Law firm ordered to pay £12m for negligence in insolvency claim

Court of Session: Complex loss of chance claim

National law firm TLT has been ordered to pay around £12.5m in damages for breach of contract and professional negligence in the way it handled an insolvency claim.

Lord Ericht, sitting in the Outer House of the Court of Session – Scotland’s High Court – said the pursuer (claimant) company had a 65% chance of success in the action and “a very high chance, amounting to a virtual certainty” of securing litigation funding.

Woodsford, the litigation funder involved, described the case as a “classic David v Goliath fight” by its client. TLT blamed the negligence on a former solicitor.

Lord Ericht said Centenary 6 Ltd (C6) had launched proceedings in the Court of Session in 2016 under section 212 of the Insolvency Act 1986, claiming damages against liquidators of a related company for breach of duty over their decision to enter into a compromise agreement with a creditor.

The action failed because of a procedural error by C6’s lawyers, TLT, in failing to ‘lodge caution’ (the Scottish terms for security for costs) in time. TLT admitted liability for this.

C6 sought £35m in damages, plus interest, from the law firm – the amount it sought from the joint liquidators in the section 212 action. In addition, it claimed over £228,500 in legal costs for failed appeal bids and a further £253,400 to cover legal fees in the original action.

According to Compass Chambers, whose Andrew Smith KC acted for the claimant: “The matter was highly complex, and in assessing the loss of a chance, Lord Ericht had to consider the chances in the underlying claim which of themselves depended upon not only the negligence of a liquidator of a wholly owned subsidiary of the Pursuers, but the dynamics of a settlement of a large claim in the English High Court which was the source of the funds comprising the claim.

“It was alleged, in short, that in distributing the proceeds of the English case, the liquidator over-paid a particular creditor. Had he correctly distributed the proceeds, there would have been a surplus to the pursuer company as shareholder.”

Lord Ericht said counsel for the law firm had accepted there was a “real and substantial chance” of C6 establishing breach of duty by the joint liquidators and had put the chances of success at 50%. The judge put it “higher than that” on his analysis of the case.

Applying a “broad brush”, Lord Ericht said the proceedings had a 65% chance of being successful.

By way of a “cross check”, he said senior counsel advised C6 in 2016 that it had a “60% or more” chance of success and TLT passed on the advice “without disagreeing with it”.

On the issue of whether C6 would have secured litigation funding to pursue the section 212 proceedings had it not fallen before the first hurdle, the judge referred to evidence from English solicitor Charles Morris, chief investment officer of Woodsford.

He said he found “particularly compelling” Mr Morris’s evidence that Woodsford would not have funded the current action unless it would have also funded the section 212 claim.

If the prospects of success in the section 212 action were as poor as TLT made out in its defence, then it should have advised its client not to proceed with it, the judge observed.

He reduced the damages claim to £14m for various reasons, then reduced it further to £9.12m by applying the 65% success rate, plus interest at 4% from May 2017.

He took the same approach to the costs of the appeal attempts. Compass Chambers said the damages total was around £12.5m.

A TLT spokesperson said: “We are disappointed with the outcome of this case and are considering appealing this decision. The matter relates to work undertaken by a solicitor who no longer works at the firm.

“We take professional standards extremely seriously at TLT and expect all colleagues to maintain high standards in order to deliver an outstanding service to our clients.”

Mr Morris said Woodsford had started supporting C6 “in this classic David v Goliath fight” back in June 2017.

“On the one side, C6 with no meaningful assets, on the other a well-resourced law firm backed by deep-pocketed professional indemnity insurers.

“Despite having a meritorious claim – negligence was ultimately admitted – the defendant and its insurers dragged this out for far longer than they should have. They now have to pay the price for that.”

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