High Court rejects claims against law firm over corporate restructure

Breast implants: Company was facing legal action

The High Court has rejected claims made against a law firm which advised a medical services company on a restructure which claimants alleged was designed to put its assets beyond the reach of creditors.

This was at a time when the company, The Hospital Medical Group Limited (THMG), faced liabilities from, among other things, the Poly Implant Prothèse (PIP) breast implant scandal.

Mr Justice Richard Smith held that Midlands law firm The Wilkes Partnership had not been negligent, nor provided dishonest assistance in the breach of fiduciary duties by directors and conspiring to use unlawful means to injure THMG.

The judge said that, building on their earlier prescription pharmaceutical sales and cosmetic procedures business venture, David Ross and Steven McNerlin established THMG in 1993, providing elective medical services including cosmetic, obesity and dentistry surgery and non-surgical procedures.

The company operated mainly from a private hospital in Bromsgrove, although it also leased a national network of around 15 clinics.

Richard Smith J said litigation investment company Henderson & Jones, assignee of the claim, argued that the restructure took place against the background of “serious problems faced by THMG from 2011”, including creditor non-payment, banking covenant non-compliance and “significant potential liabilities” from the PIP breast implant scandal and threat of backdated VAT on cosmetic procedures.

According to Henderson, the result of the restructure was to “cause THMG to divest itself of all its tangible assets and trade, leaving significant liabilities within the company”, and putting assets “beyond the reach of its creditors to their obvious detriment”.

It sued directors, THMG’s bank Barclays and The Wilkes Partnership.

The defendants denied liability, arguing that the restructure “was not unlawful but was reasonably and honestly undertaken for value, for good commercial reason and in THMG’s interests”, with the company having sufficient reserves to declare a dividend.

At trial, the claimant’s focus was on law firm’s alleged failure to advise on the likelihood of the restructure being a transaction defrauding creditors.

Richard Smith J said that based on his analysis of the substance and purpose of the restructure, and “the weak motive” suggested for former senior partner of The Wilkes Partnership Nigel Wood and partner Kathryn Hackett to act dishonestly, he rejected the claim that the firm “did not act as an honest person or that it failed to make the enquiries that a reasonable person would have in its position”.

He found no basis to assert that The Wilkes Partnership knew of, or considered reasonably foreseeable, “circumstances and risks … that could affect the outcome of your matter” – as per its letter of engagement – so as to require it to advise THMG about the risk of the restructure being considered a transaction defrauding creditors.

“Nor, more generally, would a reasonably competent solicitor having regard to normal professional standards consider such advice reasonably incidental to the services to be performed.”

The judge accepted that the solicitors “understood, and reasonably believed the restructure to be, a solvent reconstruction (and that it was)”, and found that the law firm properly discharged its duties to THMG.

He added that the claim of unlawful conspiracy ‘did not get off the ground’, again because of the substance and purpose of the restructure, “the related (non-injurious) intent of each of the defendants” and the absence of any breach of duty by directors of THMG.

Richard Smith J dismissed the entire claim.

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