50%.

In determining the appropriate quantum of damages, the Court considered, among other things:

(1) The prospects of the Joint Liquidators reaching an agreement with Deka limiting Deka’s claim in the liquidation to a sum less than £28 million: The Court found that Centenary had a reasonable prospect of establishing that the Joint Liquidators would have reached an agreement with Deka limiting its claim in the liquidation to a sum less than £28 million.

(2) The prospects of Centenary establishing that, had the claim by Deka in the liquidation been limited, then there would have been a surplus in CHIII available to Centenary as a result of the Vivendi Settlement: In January 2009, CHIII, acting by its Joint Liquidators, brought proceedings against Vivendi Universal SA (“Vivendi”), the parent of the group, and others in relation to CHIII's £77.7 million loan to Centenary (the "Vivendi Proceedings"). Vivendi counterclaimed against Centenary under Part 20 of the English Civil Procedure Rules (the "Part 20 Claim”). In September 2010, the Vivendi Proceedings were settled by Vivendi making a payment of £47 million to the liquidators of CHIII and agreeing to a "drop hands" resolution of the Part 20 Claim. The Court ultimately found that Centenary had reasonable prospects of establishing that had the claim by Deka been limited, there would have been a surplus available to Centenary as a result of the Vivendi Settlement.

(3) Discretion not to make an order in section 212 proceedings: In the Court’s opinion, there were no circumstances which would have justified the refusal to make an order or exclude interest.

For these reasons, the Court found that Centenary had reasonable prospects of succeeding in the proceedings against the Joint Liquidators, and ascribed a percentage of 65% to that chance. By way of a cross check, the Court noted that this percentage was broadly in line with the legal advice given to Centenary by TLT at the relevant time.

Conclusion

The Court applied the 65% to Centenary’s damages as follows:

(1) The £35,169,133.90 amount Centenary sought from the Joint Liquidators in the proceedings, plus interest: After conducting various calculations, including a reduction in the amount claimed to account for the full amount of statutory interest due to the creditors, the Court found that this figure should be £14,032,472. Applying 65% to this figure, the Court arrived at a figure of £9,121,106, rounded to £9,122,000, plus interest at 4% from the 5 May 2017 to the date of citation, and at 8% from the date of citation.

(2) The £228,435.31 claimed in costs incurred in the reclaiming motion in respect of the refusal of the proceedings and in seeking permission to appeal to the Supreme Court: The Court accepted that this was the appropriate figure. Applying 65% to this figure, the Court arrived at a figure of £148,482.95, rounded to £148,500, plus interest at 8% from the date of citation.

(3) The £253,358.47 claimed for the expenditure incurred by Centenary for solicitor and counsel fees in connection with the proceedings: The Court reduced this figure to account for amounts claimed for work done in other proceedings and found that this figure should be £174,158.47. Applying 65% to this figure, the Court arrived at a figure of £113,203, rounded to £113,200, plus interest at 4% from 5 May 2017 to the date of citation, and at 8% from the date of citation.

Judge: Lord Ericht

Counsel: Smith KC, T Young; Harper Macleod LLP for Centenary

McBrearty KC, Paterson; DAC Beachcroft Scotland LLP for TLT LLP