Property company — Nominee for anonymous purchasers — Sole directors and shareholders also acting as company solicitors — Damages awarded against company for failure to complete purchase of property — Company insolvent — Whether liquidator entitled to examine directors and have access to company files — High Court ordering directors to provide liquidator with access as requested
The company was formed as a shell company in 1984 as a medium through which properties were to be acquired on behalf of clients who asked to remain anonymous or who for some other reason did not want to enter into direct contractual relations with the vendors. The respondents were the only directors and shareholders of the company. On March 30 1988 the company entered into a contract for the purchase of a freehold property, 146 Sutherland Avenue, London W9, from a Mr and Mrs Perez for £640,000. A deposit of £64,000 was paid to the vendors. The date fixed for completion was over a year later on July 7 1989.
Thereafter BM & Co, a firm of solicitors, acted for the company as purchaser. The respondents in this case were the solicitors and partners in the firm of BM & Co. The date for completion came and passed and notice to complete was served on BM & Co but completion did not take place.
On July 26 1989 Mr and Mrs Perez issued a writ claiming and obtained specific performance. It became clear that the company was not in a position to complete and Mr and Mrs Perez successfully applied for an order for forfeiture of the deposit and an inquiry as to damages. They were subsequently awarded damages of £194,757 and costs. In the meantime, on August 31 1990, a resolution for a creditors’ voluntary winding up of the company had been passed. A liquidator was appointed.
On September 30 1987 the company had also contracted to buy an apartment in a development in Queen Elizabeth Street, London SE1, with an associated car-parking space for £120,000. The contract provided for payment of a deposit of £12,000. Before completion the company, through BM & Co, refused to complete alleging that it was entitled to rescind on the ground that it had been induced to enter into the contract by false representations as to the layout of the development and the availability of shopping facilities. The vendors lodged a proof in the winding up of the company claiming £104,962 as due from the company. The proof lodged by Mr and Mrs Perez was for £210,921, the damages awarded to them with accrued interest. The liquidator wrote to the respondents asking them to release all the books, papers and documents of the property of the company and asking for access to the company’s files. The respondents refused and the liquidator eventually applied to the court for an order under sections 234 and 236 of the Insolvency Act 1986 seeking access to the company’s records and other documents in their possession or under their control. If necessary he also sought the attendance of the respondents to be cross-examined concerning the affairs of the company.
Held The application was granted.
1. The company had entered into contractual relationships with BM & Co acting as the company’s solicitors. The documents relating to those transactions belonged prima facie to the company subject to any lien for unpaid fees. It was immaterial that the company’s expenses, including BM & Co’s fees, were paid by the third party on whose behalf the property was bought. It might be that in relation to some parts of the transaction, BM & Co acted as solicitors for both the company and the third party. The company could not then claim that the papers were its sole property; but, equally, neither could the third party. In such circumstances it would be the duty of BM & Co to retain the papers unless or until authorised to deal with them by both clients. In the meantime each client would be entitled to have access to the papers and to require BM & Co to supply copies on being paid proper copying charges. In handing over those documents to the third party in this case, BM & Co were clearly in breach of their duty to the company.
2. Section 236 was in very wide terms. It authorised the court to require any person to submit an affidavit setting out details of all records that were kept by the company and of all documents which came into existence in the course of those transactions and to explain what had happened to those documents and whether they had power to obtain copies of them.
3. The liquidator’s primary purpose was to obtain information as to the steps taken by the respondents, as directors and solicitors to the company, to ensure that the client for whose benefit the contracts were entered into was under an enforceable obligation to meet liabilities incurred by the company on its behalf and was in a position to meet that obligation. It was true that if the inquiries revealed that the company was allowed to enter into obligations which it had no prospect of meeting, the respondents, as directors of the company as well as its solicitors, might be liable for damages in an action which had been commenced by the company against them. The result of the inquiries might also be relied on by the liquidator as evidence that the respondents caused the company to incur liabilities at a time when there was no reasonable prospect that the company could avoid going into insolvent liquidation and support a claim that they should be liable to make a contribution to the company’s assets.
4. Although the information revealed might assist the company’s case in the action commenced, that would be as a consequence of inquiries which were plainly necessary if the liquidator were to discharge his duty of discovering whether there were grounds for commencing proceedings against the clients on whose behalf the properties were purchased or against the respondents. If the respondents were in an uncomfortable position, it was the inevitable consequence of the structure they had created — a company devoid of assets which was used to enter into commitments which it could not meet save to the extent that it was put into funds by a third party.
5. Balancing the requirements of the liquidator and the risk of oppression to the respondents, the balance clearly came down in favour of making the order sought: (a) the respondents were directors of and solicitors to the company; (b) no allegation of fraudulent misconduct was made against them; (c) the information and documents were needed to reconstitute the knowledge of the company on the winding up.
Dirik Jackson (instructed by Wegg-Prosser & Farmer) appeared for the liquidator; Robin Hollington (instructed by Brooke Martin & Co) appeared for the respondent.
