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Court Backs Ex-Partner in Debt-Laden Law Firm

In an unusual departure from the ordinary rule that proceedings should not be brought against a company in liquidation, the High Court has permitted a former partner in a debt-laden law firm to seek a declaration against liquidators that a £125,000 claim against him is without foundation.

The firm, which had employed 600 staff, had gone into administration, followed by compulsory liquidation, with an estimated deficiency as regards unsecured creditors of £203 million. Liquidators had intimated a claim against a number of former partners in respect of the firm’s overdrawn current and tax reserve accounts.

One of those partners argued that any right to make such a claim had been released by the firm under the terms of a retirement deed that he had signed on his departure from the firm a few months before it went into administration. He sought the court’s permission under section 130(2) of the Insolvency Act 1986 to bring a claim for a declaration to that effect against the liquidators.

The Court noted that the usual premise was that proceedings should not be brought against companies in liquidation. However, the matter was out of the ordinary in that the partner was making no financial claim against the firm but was rather seeking an early resolution of a claim against him.

More than two years had elapsed since the claim against the partner was intimated and the liquidators’ position was that resolution of the claim should be postponed indefinitely pending negotiations or mediation aimed at achieving a global settlement of their various claims against the firm’s former partners.

However, in allowing the partner to proceed with his claim for declaratory relief, the Court found that the existence of the unresolved claim was causing him real hardship and that the liquidators’ stance was unreasonable and unfair to him. Resolution of the matter would turn on the construction of the retirement deed and would not place an unreasonable strain on the liquidators’ resources.

The Court roundly rejected the liquidators’ plea that the partner’s application was ‘just harassment’ and threatened to become an unwelcome distraction from their carefully thought out strategy to recover as much as possible for the firm’s creditors. The liquidators had not withdrawn their claim against the partner and were not entitled to leave him in limbo indefinitely. The partner clearly had a legitimate interest in the swift resolution of the claim against him.