A Cautionary Tale
Two recent cases dealing with caution for expenses – that is an order that a “man of straw” pay upfront in security of future costs before being allowed to litigate – demonstrate the differing ways caution can affect insolvency practitioners litigating and defending.
The first, Carol Young aka Carol Ballard v William Bohannon, deals with a debtor being forced to provide caution before being allowed to continue with proceedings to recall her sequestration.
Carol Young aka Carol Ballard v William Bohannon
Mrs Young was sequestrated following the enforcement of a personal bond by her ex-partner. Post-sequestration, she raised proceedings to (1) reduce the personal bond, and (2) recall her sequestration. The petitioning creditor lodged a motion that the debtor find caution for expenses, on the basis that she was litigating as an undischarged bankrupt. Generally, such a motion will be granted. One important exception is where the proceedings deal with whether or not the bankrupt should have been sequestrated.
The petitioning creditor argued that the exception should not apply in this case because:
-
The debtor was also seeking damages;
-
Her prospects of success were poor; and
-
Her conduct of the litigation had been such that an order for caution should be made.
The debtor’s case rested on her argument that the signature on the bond was not her own, and that it had been forged. Expert handwriting witnesses were instructed by both sides; the debtor’s witness initially concluded, having seen samples of her signature, that it was not her signature on the bond. The petitioning creditor’s witness, on the other hand, concluded that there were similarities between the bond signature and to that on a separate sample – a cheque paid by the debtor to the creditor. In response, the debtor also argued that the signature on the cheque had been forged. When the debtor’s expert was provided with the cheque, he agreed that the signatures were one and the same.
Much was made by the petitioning creditor of the credibility of the debtor. She took no steps to avoid sequestration: she did not seek to suspend the charge for payment, or defend sequestration proceedings. Further, the debtor’s conduct post-sequestration was considered, which included her attempts to market heritable property despite being sequestrated and untruthfully advising her conveyancing solicitors that her sequestration had been dismissed.
The Court considered the whole circumstances of the case in deciding whether or not to award caution. One of the factors in the debtor’s favour was that she had been granted legal aid, and had therefore satisfied the legal aid board of her prima facie case. That being said, the Court did not believe that the legal aid board had, when making their decision, the full facts. In particular, they were not advised of the change in view of the debtor’s expert witness. The Court also did not find the debtor credible, particularly in light of her admission of lying about her property and status as a bankrupt. The Court further considered that even if the debtor was successful in reducing the bond, the debt between the debtor and creditor remained, on the face of it, due and so sequestration was still likely to have been competent. Having regard to all of the circumstances, the Court awarded caution against the debtor in the sum of £20,000.
The lesson for IP’s here is that caution can be a useful tool to prevent “nuisance” recalls, and can stop such proceedings in their tracks before valuable case funds are used up in defending proceedings.
Gaelic Seafoods (Ireland) Limited v EWOS Limited
The second recent case involving caution is Gaelic Seafoods (Ireland) Limited v EWOS Limited.
The pursuers in this case, GSI, were an Irish company in liquidation and receivership. EWOS supplied GSI with salmon feed for their salmon farm. GSI claimed the feed was defective and had caused them significant losses. EWOS lodged a motion to ordain the pursuers to find caution of £50,000 for expenses.
As GSI was an Irish entity, the UK Companies Act provisions about a limited company providing caution did not apply. EWOS’ motion therefore fell to be decided at common law.
At first instance, EWOS’ motion was refused. On appeal, the Outer House reconsidered matters. The most significant argument put forward by the liquidator was that there was no need for caution, as adequate security was provided already by (a) a funding arrangement and (b) a litigation costs insurance policy.
The Court approached matters by considering firstly the general rule: that an insolvent pursuer should be ordered to find caution, unless there was a “sufficiently strong countervailing consideration”. The Court did not agree that the policy and funding arrangement were such considerations. The reasoning behind this decision was that in this case, the liquidator had not joined the action as an additional pursuer. The Court took the view that this step would have rendered caution unnecessary as the liquidator would be personally liable to meet any adverse findings in expenses should there be insufficient company assets. The Court emphasised that, as a matter of policy, the law should insist that, if a company in liquidation is to avoid the need to find caution, the liquidator should sist himself as a pursuer. Caution was therefore awarded.
In summary, to avoid an adverse order for caution, a liquidator should ensure that proceedings raised are in the name of both the company and the liquidator. The risks of personal liability should of course be borne in mind when doing so, and the benefit of a full case review before proceedings are raised should not be underestimated.
For further information please contact: Fiona Carlin