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In this post, Calum Fairbairn, a trainee solicitor in the litigation team at CMS, previews the decision awaited from the UK Supreme Court in Candey Ltd v Crumpler and another (as Joint Liquidators of Peak Hotels and Resorts Ltd (In Liquidation) [2020] EWCA Civ 26. The appeal was heard on 2 and 3 March 2022.

Background

The appeal turns on what action a solicitor must take when entering into an additional security arrangement with a client in order to avoid waiving their rights under a pre-existing equitable lien (or creating an inference of waiver).

An equitable lien arises by operation of law in certain situations recognised by authority. This type of lien occurs as a result of the relationship between parties, rather than any actions taken by them. A solicitor’s equitable lien flows from the solicitor-client relationship in specific circumstances. It allows a solicitor to recover their costs by applying to a court to enforce a charge over sums recovered from success in litigation or arbitration in which the solicitor has acted.

Candey Ltd (“Candey”) acted for Peak Hotels and Resorts Ltd (“Peak”) between April 2014 and March 2016 in extensive litigation which took place in England and several other jurisdictions. By August 2015, Peak owed Candey hundreds of thousands of pounds in unpaid legal fees. Peak could no longer afford to finance the ongoing litigation, and in October 2015, the company and some of its backers negotiated a Fixed Fee Agreement (“FFA”) with Candey to cover all future litigation. The FFA was secured by a Deed of Charge registered in the British Virgin Islands (“BVI”), which purported to create charges over Peak’s assets and undertakings, and over damages, costs, monies and other sums or benefits flowing from the litigation.

Subsequent to the FFA being agreed, Peak entered liquidation in the BVI, and the respondents were appointed as joint liquidators of the company. As litigation involving Peak was ongoing in London, the liquidators applied for and obtained a recognition order under Schedule 1 to the Cross-Border Insolvency Regulations 2006 (“the CBIR”). This recognised the BVI liquidation as the foreign main proceedings, and therefore had the effect of staying all proceedings against Peak, except for those listed in the order.

The liquidators replaced Candey with new solicitors soon after being appointed. A dispute then arose between the liquidators and Candey regarding unpaid fees which Candey alleged were owed to it by Peak. During this dispute, Candey was represented by a separate entity, Candey LLP. Candey LLP operated from the same offices as Candey and appeared to have the same fee earners. In March 2016, Candey entered into a Conditional Fee Agreement (“CFA”) with Candey LLP, under which it was obliged to pay a 100% success fee to Candey LLP if it was successful in its dispute with the liquidators.

Procedural History

There were several hearings in the dispute, and the liquidators were ordered to pay some of Candey’s legal costs. The High Court determined two key issues. Firstly, the court held that the liquidators were not obliged to pay the success fee owed by Candey to Candey LLP. Secondly, the court rejected Candey’s request to convert a putative equitable lien over settlement sums paid to Peak during the litigation into a charge on Peak’s assets under s 73 of the Solicitors Act 1974, as it held that Candey had waived its right to the lien by entering into the subsequent Deed of Charge. Candey appealed to the Court of Appeal on both of these issues.

The Court of Appeal dismissed Candey’s appeal on both grounds.

Success Fee

Under s 44 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPO 2012”), since 1 April 2013, the general rule has been that success fees payable under CFAs cannot be recovered from an opponent. As such, the successful party in an action must pay any success fee to which it has agreed itself.

However, Article 4 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Commencement No.5 and Saving Provision) Order (SI 2013/77) (“the LASPO Order”) listed several exemptions to the general rule, including:

“proceedings in England and Wales brought by a person acting in the capacity of –

a liquidator of a company which is being wound up in England and Wales or Scotland under Part IV and V of the (Insolvency Act 1986)”.

Section 44 of LASPO 2012 came into force from 6 April 2016, with the result that success fees can no longer be recovered from the other side in insolvency proceedings. However, given that the CFA between Candey and Candey LLP under which the success fee became payable was entered into in March 2016, the court was not precluded from ordering the liquidators to pay the success fee in this case.

Candey argued that the liquidators were acting in the capacity of English liquidators as required by the LASPO Order exemption by virtue of the recognition order which was granted in their favour. The Court of Appeal rejected this argument.

The Court of Appeal held that the liquidators’ application did not fall within the LASPO Order exemption as the recognition order granted under the CBIR did not have the effect of treating foreign representatives, such as the liquidators, as acting in the capacity of an English liquidator. Article 21 of Schedule 1 to the CBIR states that upon recognition of a foreign proceeding, a court can grant any appropriate relief at the request of the recognised foreign representative where necessary to protect the assets of the debtor or the interests of creditors. This includes, inter alia, at Article 21(1)(g), “any additional relief that may be available to a British insolvency officeholder under the law of Great Britain including any relief provided under paragraph 43 of Schedule B1 to the Insolvency Act 1986”.

The court found that if the recognition order had the effect of deeming the foreign representative to have the same abilities, capacities and powers of a British insolvency practitioner, Article 21 would be redundant as the representative would automatically have the powers given by the Schedule.

The court added:

“There is nothing in the structure or wording of Schedule 1 that supports the contention that a recognised foreign representative is to be treated as a British insolvency officeholder or that he acts in the capacity of a British insolvency officeholder. The provisions that refer to the recipient of the recognition order still refer to him as the foreign representative.”

The court added that, in its view, it was not the intention of Parliament to “allow foreign representatives to continue to recover success fees under their CFAs in the same way as English liquidators. If that had been the intention it would have been a simple matter to make that clear.”

Lien

It is a long-standing principle that solicitors are entitled to recover their unpaid fees out of sums received by their client as a result of success in the litigation in which they are instructed. This concept was described by Lord Briggs JSC in Gavin Edmondson Solicitors Ltd v Haven Insurance Co Ltd [2018] UKSC 21 as promoting access to justice, as it allows solicitors to provide litigation services on credit to clients with strong cases who do not have the financial means to pay upfront.

Candey applied to the court for a charging order under s 73 of the Solicitors Act 1974, in order to enforce the lien it claimed it had over settlement sums paid to Peak.

The court said that generally, a person would not be treated as having waived their rights unless they make an unequivocal representation by words or conduct that they forgo those rights. However, the courts regarded a solicitor’s equitable lien as more prone to being waived than other rights. Candey argued that it was not subject to this lower threshold as it had advised Peak to obtain independent legal advice regarding the FFA and Deed of Charge it entered into, rather than providing advice itself. Candey therefore submitted that it had put itself in the position of a ‘banker or innkeeper’ with the concomitant higher threshold for inference of waiver being drawn, rather than a solicitor in a fiduciary relationship.

The court dismissed this argument on the basis that the duty of a solicitor is not simply to explain to their client the additional security arrangements being entered into. Rather, the solicitor must describe what the combined impact of both the new security and existing lien will be on the client’s prospects of receiving any actual monetary award from success in the litigation. The court noted that in most cases, the client has a choice between either signing the new security agreement or abandoning the litigation altogether due to inability to fund legal costs. They must have a complete understanding of what their solicitors’ claims will be to any sum awarded, and what (if any) proceeds would remain after this, to assist in making this decision. The relevance of the solicitor’s fiduciary duty is that they are seeking to have their fees paid from sums awarded in the litigation in which they are representing the client.

The court said that Candey would be treated as having waived its equitable lien if (i) the inconsistencies between the Deed of Charge and the lien were such that it intended to abandon the lien and (ii) it failed to reserve that lien.

On the incompatibility of the lien with the Deed of Charge, the court found that the Deed of Charge covered the proceeds of the litigation, which were the fruits of litigation covered by the lien, as well as a charge over all of Peak’s assets.  It could be inferred that the taking of additional security over the proceeds of litigation which would otherwise be covered by the lien indicated that the solicitor no longer intended to rely on that lien.

The court also found that the difference in priority ranking of the two securities (the lien would have entitled Candey to a charge in priority to all other debts, whereas under the Deed of Charge, Candey ranked behind a third-party litigation funder) cannot have been intended to exist in parallel.

Additionally, the difference in the right to interest on the debt payable under the two forms of security (the standard terms and conditions of the original retainer on which Candey was retained did not specify any interest rate, whereas the FFA provided for interest to be paid at 8% in some circumstances) meant that the new security arrangements were incompatible with the continued existence of the lien.

The court held that it was not possible to read the FFA and Deed of Charge as reserving the lien. Inter alia, Clause 1 of the FFA explicitly stated that the agreement superseded and replaced any previous agreement between the parties in respect of fees. It also found that, in the event that it is possible by operation of law for a lien to ‘revive’ if the inconsistent security were set aside, this principle was not applicable to the case.

Comment

The Court of Appeal placed significant emphasis on the fiduciary duty owed by a solicitor to their client. The solicitor must explain not only the new security arrangements, but also the combined effect of these new arrangements and the pre-existing equitable lien on the client’s prospects of recovering any financial award from success in the litigation. The court noted that in most cases, a client entering into a new security agreement faces a choice between either agreeing to the new arrangements or withdrawing from the litigation due to lack of funds. It is therefore vital that solicitors explain fully to the client the impact of the combined security arrangements on their prospects of recovery in order to avoid the inference being drawn that the solicitor has waived their rights to the lien.

This case demonstrates the importance of a solicitor reserving their right to an equitable lien when entering into new security arrangements with a client if they wish to continue to rely on that lien, in order to rebut any inference of waiver. This is particularly important if there are inconsistencies between the two forms of security which may lead a court to find that there has been an inference of waiver, such as covering the same assets or being subject to different priority rankings or interest rates. Because of a solicitor’s fiduciary duty to their client, courts will be more willing to find that there has been an inference of waiver in a solicitor-client relationship compared to other situations where an equitable lien may arise. Solicitors must make any reservation in a clear and transparent manner. It will be interesting to see whether the Supreme Court agree.