The recent case of Husky Group Ltd (“Husky”) underlines the importance of following your lawyer’s advice and not pursuing the defense of the indefensible.
A liquidator overturned an undervalue transfer of trademarks by an insolvent company to its parent company, where it was clear that the substantive purpose of the transaction was to put the assets beyond the reach of creditors. Nothing surprising there, however, the Judge held that as there was a relevant part 36 offer and the liquidator’s application should not have been defended, cost and interest sanctions should be applied to the fullest extent.
In November 2008 Husky transferred trademarks (worth £360,000) to its parent company, Jupiter for the nominal consideration of £1. There was evidence that at the relevant time Husky was in financial difficulty and in August 2008 Husky had written to its auditors in respect of cash flow problems. The company’s solicitor therefore advised Jupiter that the transfer may have corporate governance issues. The controlling shareholder and owner of Husky had originally owned the trademarks, hence his decision to reassign them back to himself in November 2008.
In January 2010 Husky entered creditors’ voluntary liquidation. The liquidator applied for relief on the basis that Husky had transferred trademarks at an undervalue pursuant to s.238 Insolvency Act 1986 and had entered into an action to defraud creditors under s.423 Insolvency Act 1986. During the course of the proceedings, the liquidator made a part 36 offer stating that he would accept £325,000 (inclusive of interest). The offer was made at the time an expert’s opinion was released valuing the trademarks at £360,000. A few months later the liquidator offered to accept a smaller sum of £110,000. There were offers from Jupiter however they were at a very low level.
The liquidator’s application was granted. The Judge had no hesitation in determining that the transfer to Jupiter was intended to put the trademarks beyond the reach of creditors and that the transfer fell squarely within s.423 and s.238. The liquidator triumphed… he was awarded £360,000 and costs on an indemnity basis… within an enhanced rate of interest … 10% above base from the date of the expiry of the part 36 offer…ouch!
- The liquidator beat his own part 36 offer which was made in very good time before the trial and this justified awarding an enhanced rate of interest.
- The purpose of Part 36 offers is to encourage parties to seek to avoid the “horrendous display of costs in this case”. For that to be effective, it needed to be underpinned by an effective sanction, and a rate of 10% above base from the expiry of the offer achieved that. Failing to accept the liquidator’s offer was inexcusable.
- The Defendant contended that the judgment was unjust due to the large costs involved. The liquidator had the benefit of a CFA with a 60% uplift and ATE premium of £213,000. Purle J was clear… the sums involved were not relevant as all costs are in principle recoverable. It was not unjust for consequences to follow just because amounts are high.
- Purle J referenced the fact that at the time Jupiter chose to ignore legal advice that the nominal consideration gave rise to corporate governance issues.
- Purle J also noted that there was no need to show dishonesty for s.423 to apply, and did not find dishonesty against any of the individuals; however they were fully aware of the risk of insolvency and chose to ignore those risks.
- The case highlights the importance of recognising the separate legal personality of shareholders to that of a company and to not try to defend the indefensible.