Bourne & 101 Ors v The Charit-Email Technology Partnership LLP

Factual and Procedural Background

This is a Companies Court application under section 130(2) of the Insolvency Act 1986 seeking permission to commence proceedings against the respondent, a limited liability partnership in liquidation, by joining it to existing proceedings in the Commercial Court. The dispute arises from a series of broadly similar investment schemes using limited liability partnerships as vehicles, all promoted by Company A. The particular scheme involving the respondent is referred to as "the Charit Scheme". There are currently 556 individual claimants in the Commercial Court actions, of whom 102 were involved in the Charit Scheme.

The schemes involved the respondent purchasing intellectual property rights in an Information and Communications Technology product from a vendor company ("the technology vendor"). The purchase was funded by a combination of partner members' investments and a bank loan. The accession agreement made each member liable to contribute five times their original investment. The technology vendor underwrote the bank borrowing by pledging a significant portion of the purchase price back to the bank. If the LLP failed to repay the loan, the vendor would be subrogated to the bank's claim against the LLP, and the LLP could call on its members to pay.

The schemes attracted high net worth individuals by offering tax advantages under the Capital Allowances Act 2001, but ultimately did not deliver the expected benefits. HMRC conducted enquiries and settled claims by permitting allowances on only 20% of the acquisition price. There is a dispute between the parties as to whether HMRC found the schemes to be shams or merely overvalued.

In the Charit Scheme, the technology acquired was a web-based e-mail product. The purchase was funded by a loan from a Swiss regulated bank, guaranteed and secured by the technology vendor. The loan was not repaid, leading the bank to demand payment from the vendor, who then petitioned for the respondent's winding up in March 2009. The applicants contend the schemes were fraudulent shams with no genuine loan transactions.

The claimants, including the appellants, brought proceedings in the Commercial Court for damages based on dishonest promotion of the schemes by various defendants. Fraud by the LLPs themselves is not alleged, although the LLPs are parties for declaratory relief purposes. The proceedings are extensive, involving 40 defendants and complex issues, with a trial unlikely before 2012.

The applicants unsuccessfully opposed the winding-up petition on the basis that they were not members of the respondent. Following the winding-up order, the applicants sought permission to start a new claim against the respondent in the Commercial Court for declaratory relief relating to two main issues: whether the applicants were members of the respondent and thus liable to contribute, and whether the respondent is bound by the sale and purchase agreement or whether the loan arrangements were genuine.

The evidence indicates discrete issues specific to the Charit Scheme, including questions about the respondent's existence at relevant times and the identity of contracting parties. The applicants argue that these issues cannot be conveniently decided in isolation from the other schemes due to overlapping factual and legal questions.

Legal Issues Presented

1. Whether permission should be granted under section 130(2) of the Insolvency Act 1986 to commence proceedings against a limited liability partnership in liquidation by joining it to existing Commercial Court proceedings.
2. Whether the issues relating to membership status and the validity of the loan arrangement concerning the respondent can be conveniently determined in the liquidation or require determination within the broader Commercial Court litigation.
3. How to manage the risk of inconsistent judgments arising from parallel proceedings in the Companies Court and the Commercial Court.
4. The extent of the Court's discretion under section 130(2) to lift the stay on proceedings against a company in liquidation in the interests of justice and fairness.

Arguments of the Parties

Applicants' Arguments

• All issues concerning the Charit Scheme, including membership and loan validity, form part of complex, interrelated matters spanning 19 schemes and should be decided together in the Commercial Court.
• There is a real risk of inconsistent judgments if the issues are decided separately in the liquidation and the Commercial Court.
• The members issue involves examining the conditions of membership, including the validity of accession deeds and powers of attorney, which relate to the wider factual matrix of all schemes.
• The loan issue requires analysis of the genuine nature of the loan and associated transactions, including inter-scheme money flows and valuation methods, to determine if the schemes were fraudulent shams.
• The Commercial Court is already seized of these issues, making it appropriate to join the respondent to avoid duplication and inconsistent outcomes.
• There is evidence of cross-firing of funds between schemes, reinforcing the need for a comprehensive overview.

Respondent's Arguments

• The issues concerning the respondent can conveniently be decided in the liquidation, which is designed to handle such matters efficiently and cost-effectively.
• The only relief sought against the respondent is declaratory; there are no damage claims or allegations of dishonesty against the respondent.
• The members issue is essentially one of document construction and fact-specific questions about the respondent's identity and name changes.
• The loan issue is specific to the Charit Scheme, with Vermillion being the only vendor seeking enforcement, and should be resolved in the liquidation.
• The application to join the respondent to the Commercial Court proceedings is an artificial attempt to delay and frustrate the liquidation process.
• There is no genuine commonality with other schemes that justifies joining the respondent to the broader litigation.
• The liquidator is conscious of costs and delay, and the respondent is without funds to support protracted litigation.
• Joining the respondent will not eliminate the risk of inconsistent judgments, which can be managed by appropriate case management.

Table of Precedents Cited

Court's Reasoning and Analysis

The Court began by acknowledging the broad and unfettered discretion under section 130(2) of the Insolvency Act 1986, emphasizing the need to act fairly and justly in all circumstances. It recognized the principle that permission should be refused if issues can be conveniently decided within the liquidation to avoid unnecessary cost and delay, but also noted the need to protect the liquidator from burdensome litigation.

The Court considered the nature and complexity of the Commercial Court proceedings, which involve multiple schemes with interrelated issues, including membership status and the validity of loan arrangements. The applicants demonstrated that the Charit Scheme's issues are interwoven with those of the other schemes, necessitating a comprehensive overview to avoid inconsistent judgments and duplication of proceedings.

The respondent argued that its issues are discrete and suitable for determination in the liquidation, emphasizing the absence of damage claims or allegations of dishonesty against it. However, the Court found that the applicants' case had merit in showing that the issues could not be conveniently isolated.

The Court also considered the risk of inconsistent findings and concluded that this risk could be managed by having the same Judge oversee both the Commercial Court and Companies Court proceedings, enabling coordinated case management and reducing the risk of conflicting decisions.

The Court was mindful of the liquidator's concerns about costs, delay, and the respondent's lack of funds, but determined that the interests of justice required granting permission. The Court explicitly rejected the notion that the applicants' lack of standing in the liquidation precluded permission, emphasizing the discretion to do what is just in all circumstances.

Accordingly, the Court concluded that the right and fair course was to grant permission to the applicants to commence proceedings against the respondent by joining it to the Commercial Court action.

Holding and Implications

Permission to commence proceedings against the respondent under section 130(2) of the Insolvency Act 1986 was granted.

The Court's decision allows the applicants to join the respondent to the existing Commercial Court proceedings despite the respondent being in liquidation. This approach aims to ensure a comprehensive and consistent resolution of complex, interrelated issues spanning multiple investment schemes, avoiding duplication and the risk of inconsistent judgments. The Court emphasized that the same Judge will oversee both sets of proceedings, allowing flexible case management, including the possibility of staying claims if appropriate.

No new precedent was established beyond the application of established principles under section 130(2) and case law. The ruling primarily affects the parties by permitting the joinder and enabling coordinated litigation strategy in complex insolvency-related claims.