Who gets what when an IP switches firms

This poses no problem – until the office holder moves firms.

In such circumstances, do the appointments follow him or stay put? Can the original firm retain the appointments and transfer them away from the outgoing office holder? And, just as crucially, can the office holder be made to take unremunerative appointments with him? The few transfer applications that have made it before the courts provide the answers to these contentious questions.

Understandably, the court’s first priority will be to act in the best interests of the creditors in that particular insolvency. The business interests of both the previous or the new firms will take a back seat, regardless of any employment related contractual provision to the contrary.

This is clear from Justice Chadwick’s words. ‘It is likely that the interests of creditors will be best served by leaving the administration of the debtor’s affairs where it is. But I have to consider whether it is so obviously in the interests of creditors in each individual liquidation or bankruptcy that there should be a substitution of office holder within the relevant accountancy firm.’

Remarks made by Blackbourne J in A&C Supplies endorse this view, where, after describing largely ineffective attempts by the outgoing office holder to access papers at his previous firm, he says: ‘It is evident that in the interests of creditors of the various insolvent estates involved, this is a state of affairs which ought not to be allowed to continue.’

Useful indications have also been provided by the courts in deciding whether a transfer is, or is not, in the interests of creditors. For example, the importance of the knowledge of the various managers and supervisors handling the daily administration of the insolvency was recognised in both Equity Nominees and Cork v Rolph.

Creditors may be better served if another office holder from the original firm deals with the appointments. This would avoid spending time and money getting new staff up-to-speed and also prevent the sometimes considerable disruption of moving papers and other records.

The likelihood of a transfer is also affected by how close the appointments are to being finalised. The nearer to completion they are, the less likely a transfer will be granted by the judge, as shown in the Sankey and Equity Nominees cases.

Sometimes the outgoing office holder may not be able to carry out his responsibilities at a satisfactory level as shown in each of A&C Supplies, Equity Nominees and Cork v Rolph. In the recent case of Mullins v Laughton & Others (19 December 2002), Mullins was excluded from his office by fellow partners but required by those same partners to continue with the conduct of some 200 unremunerative insolvencies.

Justice Neuberger said: ‘Mr Mullins alleges that, having been required to leave the office precipitately, he had no facilities or supporting staff, and no insurance, and it was therefore neither practical nor proper for him to remain the appointee in respect of, or be responsible for the management of, 200 insolvencies. From the point of view of managing the insolvencies, expediency would point firmly in favour of one or more of his former partners, with all (their) staff and resources, replacing him as appointee. All the more so, as (those) staff would have been responsible for much of the day to day running of the insolvencies, and they remained in place.’

Where there is a debenture, the contractual power to appoint the office holder of choice belongs to the charge holder. The courts have the power to remove an administrative receiver from office, but cannot appoint a replacement; that privilege lies with the debenture holder. The courts will reluctantly remove someone specifically selected by the appointer, but only if necessary. The appointer can then leave the appointment as single (if previously joint), appoint someone other than the outgoing office holder, or apply to the court if the outgoing office holder is to be retained.

The court takes a dim view of arguments between a previous office holder and a professional firm which appears to ignore creditors’ interests.

The ‘You’ve got, I want’ approach may be considered distasteful and unhelpful by the judge.

Indeed, it would be highly preferable to avoid the courts altogether.

A sensible alternative is to discuss and resolve appointment transfers before competing positions are taken and, if that fails, then apply to the court as a last resort.

Each individual insolvency should be treated as separate and the court will decide where creditors’ interests lie with reference to specific factors such as: Who has the knowledge to deal with it most efficiently?

When is the closure due? And where are the appropriate papers located?

Joint appointments demand the role of the outgoing office holder is scrutinised.

The views of any principal creditor or committee must also be obtained and considered seriously.

Sufficient notice of intended departure from the outgoing office holder should be employed to ensure an orderly transfer of papers and knowledge.

In some cases, employment contracts or partnership deeds contain a provision that all fees generated by appointments taken away should be accounted to the outgoing office holder’s previous firm. It may become necessary for the firm to make the outgoing office holder aware of this responsibility to assess the commerciality of taking his appointments, and accounting to the original firm for all fees earned.

When considering whether or not making a transfer application is the best course of action to take, an awareness of the potential legal hazards and the approach of the court if transfer issues cannot be resolved by discussion, is essential for a smooth and fair transition.

  • Simon Moore is partner and commercial litigation lawyer at City law firm Field Fisher Waterhouse.

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