Disputes Matter – May 2015
Print newsletter20/05/2015

Court assists creditors: Davy v Pickering & Others
Facts and Law In 2011, some ten years after having received professional advice from the […]
Facts and Law
In 2011, some ten years after having received professional advice from the defendant company (the Company), the claimant (Mr Davy) learned that the advice had been negligent and had caused him loss. Mr Davy made a complaint to the Financial Ombudsman Service, which informed the Company of his potential claim. While the complaint was being investigated, in March 2012, the Company was dissolved. The business had been sold and assets transferred to shareholders during the two year period prior to dissolution.
In order to pursue a claim, and in order to claw back Company assets which could compensate for negligent advice, Mr Davy had to overcome certain hurdles:
Limitation: ten years had elapsed between the giving of the negligent advice and Mr Davy becoming aware of the negligence. Further time had passed between Mr Davy’s knowledge and the bringing of proceedings.
Lack of legal entity and lack of assets: having been dissolved, the Company was no longer a legal entity against which a claim could be brought and, assets having been dissipated, there was nothing from which any compensation for Mr Davy could be paid in any event.
Despite the apparent practical difficulties, Mr Davy:
- applied to restore the Company to the register of companies and for consequential directions. (Section 1032 of the Companies Act 2006 (CA) allows the court to make any directions as seem just for restoring companies and any other persons to the position they would have been in had dissolution or strike-off not occurred.);
- entered into a standstill agreement in respect of the applicable limitation period for the bringing of his claim. (He sought to rely on section 14A of the Limitation Act 1980 which, in latent negligence cases, effectively extends the usual six year limitation period to a date three years from the date the claimant became aware, or should have become aware, of the negligence);
- sought a direction that the period between the Company’s dissolution and restoration did not count for limitation purposes; and
- sought a direction that if a winding up petition be presented within 14 days of restoration the petition be deemed to have been presented on the day that the company was struck off the register and dissolved (namely 20 March 2012). This was necessary to enable a liquidator to be appointed over the Company, who could then challenge the asset-disposal transactions under the transaction-avoidance provisions in the Insolvency Act 1986. In the ordinary course it would have been necessary to present the winding-up petition within two years of the relevant transactions taking place for the liquidator to be able to make such claims.
Decision and WM Comment
The High Court made the various directions requested by Mr Davy.
Whilst excluding the period of dissolution for the purposes of limitation is a fairly well-established principle and practice, the court’s application of section 1032 (3) CA to effectively back-date a creditor’s winding-up petition so as to allow the investigation and challenge of antecedent transactions is interesting and important.
Section 1032 (3) allows the court to make such provisions as seem just for restoring a person affected by a company’s dissolution or strike off to the same position it would have been in but for the dissolution/strike off. In this case, however, the court’s decision placed the claimant in a somewhat improved position. His Honour Judge Keyser QC, sitting as a Judge of the High Court, decided it was necessary to consider whether Mr Davy had been deprived of the opportunity to petition for the Company’s winding-up during the period of its dissolution, not whether he would actually have done so (bearing in mind his knowledge – or lack of it – at the relevant time). He stated that “[I]f justice requires that the effects of the striking-off of the Company be undone by restoring to Mr Davy his lost opportunity, the risk that his position will be improved over what it might have been perhaps because he is better able to take advantage of the opportunity-seems to me to be the price of seeking the best attainable equation of positions under section 1032(3).” [2]
This could be a useful decision for creditors of dissolved companies. It demonstrates the willingness of the court to assist claimants in circumstances where assets have been moved and companies dissolved in circumstances where potential claims are pending.
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[1] Graham Frank Davy v Brian Michael Pickering (1) Ann Dolores Pickering (2) Registrar of Companies (3) and 1000654 Ltd (4) [2015] EWHC 380 (Ch)
[2] para. 43

Don’t bite the hand that advises you
When an unusual business arrangement with family associates went wrong, a claimant looked to his […]
When an unusual business arrangement with family associates went wrong, a claimant looked to his solicitors’ professional indemnity insurance policy to try to recover lost funds. The case provides a helpful summary of the key principles for establishing the extent of a solicitor’s duty to advise a client of risks in any transaction.
Kandola v Mirza Solicitors [1]
The claimant, Mr Kandola, was a businessman with a significant real estate portfolio. He regularly instructed the defendant firm in relation to his dealings. In this particular case he instructed the firm on the purchase of a development property from a family friend. The family friend needed a short term loan for another, unconnected, transaction and so Mr Kandola agreed (a) to pay an unusually large deposit; and (b) for the deposit to be paid to the family friend’s solicitors as agent for the seller (so that the family friend could immediately use the money as he wished). The defendant firm advised Mr Kandola not to proceed on that basis. The firm advised that the proposed deal was too risky. They explained that the deposit would not be recoverable if the vendor went bankrupt or was unable to complete and they further advised that there were charges outstanding on the property, which the purchase monies may not cover and discharge. Nevertheless, Mr Kandola wanted to proceed and indeed he read and signed a waiver to say that he was doing so against advice.
When the vendor did then go bankrupt and the transaction failed to complete, Mr Kandola sought to recover his lost deposit from his solicitors, alleging that their advice had been negligently inadequate. In particular, he alleged that, had a bankruptcy or Land Registry priority search been carried out immediately prior to exchange, the bankruptcy petition would have been discovered and Mr Kandola would not have gone ahead.
Decision
The Law Society’s conveyancing handbook advises solicitors to warn clients of the dangers of paying a deposit as agent for the seller; it does not advise solicitors to carry out searches as Mr Kandola had contended. In a narrow sense, therefore, the defendant firm had discharged its duty.
In a wider context, the court explained that the extent of a solicitor’s duty to explain matters to his or her client takes account of the client’s experience in the relevant area. An inexperienced client, or one dealing in matters with which he or she was unfamiliar, might need more explanation and advice; a more experienced or sophisticated client may need less, if any. Furthermore, the court indicated that this is an objective test: a solicitor’s duty will be discharged if advice is given in terms suitable for the particular client’s experience in the area even if, in fact, the client did not subjectively understand.
Mr Kandola’s attempt to recoup his bad business loss from his solicitors failed.
WM Comment
The case is a helpful summary of the general principle that a client’s knowledge and experience in any given area will be relevant to the nature and extent of legal advice that a solicitor is professionally obliged to provide.
The principle is comforting to solicitors and their insurers, that indemnity policies will not be seen as an easy target to cushion clients’ bad business decisions; and it is equally convenient for commercial clients, who do not want to receive reams of back-covering legal advice every time they want to quickly and cost-effectively complete a deal.
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[1] Kandola v Mirza Solicitors LLP [2015] EWHC 460

Contract by conduct: A cautionary tale
The Commercial Court has served a salutary reminder that parties should not become complacent towards […]
The Commercial Court has served a salutary reminder that parties should not become complacent towards the close of contractual negotiations. Written contracts can become binding by virtue of conduct, even regardless of apparent completion formality requirements.
In Reveille Independent LLC v Anotech International UK Ltd [1] the claimant US TV company negotiated terms with the defendant British distributor of cookware for the licensing of intellectual property rights in the MasterChef brand and the integration and promotion of the defendant’s products in the programme. The parties negotiated a short form written agreement (“the Deal Memorandum”), which was never signed and which was intended to be replaced by long form agreements. The long form agreements were never agreed and negotiations between the parties broke down. In the meantime, the cookware had been integrated during MasterChef episodes; the defendant had acknowledged that it was liable to pay for such promotion; and the defendant had marketed products and literature bearing or referring to the MasterChef logo. When the claimant subsequently brought a claim for breach of the Deal Memorandum, the defendant argued that there was no binding contract as (1) the Deal Memorandum stated that it was not to be binding until signed by both parties and it had not been signed by the claimant; and (2) any steps taken had merely been in anticipation of a binding agreement being concluded either under the Deal Memorandum or pursuant to the long form agreements.
The Commercial Court did not accept the defendant’s arguments. It decided that a binding contract had come into existence.
Commercial clients, contract managers and anyone involved in commercial negotiations should note that binding agreements can arise easily, and often inadvertently.
Key points
- The signature of parties to a written contract is not essential for a binding contract to arise.
- That is the case even where the written terms of the contract itself require signatures or other completion formalities.
- Written or other requirements or formalities can be waived, and waiver can be demonstrated by behaviour.
- Any offer or contract can become binding by virtue of a party’s acceptance by conduct.
- Contracts can be partly written, partly oral and partly implied by behaviour.
- Contracts can be concluded via e-mail, or even by clicking a button on a website.
- The law recognises commercial reality to the extent that some work can be carried out in anticipation of a contract being put into place, without binding contractual obligations immediately arising.
- However, whether and when a contract will come into existence will be a question of fact and degree in each case. The more significant, costly and long-running any work is, the more likely it is that a contract has arisen by conduct.
- Here, acknowledgement by one of the defendant’s directors that liability to pay for promotion had arisen was particularly persuasive of the existence of a binding contract.
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[1] [2015] EWHC 726 (Comm)

Ex Turpi Causa: Incomprehensible even in English?
The Supreme Court has recently considered the illegality defence. It has concluded that this legal […]
The Supreme Court has recently considered the illegality defence. It has concluded that this legal principle has become incoherent through inconsistent authority and application. Walker Morris’ Head of Commercial Dispute Resolution, Gwendoline Davies, reviews this important rule of public policy.
The murky world of corporate crime was the backdrop to the recent Supreme Court case of Jetivia SA v Bilta [1]. The facts, which are not uncommon, were that the liquidators of an insolvent company issued a fraud claim against the company’s directors and third party companies. The defendants sought to rely on the principle of ex turpi causa non oritur action, also known as the illegality defence, and the fact that the company was complicit in the fraud, in their application to strike out the claim.
(The defendants also argued that certain elements of the claim must fail on the basis that the relevant provisions of the Insolvency Act 1986 (“IA”) did not have extra-territorial effect, and the defendants were domiciled out of England and Wales and did not have any assets in the jurisdiction.)
The High Court, Court of Appeal and Supreme Court all dismissed the defendants’ arguments, but the justices could not agree on the proper approach to the illegality defence. The following key points arise:
- Ex turpi causa is an important rule of public policy which provides that no action should be founded on an illegal act. A claimant should not be entitled to pursue legal rights or remedies where they have been involved in illegal conduct which is linked to the claim.
- If the courts accept the illegality defence, it often involves granting an unjustified windfall to the defendant (who may be equally implicated in the illegality); but if the courts refuse, they may be helping a claimant who has behaved illegally.
- The courts have, over time, sought to set out guidelines to govern application of the illegality defence but the rules have become complex and confused. The myriad possible circumstances in which the illegality defence could arise are hugely wide in scope and, of course, case law is primarily concerned with reaching the correct outcome on specific facts.
- Lords Toulson and Hodge considered that the application of ex turpi causa in this case was inconsistent with statutory policy requiring directors to have regard to the interests of creditors, whereas Lord Sumption believed that the defence is a rule of law that is not dependent on the balance of merits between the parties in any particular case. Ultimately, the Supreme Court did not accept the illegality defence in Jetivia.
- In 2010 The Law Commission recognised that the law is complex, uncertain, arbitrary and occasionally unjust. In this case Lord Sumption stated that the illegality defence has become “encrusted with an incoherent mass of inconsistent authority” [2].
- The case has therefore highlighted the need for a review of ex turpi causa. In the meantime, whilst it remains impossible to glean strict rules, it seems that the courts will consider the policy rationales that underlie the illegality defence and apply them to the facts of any given case.
WM Comment
So far as businesses and practitioners are concerned, the Supreme Court’s ruling in Jetivia, and its decision not to determine the wider problems with the illegality defence, is likely to represent a significant relief to administrators and liquidators who may continue to bring claims against fraudulent directors. The case also serves as a reminder of an important principle which, in the right circumstances, can assist a party who is being pursued by any person guilty of relevant wrongdoing itself.
(Additionally, the decision did not deny the extra-territorial effect of the IA, which is good news for office holders who are increasingly looking to make recoveries for the benefit of creditors of businesses with international reach.)
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[1] Jetivia SA & another v Bilta (UK) Ltd (in liquidation) & others [2015] UKSC 23
[2] para. 61