Plaintiffs selling hotel – Plaintiffs and vendor agreeing to defer part payment for hotel – Agreement subject to purchaser giving security of second charge on hotel and acquiring properties after transaction to be charged to plaintiff – Solicitors and accountants instructed to act for plaintiff – Agreement completed – Purchaser becoming insolvent – Assets insufficient to cover first charge – Whether defendants failing in duty to advise – Plaintiffs’ claims dismissed
The plaintiffs owned the shares of a company which had as its principal asset an hotel. They also owned a house adjoining the hotel. They sold the shares, the hotel and the house to a company, HLM, and instructed the first defendant, a firm of solicitors, and the second defendant, a firm of accountants, to act for them. It was agreed with the purchasers that part of the payment for the hotel was to be deferred and was to be secured by, inter alia, a charge on the hotel behind a first charge which existed in favour of a bank. In order to provide further security it was also agreed, in clause 2(iii)(e), that HLM would acquire properties and charge those properties to the plaintiffs.
The purchasers of the hotel failed to make interest payments to the bank and failed to acquire properties and charge them to the plaintiffs under clause 2(iii)(e). HLM went into administrative receivership. Its assets proved to be insufficient to cover the bank’s first charge. The plaintiffs issued proceedings against the defendants and claimed that they had failed generally in their duty to advise and in particular had failed to advise that the transfer of the hotel to HLM was unlawful under section 151(1) and (2) of the Companies Act 1985 because it amounted to financial assistance by the company for the purchasers to acquire the shares in the company or discharge liability incurred by acquiring shares in the company. The defendant contended that the financial transaction did not fall within section 151(1) and (2) of the 1985 Act and that in any event it fell within the relaxation of the rule in section 155(1), whereby a private company could give financial assistance if the company’s net assets were not thereby reduced.
Held The plaintiffs’ claim was dismissed.
1. Even if the financial transaction fell within section 151(1) and (2) of the Act, the net assets had not been reduced and the relaxation for private companies found in section 155(2) applied. In any event if section 155(2) did not apply, the second defendant (and the first) had not been negligent in advising that it did, since they had acted in accordance with the accepted practice of persons skilled in the relevant field.
2. Although the first defendant had advised the plaintiffs that charging the additional properties under clause 2(iii)(e) would improve their security position, it had also advised the plaintiffs that that did not alter its repeated reservations about the risks of the transaction. Therefore the first defendant had not negligently advised that its previous doubts as to the commercial wisdom of the transaction had been overcome.
3. The first defendant had not failed in its duty to advise the plaintiffs that the first charge on the hotel to the bank would rank in priority to any charge in their favour. The first defendant had correctly advised the plaintiffs that the first charge in favour of the bank would cover capital and interest and that their second charge would be behind that.
4. The first defendant had not failed to advise the plaintiffs properly on HLM’s breach in failing to introduce unencumbered properties as required by clause 2(iii)(e) of the agreement. The plaintiffs had been informed by the first defendant that the purchasers had not complied with clause 2(iii)(e), but had not instructed the first defendant to commence proceedings nor had the first defendant been under any duty to commence proceedings without instructions.
Michael Patchett-Joyce (instructed by Wedlake Bell) appeared for the plaintiffs; Richard Seymour QC (instructed by Mills & Reeve) appeared for the first defendants; Guy Phillips (instructed by Barlow Lyde & Gilbert) appeared for the second defendants, Binder Hamlyn.
