New Case Management Regime Poses Problems for Liquidators

Introduction

The High Court, which comprises the Court of First Instance and the Court of Appeal, has introduced significant reforms of its civil procedure in the form of new rules that came into effect on April 2 2009.

The reforms will have an impact on the conduct of litigation by liquidators and insolvency practitioners – not in winding-up proceedings (to which the reforms do not apply), but in other actions involving companies in liquidation.

The aim of the reforms is to improve the time and cost efficiency of High Court proceedings. The new rules emphasize the court’s case management role, taking primary control of the progress of the litigation out of the hands of the parties and their lawyers. In particular, a more front-loaded case management process will test liquidators and their solicitors. Delays and non-compliance – and even what the rules term “unreasonable behaviour” – will be looked upon unfavourably and costs and other penalties will be imposed.

An amended Order 25 of the rules and a replacement Practice Direction 5(2) introduce a new regime for the court to give directions, set deadlines for pre-trial steps and schedule the date and length of the trial.

Greater Stringency

The new regime introduces new (or newly formalized) stringency in many aspects of litigation:

  • The parties are encouraged to proceed with discovery immediately and to try to agree on modifying their discovery obligations, particularly by limiting the scope of discovery.
  • The court will not permit a party to adduce expert evidence unless the party has adequately answered the specific questions about expert evidence in the questionnaire that it is required to complete before trial.1
  • The closer to trial an interlocutory application is made, the less likely it is to be granted.
  • Sufficient grounds must be shown for extensions of time and the court must be satisfied that an extension will not impinge on the trial date – dates for case management conferences2, pre-trial reviews3 and the trial will be moved only in exceptional circumstances.
  • Trial counsel and the solicitors having conduct of the case must attend all case management conferences and pre-trial reviews so that case management decisions can be made.
  • In relation to the parties’ compliance with case management directions generally, the court may order costs against a party where the fault or default of that party necessitates a hearing or the adjournment of a hearing. Such costs may be summarily assessed and ordered to be paid forthwith. Costs orders can be made against solicitors personally.

Effects on Liquidators and Insolvency Practitioners

The case management regime does not apply to winding-up proceedings, which are subject to their own rules. However, to the extent that the reforms apply generally to actions in the High Court, they will affect actions commenced (or defended) by companies in liquidation, through their liquidators, outside of winding-up proceedings.

Statements of truth

Each pleading (among other documents) must be verified by a statement of truth in the following words: “I believe that the facts stated in this [name of document] are true.” A pleading that is not thus verified is liable to be struck out. False statements in a verified document leave the verifier exposed to contempt proceedings.

Although solicitors for the parties concerned are permitted to verify documents with statements of truth, they are likely to be reluctant to do so, not only out of instinctive caution, but more particularly because they very seldom have personal knowledge of the allegations made in pleadings.

The same dilemma will present itself to liquidators, who know the facts on which a claim is based only through information that they have received. In many cases this may be gleaned from documents found among the company’s books and records, which are sometimes incomplete or difficult to reconstruct. In many cases brought by liquidators on behalf of companies, personal knowledge of relevant facts will reside with people, such as the company’s directors, who may be unavailable or unwilling to offer such knowledge – they may have been displaced from the company, or they may be the proposed defendants or may otherwise be facing penalties as a result of the events or conduct underlying the proposed litigation.

Nevertheless, the liquidator is the only person who can realistically verify a pleading on behalf of the company with a statement of truth. It is easy to imagine liquidators making frequent requests for legal advice where they are unsure whether they can reasonably believe the information presented to them.

Difficulty of obtaining information and evidence before action

As they never have personal knowledge of the underlying events and must reconstruct history from such records and recollections as can be gathered, liquidators are forced to rely on incomplete information and more or less rational deductions, perhaps more so than any other commercial litigants. However, liquidators are also unusual among litigants in that they are constrained by their duties to the company, its contributories and creditors and the courts to act on the most solid of legal and commercial bases.

The front-loading of litigation that will ensue from the case management reforms will particularly affect liquidators. It is difficult to imagine how a liquidator will be in a position to state that he or she has identified all parties, completed all possible pleading amendments, marshalled the evidence and identified his or her experts by the time of the first case management conference. Liquidators often rely heavily on information acquired through compulsory interlocutory processes that occur only after pleadings (eg, discovery, interrogatories and subpoenas), which makes them much more likely to be less advanced in their trial preparations when case management directions are sought. This will not necessarily count against liquidators – maybe the courts will choose to recognize and accommodate their special circumstances. Nevertheless, the potential penalties for a perceived lack of diligence are severe enough to be a source of concern.

Lack of funds before action

How will liquidators afford the necessary pre-action activity? It remains unclear whether insolvency lawyers will be willing to undertake yet more work for which fees may never be recovered and on claims that may never take shape. Moreover, litigation funders – especially company creditors – may be reluctant to finance substantial pre-action investigative work before a decision is taken to sue.

Compromise of actions

The special necessity for front-loaded litigation work by liquidators and the difficulties that this poses may have an unfortunate consequence: less litigation by liquidators. This is not necessarily bad, but nor is it intrinsically good – liquidators already face numerous hurdles in seeking to prosecute good claims against delinquent directors or others who have contributed to, or benefited unfairly from, corporate collapses.

Liquidators often have a strong interest in compromising claims. Far from being a point of criticism, this is a necessary consequence of their duty and concern to avoid unnecessary loss of time and money, as litigation is one of the most time-consuming and costly activities in which a liquidator can become embroiled. Compromise works particularly well when a good claim is brought quickly, backed by just enough evidentiary support (whether actual or threatened) to make genuine wrongdoers genuinely cooperative. Claims that take longer and cost more to be fortified before being brought are less likely to be brought at all. As a result, potential recoveries may be hindered and cost-benefit considerations may push more claims beyond the point at which they are not worth pursuing.

Comment

The reformers intended to minimize unnecessary interlocutory wrangling between the parties and, since most activity in civil proceedings occurs before trial, to save litigants time and money. It is also apparent that efforts are being increased to prevent frivolous actions being brought. However, it would be unfortunate if liquidators – who already have good reason not to be frivolous – were to face greater difficulty in prosecuting good claims.

The new case management regime is in its infancy and may mature into nothing more than a facilitative framework. Moreover, liquidators have some fortunate and special advantages over other litigants, such as their powers of examination, and may find it useful to take advantage of them.

Increasing the pre-claim and interlocutory workload on parties and their lawyers is no guarantee that time and money will be saved, although improvements should follow as attitudes to litigation – and not litigating – change in the long term. Lawyers and clients that already take a commercial approach to dispute resolution will have no complaints about the welcome ambitions of the reforms.

1.Within 28 days of the close of pleadings, the parties must complete a timetabling questionnaire, which contains nearly 40 questions about the party’s past and future conduct of the case – topics include alternative dispute resolution efforts and requirements for trial.
2.There is provision for the court to hold a case management conference for directions to be made or varied. This is likely to be unpopular, as seven days before the conference the parties must file a listing questionnaire with answers to a further round of questions about their intentions and readiness for trial.
3.The pre-trial review – a final check on the process – takes place eight to 10 weeks before trial. The court will be particularly unaccommodating towards applications made at this stage if they could have been made earlier.