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A cautionary tale for liquidators who drag their feet and don't play by the rules

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(Brian Johnson (Liquidator of Strobe 2) v Arden and Others)

This article was written by Clive Ince and Ellie Spencer.

The Background

In the early years of the new millennium the Luminar Group was a major player within the UK nightclub and leisure sector operating, at its peak, over 300 venues across the country.

Between 2005 and 2007 a fundamental restructuring took place largely to address market challenges including the liberalisation of pub opening hours and the impending smoking ban. Many of the club premises were transferred out of the Group which redefined its core business and, in doing so, became cash rich and so returned substantial capital to its shareholders.

But during 2008 the nightclub industry began to feel the chill winds of the dramatic economic downturn arising from the banking crisis. Previously profitable clubs struggled and some failed altogether leaving many trade creditors (whose ranks included commercial landlords) facing significant losses.  In turn these landlords looked at their options to recover lost rental income. One possibility was to attempt to call in guarantees from the former “Parent” company within the Luminar empire, Luminar Plc. By this time the company was renamed Strobe 2 and in September 2009 it ceased to operate and moved towards insolvent liquidation. The former landlords were aggrieved by this turn of events and pressed Strobe 2’s liquidator (Mr Johnson) to focus on the company’s former directors and  to pursue remedies under the Insolvency Act 1986. Their core complaint was that the ex directors had failed to ensure  that Strobe 2 had retained sufficient financial resources to meet claims (as guarantor) in respect of contingent lease liabilities.

Some four years later (2013) proceedings were first commenced by the Liquidator against the ex directors (and the former company secretary) but those proceedings were then discontinued by the Liquidator without being notified to or served on the Respondents, who remained blissfully unaware that they had been targeted.

In September 2015 further proceedings were issued. Service on the unsuspecting ex directors took place just before Christmas, in several cases on Christmas Eve 2015. As these proceedings for the first time notified huge personal claims against the individuals concerned – potentially ranging between £40m and £360m – it is fair to conclude that, in their respective households, Christmas cheer was in short supply. They quickly sought legal advice from Goodman Derrick and a legal battle commenced.

The Legal Claims

The Liquidator’s claims were pursued under the Insolvency Act 1986 (“IA”); specifically sections 214 (wrongful trading) 238 (transfers at undervalue) 239 (preferences) and 423 (transactions defrauding creditors).  No claim was actively advanced under s212 (breach of director’s duties) because this potential cause of action was time barred by the time of the second proceedings.  The former directors strenuously denied all of the allegations made against them. Certain features of the Liquidator’s claim stood out:

  1. There was no assertion that any one of the former directors had benefitted personally from any of the transactions, whether directly or indirectly;
  2. It was acknowledged that when undertaking the re-structuring of the Luminar Group the directors had taken advice from a raft of eminent professional firms including Deloitte, PWC, CMS Cameron McKenna and Rothschild;
  3. Although the Liquidator denied basing any part of his claim on alleged fraud there were nevertheless shadowy allegations in his case, arguably amounting to the assertion of a conspiracy (which the judge noted to be unsupported by any evidence); and
  4. The value of the Liquidator’s financial claim was not easy to identify, but evidently he was applying for each of the Respondents to make very substantial contributions to the Company’s assets and on a scale which would be beyond their means. For the ex-directors this was potentially a ruinous legal claim.

The Main Issues and the Court’s Decision

Fast forward to June 2018 when the High Court (Deputy ICC Judge Kyriakides) ruled on summary dismissal applications brought by the former directors and ordered that the Liquidator’s claims should be struck out (with judgment entered against him) and also that the Liquidator should meet the Respondents’ costs on the indemnity basis.

Alleged Wrongful Trading (s214 1A)

The case pleaded against the ex-directors was essentially on a collective basis rather than specific allegations being advanced against individual directors. They were simply “lumped together” with no allegation of which alleged acts and/or omissions (and by whom) gave rise to an increase (if any) in the Company’s eventual deficiency. Moreover, the Liquidator’s central assertion was that the ex directors had placed the Company “at risk of potential insolvency” which, as the judge (correctly) identified, is not the relevant test for the purpose of establishing wrongful trading. The claim was struck out.

Preferences, TUVs and Transactions Defrauding Creditors (ss 238, 239 & 423 1A)

There was no assertion that any one of the ex directors had personally been a party to any of the transactions within the corporate re-structuring.  Likewise no allegation was made that any of the ex directors had benefitted personally (whether for example through being a preferred creditor or as a guarantor or surety). None of the corporate “counterparties” within the reconstruction featured in the litigation.

The judge ruled:

“In this case, the (Liquidator) does not contend that the Respondents were parties to any of the transactions alleged to fall within sections 238, 239 and 423 or that they were preferred creditors, guarantors or sureties, or that they received the Dividend or any other benefit from the impugned transaction/preference.  I am therefore of the view that the (Liquidator) has no real prospect of succeeding in his claims against the Respondents under sections 238, 239 and 423.  I agree with the Respondents’ submissions that what the (Liquidator) has sought to do is to pursue claims for breach of duty against the Respondents under the guise of claims under sections 238, 239 and 423”.

These claims were also struck out.

The Sanction of Indemnity Costs

Although sparingly used, an award of indemnity costs is a potent weapon in the judicial armoury. It is usually reserved to mark the court’s condemnation or serious disapproval of the conduct of a party to litigation. Indemnity costs were awarded against the Liquidator of Strobe 2 based on a combination of findings by the judge. She held that the Liquidator had not conducted a proper investigation prior to the commencement of proceedings and, in particular, he had failed to interview any of the directors before embarking on complex and costly litigation. 

Secondly, there had been a complete disregard of the Pre Action protocol. No letter of claim had been served in advance of the proceedings and so the Respondents had not been given an opportunity to challenge the allegations or to explain themselves. Perhaps most importantly, the Liquidator’s case was held to contain shadowy and completely unsupported allegations which, when analysed, were essentially assertions of dishonest conduct. The Liquidator denied this but the judge refused to accept the submission of the Liquidator’s legal team that his allegation that there had been “an agreement to pursue, and pursuit of, an objective that the company would be denuded of its assets” was anything but an allegation of illicit/dishonest conduct. Consequently an order of indemnity costs was made in favour of all Respondents.

Lessons to be Learned

From a liquidator’s perspective:

  • Investigate adequately and as soon as possible
  • Take the opportunity to interview directors, using statutory powers as necessary
  • Play to the rules and, in particular, adhere to the guidelines for Pre Action Conduct
  • Do not include allegations (or even suggestions) of illicit conduct, such as conspiracy or deceit, except where there is adequate evidence to support such serious allegations being made
  • When formulating the claim be sure to descend into the necessary degree of detail and to distinguish between the alleged shortcomings of individual directors and also as between classes of director (executive versus non executive). Don’t simply lump them all together.

For Directors Who Consider They Are Being Unfairly Pursued:

  • Where a liquidator behaves unreasonably, whether by making unfounded allegations or by not playing to the rules, be prepared to challenge him and require him to comply. By all means cite this case !
  • Wherever possible, test the strength of the case sooner rather than later and be willing to make use of summary procedures
  • Individual directors and ex directors should retain records of potentially responsive insurance cover - most likely Directors & Officers’ cover (“D&O”). 
  • Keep in mind that if a liquidator pursues an unsuccessful claim he may be held liable personally for the costs incurred by the former directors.


This was a resounding result for the former directors of Strobe 2. An appeal has been filed by the Liquidator. The above summary is for guidance only and, most obviously, all cases turn on their own particular facts. 

In “Strobe 2” Goodman Derrick LLP (Clive Ince and Ellie Spencer) instructed Hugh Jory QC (4 New Square) and Hugo Groves (Enterprise Chambers) and, together, they successfully represented six of the original Respondents to the Liquidator’s claim.

This article was written by Clive Ince and Ellie Spencer. It is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.