Insolvency Practitioners (IPs) welcomed the Government’s decision earlier in the year to continue allowing Conditional Fee Agreement (CFA) success fees and ATE insurance premiums to be recovered in insolvency proceedings. For one liquidator, however, his successful litigation under a CFA was undermined by a somewhat unsuccessful turn of events; the High Court, in Stevensdrake Ltd v Hunt and others [2015] EWHC 1527 (Ch), has dismissed an appeal in which a liquidator sought to avoid being personally liable for success fees and counsel’s fees pursuant to a CFA when the defendants came up short.

Stephen Hunt (“Hunt”) was the liquidator of Sunbow Limited (“the Company”). Following administration, the Company was placed into compulsory liquidation. Hunt issued proceedings against the former administrators, alleging misfeasance pursuant to section 212 of the Insolvency Act 1986. Hunt’s legal advisor to these proceedings was a firm of solicitors, Stevensdrake Limited (“Stevensdrake”), which had been instructed under a CFA that provided for a 100% uplift on their fees. The proceedings against the administrators were settled within the definition of “success” in the CFA, entitling Stevensdrake to fees of just under £1 million. The subsequent failure of one administrator to pay his agreed settlement sum of £1.9 million, however, meant that there were insufficient funds in the liquidation to pay Stevensdrake’s fees just from defendant recoveries. Accordingly, Sevensdrake sued Hunt in his personal capacity for the outstanding sum.

At first instance, having obtained summary judgment, the Master found in favour of Stevensdrake, holding that the terms of the CFA were sufficiently clear and precise to overcome Hunt’s defence. The CFA provided: 1) that Hunt would be “personally responsible for any payments that he may have to make under the agreement. Those payments are not limited by reference to the funds available in the liquidation.”; 2) As with costs in general, [Hunt] remain[ed] ultimately responsible for paying Stevensdrake’s success fee”; and 3) “Success” was defined not by reference to recoveries but to either a judgment against or an agreement to pay by the parties sued. There was a pleaded counterclaim to the effect that Stevensdrake owed and breached a fiduciary duty to explain the CFA and the event of success to Hunt. This was struck out and Hunt appealed.

The High Court dismissed Hunt’s appeal with respect to his interpretation of the CFA, namely, that references to him in the CFA were in his capacity as liquidator of the Company. Further, the court found that, whilst Stewart v Engel [2000] BCC 741 is the starting point as to the nature of a liquidator’s liability under a contract, it does not preclude personal liability being imposed on clear terms. The word “responsible” used in the CFA was interpreted by the court as “liable” and did not affect the term. On this basis, the Master’s order that Hunt make an interim payment of £75,000 by way of indemnity for counsel’s fees was upheld in the High Court. As regards Stevensdrake’s remaining fees, the action will proceed to trial. The Master’s condition for Hunt to continue his defence and counterclaim by payment of £100,000 into court was also upheld.

The decision in Stevensdrake Ltd v Hunt is not altogether surprising. It is, however, a stark warning for IPs to take a proactive role in the drafting and negotiation of CFA terms. The courts have shown that the commercial risk run by IPs and their advisors in litigation is on a comparatively equal footing and not worthy of unsettling the need for certainty within the law. If IPs intend to shield themselves from such risk, they have the ability to do so by negotiating the definition of “success” within the CFA to refer to the funds available or actually recovered from defendants.

Whilst this case will, no doubt, strike fear into IPs with current CFAs on their books, Hunt was not altogether an unsuccessful “success”: the court accepted that there is an arguable counterclaim waiting to be pleaded properly. It remains to be seen whether Hunt ought to have been advised by Stevensdrake that he would be personally liable for the full amount under the CFA. Regardless of whether or not the court finds Hunt, and IP clients in general, to be “sophisticated” and capable of understanding the full implications of CFAs without further advice, the counterclaim serves as an important wake-up call to ensure a common understanding of CFA terms by IPs and solicitors alike!

For further information regarding this topic, please contact Simeon Gilchrist or Sophia Mew. Alternatively, please contact us on t: 020 7691 4000 | e: info@edwincoe.com

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