Is asking Gollum about his precious ring a viable recovery strategy?
23 / 09 / 2016
Liquidators and Trustees in Bankruptcy have wide ranging powers to apply to the Court for the delivery up of information that relates to the affairs of the bankrupt or the company in liquidation (Section 236 and Section 366 of the Insolvency Act). However, there are other ways afforded by the Civil Procedure Rules to obtain information that might be relevant to the office holder’s plan to recover assets for the benefit of creditors.
Section 236 provides that an office holder can apply to court to summon anyone who is known or suspected to have property of a company or any person whom the court thinks capable of giving information concerning the promotion, formation, business, dealings, affairs or property of the company. However, historically, the English courts (Australian courts have started to take a more robust and office holder friendly approach) have determined that it is more difficult to obtain such an order where there are proceedings on foot or where the office holder has made a firm decision to commence proceedings. Granting such an order could be seen as oppressive against the Respondent. This may put the office holder in a position where he has a potential claim against the Respondent but there are certain aspects of the case that require further information or clarification. In particular and typical in an insolvency situation is a situation where there may well be claims against the Respondent but there is no visibility on the assets of the Respondent – particularly where those assets are held on trust. In these circumstances, there may be particular situations where CPR 25.1 (1)(g) may assist.
CPR 25.1(1)(g) provides that the Court has the power to make an ‘Order directing a party to provide information about the location of relevant property or assets or to provide information about whether the property or assets which are or may be the subject of an application for a freezing injunction’. In other words, it applies where the office holder could make an application for a freezing order but there are circumstances which have led to a decision by the Office Holder not to apply for a freezing injunction at that stage – probably because it would be prudent or necessary to obtain further information before deciding whether to actually make a freezing injunction. Clearly freezing injunctions are draconian, costly and have potential consequences in terms of funding an application, a cross undertaking in damages and adverse costs. The ability therefore to apply for an Order to provide information about the location of the relevant property or assets or to provide information about the property or assets may be a possible preliminary route for an Office Holder to take prior to or instead of (depending on the outcome of the disclosure provided) actually applying for a freezing injunction.
Gerald Metals SA v Timis case
The recent case of Gerald Metals SA v Timis  EWHC 2136 (Ch) was not an Office Holder application but demonstrates the potential use of such an information request under CPR 25.1(1)(g) and its scope. In that case arbitration proceedings had already been commenced and there was concern by the Claimant that the Respondent had not been transparent about relevant assets held in a trust (in fact assets that were said to be in a particular trust were not actually in the aforementioned trust due to a clerical error). The Claimant was not satisfied by the responses provided by the Respondent and the Respondent refused to give undertakings in this regard. In those circumstances the Claimant applied under CPR 25.1(1)(g) for details of what was in the relevant trusts. As the trust had guaranteed a loan it was imperative for the Claimant to understand whether the trust was worth pursuing – if the assets were not, as a matter of fact, in the trust then there would be little point in applying for a freezing injunction.
The Court held that this was a situation appropriate for the grant and Order under CPR 25.1(1)(g) and in doing so determined that: –
- It was not necessary to show that there was a risk of dissipation by the Respondents (the Respondent had argued that because the Claimant could not show a real risk of dissipation, then a freezing order could not be applied for in any event – thus preventing an order under this provision due to the requirement that the property or assets may be “the subject of an application for a freezing injunction”);
- The evidential burden was lower than that required to obtain a freezing Order (reiterating previous decisions); and
- It was just and appropriate in all circumstances to make the Order, there being no prejudice to the Respondent in the making of the Order.
In a majority of cases, Office Holders will utilise the express powers under Sections 236 and 366 to obtain or seek to obtain relevant information about the bankrupt’s affairs or assets/information relating to the company in liquidation. However, the power contained in CPR25.1(1)(g) may afford an alternative where there was concern about applying for a freezing injunction and also where there are either proceedings on foot or whether a decision has been taken to commence proceedings against the Respondent.
Most practitioners will have come across situations where only a freezing injunction is appropriate due to the risk of dissipation and that it seems an alien concept to ask the Respondent where certain assets are (given the nature of the investigations already conducted by the Office Holder and often the credibility of the Respondent’s) but there could be certain circumstances where this approach is a useful and cost effective tool for Office Holders. Gollum might actually have a change of heart and allow you free access to the ring (and avoid the end of Middle earth a lot earlier).