Monday, 15 October 2012

Law report - bringing action against a company in liquidation

Re Kingate Management Limited [2012] SC (Bda) 52 Com

This judgment marks another episode in the liquidation of Kingate Management Limited ("Kingate"), which is linked to the Bernie Madoff affair. See previously here and here.

Liquidators for other Kingate entities had brought a civil claim against Kingate alleging that they were entitled to recover generous management fees which had been paid to Kingate. The action was also brought against certain trustees who had held shares in the corporate shareholders of Kingate.

It is necessary to obtain the permission of the court to continue an action against a company in liquidation. Other aspects of the judgment were whether the other defendants in the civil action were entitled to be joined to the application for permission to continue an action; and whether discovery should be ordered.

Joining of co-defendants
Regarding joining the other defendants to the application, Kawaley CJ said that normally the company will be the only respondent to such an application. The other defendants could not identify a single case where a creditor or shareholder had appeared, despite such case law going back to the nineteenth century [21]. Although circumstances might exist where a creditor would be entitled to be joined, it would be unusual circumstances [22].

Although a creditor has the right to challenge the exercise of a company's powers to bring or defend legal proceedings, this did not extend to appearing on an application to lift a stay for proceedings in which the company was a defendant. [24] It is for the creditor to make the application that the company should defend the proceeding [24].

Furthermore, if a creditor is unwilling to finance a proposed litigation course, it will not lie in their mouths to complain if the liquidator fails to do so due to lack of funds [26].

The lifting of a stay is a matter between the party suing and the company itself and is of no legally cognisable concern to co-defendants. [28]

Lifting of stay
The company has no assets to distribute at present. It follows that the civil action will not interfere with an active liquidation [48]. Furthermore, it would be appropriate for claims against the company and the co-defendants to be heard in the same proceedings to prevent overlap or inconsistent findings [47].
The plaintiffs in the civil action would not gain any advantage over other creditors by bringing the action, as any successful claim would be paid by insurance monies for the benefit of third parties rather than the insolvent estate. It would not increase the plaintiff's share due out of the company's assets. [49]

The Liquidators for other Kingate entities argued that they were entitled to know the commercial value of Kingate's insurance policy. Kawaley CJ agreed that this was appropriate under the Third Parties (Rights Against Insurers) Act 1963, s.3(1), which states that a plaintiff is entitled to such information as is reasonably required for the purpose of ascertaining whether any rights have been transferred to and vested in him and for the purpose of enforcing such rights.

No comments:

Post a Comment