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Why Was Conflict Of Interest Under The Microscope?

The case of Pagden v Soho Square Capital LLP [2022] EWHC 944 (Ch) was a matter looking at conflict of interest under the microscope.

The cases of Core VCT plc, Core VCT IV plc and Core VCT V plc (“the Companies”) have been awash with such considerations and this was the latest round.

At the heart of this matter was a members’ vote that had not gone fully in favour of the Joint Liquidators ie. for them to be the ones to remain in office to inter alia investigate the Former Joint Liquidators’ conduct or whether removal of the Liquidators should take place.

Litigation claims had been served by the Companies via the Joint Liquidators just after this vote.

The problem was that out of the three companies in Liquidation, the one company with the majority of the litigation claims, actually voted for the Joint Liquidators to be replaced.

The matter therefore then became a consideration as to whether the Court would get involved in matters or not. The Court declined thereby permitting the votes cast to stand.

Conflict Of Interest And Majority Voting

Soho Square Capital LLP (“SSC”) claimed that the Joint Liquidators’ recovery of fees was tied up in the success of the litigation and that they appeared too close to the interests of their appointors. In effect, SSC appeared to be saying that the Joint Liquidators were engaged in a fee generation exercise because it seemed unlikely there would be a return to the members. The Court was unimpressed with the fees conflict argument raised:

I reject the Soho Respondents’ criticism of the Joint Liquidators’ alleged lack of independence and conflict of interest. Once an insolvency office holder has satisfied himself that grounds exist for proceedings to be brought against former directors, he will necessarily adopt a partisan approach. I also accept that where, as is so often the case, the likelihood of a liquidator recovering his fees will depend to a lesser or greater extent on recoveries in the litigation, he will unavoidably have an interest in seeing the litigation through to a successful conclusion. Such an interest should not, in my view, usually give rise to a conflict requiring him to retire from the case.

On the other hand, the Joint Liquidators asked the Court to consider the cases where the court has been prepared to intervene to prevent a majority from voting in respect of their own wrongdoing. This will have had its roots in well-known cases such as Fielding v Seery [2004] BCC 315 which said in essence a Liquidator should not be a person nor be the choice of a person who has a duty or purpose which conflicts with the duties of the Liquidator.

This has already featured earlier in this case when the Former Joint Liquidators issued an application – see the post Liquidator Removal: Open Your Eyes and See.

The Court disposed of this matter as follows:

In case I am wrong in focussing on the court’s jurisdiction to interfere in the votes cast by the Soho Respondents at the Meeting rather than on the specific resolution in question, and should instead treat the Application as if it were to remove the Joint Liquidators under section 108 of the IA86 or more along the lines of the approach taken by Marcus Smith J in Raithahta (which concerned an application to prevent a meeting of creditors to remove liquidators), it is perhaps helpful if I record that I am not convinced that the outcome of my decision would be significantly different. As the Court of Appeal noted in this case, when considering an application to remove a liquidator, the existence of matters concerning the conduct of the party applying for the liquidator’s removal that are worthy of investigation is highly material, but not determinative in all cases. It would be open to the court when considering such an application to place greater emphasis than I considered to be appropriate when considering the court’s jurisdiction to interfere in votes cast by members at a meeting, on the number of retail investors and members of the public voting to retain the Joint Liquidators. However, it would also be open to the court to consider, as I have done, the potential benefits of bringing fresh scrutiny to the proposed Claims and their funding and to consider the Soho Respondents’ criticism of the Joint Liquidators in greater detail than I have considered necessary or appropriate.

In my judgment, a potentially significant distinguishing feature between Raithata and this case is that in the former, the proposed replacement liquidator had been nominated by the party against whom claims were about to be brought and the court’s confidence in that proposed replacement liquidator had been undermined. That is not the case here, where the Soho Respondents propose that the Joint Liquidators or the court select their replacement. Furthermore, in this case, I do not consider that replacing the Joint Liquidators will necessarily stifle the Claims. In short, I consider that there are reasonable grounds upon which the court could conclude that the removal of the Joint Liquidators would be conducive to the proper operation of the process of the liquidation and to justice as between all those interested in it.

In conclusion, I see no grounds in this case for the court to intervene in the votes cast at the Meeting of Core’s members on 20 December 2021.

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