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The High Court’s recent judgment in Stevensdrake Ltd -v- Stephen Hunt & Others highlights the need for Insolvency Practitioners to make sure that they carefully review conditional fee arrangements before entering into them and understand the potential contractual ramifications which may give rise to personal liability.
Stephen Hunt (“the Liquidator”) was appointed as liquidator of a company, Sunbow Limited (“the Company”). The Liquidator instructed a firm of solicitors, Stevensdrake, to act on his behalf in pursuing claims against two individuals who allegedly owed money to the Company.
Under the terms of the original retainer letter between the Liquidator and Stevensdrake, the payment of any fees and disbursements by the Liquidator was contingent on making a recovery.
The parties subsequently entered into a CFA. The terms of the CFA were that “if you [the Liquidator] win your claim, you pay our basic charges, our disbursements and a success fee”. The CFA’s schedule also provided that “you [the Liquidator] are personally responsible for any payments that you may have to make under this agreement. Those payments are not limited by reference to the funds available in the liquidation.” It also stated that “as with costs in general, [the Liquidator] remains ultimately responsible for paying our success fee.”
A settlement was agreed with the debtor individuals. The individuals agreed to pay certain sums pursuant to that settlement. This constituted “success” for the purposes of the CFA and triggered payment of the success fee.
One of the individuals was unable to repay the settlement sum due. On the basis that counsel had obtained an arbitration award for his fees (as the CFA between counsel and Stevensdrake was also not subject to a successful recovery), Stevensdrake sought recovery of those disbursements, together with their own charges and success fee, from the Liquidator in accordance with terms of the CFA.
The Liquidator refused to pay, so Stevensdrake brought a claim against him for those monies. A summary judgment was made in favour of Stevensdrake and the Liquidator appealed that decision.
The Liquidator argued that, on the basis of the original retainer letter that preceded the CFA, Stevensdrake’s fees and any disbursements were only repayable in the event of a successful recovery, rather than just winning the case. Stevensdrake argued that the settlement was a ‘win’ as defined in the CFA and, as a result, the Liquidator was liable for their fees on a personal basis, as set out in the CFA (which superseded the prior retainer).
The High Court dismissed the Liquidator’s appeal. The court held that the original retainer letter and pre-action correspondence had no bearing on the governing contractual position between the Liquidator and Stevensdrake. The position was determined by the terms of the CFA regardless of any understanding between the parties that a liquidator would not normally assume personal liability under contracts.
In his judgment, Judge Purle stated that “… the plain words of the … CFA cannot be ignored”. In this case, the terms of the CFA were clear in that the Liquidator was personally liable for repayment and payment of those sums was not contingent on successful recovery.
As an aside, Judge Purle advised that “matters might look different” if a counterclaim for breach of fiduciary duty or undue influence had been properly pleaded by the Liquidator against Stevensdrake. Judge Purle stated that one thinks of “…undue influence … as being there to protect the vulnerable and weak, but it is also there to protect those to whom fiduciary duties are owed, and the consequence may be, if the complaint is made good, that the CFA will be set aside, or compensation will be ordered.”
In light of Judge Purle’s comments, it remains to be seen whether this potential counterclaim will be pursued by the Liquidator. It will be noted that the Master in the first instance decision (which was upheld by the High Court), required that the Liquidator make an interim payment of £100,000 into court in order to continue his defence and counterclaim.
The decision of the High Court serves as an important reminder to IPs to take a proactive role in the drafting and negotiation of CFA terms. IPs should, when entering a CFA, review the terms carefully and make sure that they are suited to an insolvency context. In particular, IPs can protect themselves from such risks, as had occurred in this case, by negotiating the definition of ‘success’ or ‘win’ in a CFA to ensure that payment of the requisite fees are contingent on making a successful and sufficient recovery from defendants and/or funds actually being available. Further, IPs should ensure that any CFAs they enter into expressly exclude personal liability (although, this will not be possible for Trustees in Bankruptcy who cannot exclude personal liability in relation to claims run in their personal capacities).
More questions will arise if a counterclaim is pursued by the Liquidator, such as whether the solicitors should have advised the Liquidator that he would be personally liable for the full amount under the CFA or whether the court considers that IPs are appropriately experienced and capable of understanding the full implications of CFAs without further advice.
In either case, this serves as a stark warning to IPs and solicitors alike to ensure that CFA terms are drafted on the basis of a common understanding as to how the payment obligation will arise.
This article was written by Melania Constable and Aziz Abdul. For more information please contact Melania on +44 (0)1483 252547 or firstname.lastname@example.org