Judge critical of leading liquidator’s wind up of firm

A leading law firm and a senior liquidator have been heavily criticised by a judge over their handling of a company’s winding up.

Lord Hodge made his attack on Brodies LLP and Kenneth Pattullo as he described “irregularities” in the liquidation and the “improper bypassing” of procedures.

He said he wanted to discourage a repetition of “unacceptable events” and had sent copies of his comments to the Law Society of Scotland and the Insolvency Practitioners’ Association.

Lord Hodge, a senior commercial court judge at the Court of Session in Edinburgh, stated: “Accepting as I do that there was no bad faith...the successful operation of insolvency procedures depends on the integrity and the professionalism of insolvency practitioners and those who advise them. I ask the professional bodies to see that the relevant members of their professions learn from this case.”

Irvine Estates Ltd (IEL) was the landlord of warehouse premises in Irvine, North Ayrshire, which were rented by Quantum Distribution (UK) Ltd, and it petitioned the court in 2008 to wind up Quantum.

Mr Pattullo, a partner of accountants Begbies Traynor, was appointed liquidator. He learned that Quantum had a claim against its parent corporation, Quantum Corporation (QC) from California. However, pursuing the claim in the United States would involve cost, delay and considerable risk. He sought advice from Brodies and was told it was “not likely the claim would be available.”

Lord Hodge said Mr Pattullo and representatives of IEL negotiated with QC and a deal was struck for QC to pay £50,000 directly to IEL and £50,000 to Mr Pattullo for the winding up.

He added that David Sellar, QC, for Mr Pattullo, sought to explain but not justify the arrangement.

“He stated that the liquidator was in a difficult position as the petitioning creditor was determined to receive money but the claims were risky. The deal provided £50,000 to the winding up. That sum would not otherwise have been obtained,” said Lord Hodge.

“Mr Sellar suggested that Mr Pattullo was attempting to do his best in difficult circumstances. He acknowledged that the liquidator had no power to compromise the claims without coming back to the court for authorisation, but he stated that Mr Pattullo had not been advised of the need for court approval of the compromise.”

IEL, on advice from Brodies, had submitted a near £1.5 million claim for damages in the liquidation. Lord Hodge said it was not unusual for a firm of solicitors to act for both the petitioning creditor and also the insolvency practitioner in a winding up.

“But where solicitors choose to do so, they must be sedulous in guarding against conflicts of interest. In this case, Brodies, in my view, failed to avoid a conflict of interest...I am satisfied that by acting for the petitioning creditor in submitting its claim for damages and by facilitating the settlement agreement without advising Mr Pattullo that he should obtain separate legal advice, Brodies found itself in a position of conflict of interest and failed to act to remove that conflict,” said Lord Hodge.

“I am critical of both Mr Pattullo and Brodies. In fairness to both, I record that there is no evidence that in the end the general body of creditors suffered a significant loss as a result of their failings. Nonetheless, the events show an unacceptable attitude by the liquidator and by Brodies both in relation to their obligations to the court and to their professional responsibilities.

“I accept...that Mr Pattullo and his staff and Brodies did not set out to conceal information from the court. (But) it was not acceptable behaviour for Mr Pattullo or Brodies to seek to bypass the court by turning to the creditors to obtain approval of the liquidator’s accounts and remuneration. It was also not acceptable for Mr Pattullo to fail to disclose to those creditors the circumstances of the settlement of the claims against QC.”