Baister: Funder’s behaviour was abusive
A judge has condemned the London arm of a US law firm for sending a “disgraceful” letter to a competitor of one of its clients.
Deputy Insolvency and Companies Court Judge Baister said: “It would have been wrong for a lay client to write in those terms; for a solicitor to do so was, in my view improper.”
The conduct of McDermott Will & Emery (MWE) contributed to his decision to grant Alpha Schools (Holdings) Ltd an order restraining its client, Signal Capital Partners, from presenting a winding-up petition.
Private schools operator Alpha had been in talks with Signal about refinancing but ultimately chose Fintex Partners instead. The terms sheet said that, if Alpha did not complete the deal with Signal, it was obliged to pay a fee of £350,000.
Signal immediately issued an invoice for £1.1m, of which £700,000 was legal costs, demanding payment within just five days. It then served a statutory demand and gave notice that it was presenting a winding-up petition, leading to Alpha’s application.
Alpha’s case rested primarily on its contention that Signal made a number of misrepresentations to induce it to refinance with it.
Judge Baister found Alpha made out a case of fraudulent, or in the alternative negligent, misrepresentation “to a sufficient degree of substance” that it could only be decided at trial, meaning the company was entitled to the relief it sought.
The legal fees claimed were “high”, he observed, adding that Alpha had applied for a Solicitors Act assessment of them.
“It would be wrong, in my view, to allow a petition (with all the possible consequences for Alpha) to be presented, only for it to be stayed while the bulk of Signal’s debt was subject to a process to which Alpha is entitled to have recourse.
“In any event, it is always unsatisfactory to have two sets of proceedings on foot at the same time dealing with the same subject matter.”
Judge Baister noted the “extraordinary speed” with which Signal acted after discovering that Alpha had refinanced with Fintex.
“There is no indication that the solicitors’ bill or any other fee was due for payment when Signal invoiced,” he said.
“The five-day period is even odder when… no detail was given of the expenses claimed, for example of the work done by the solicitors. Signal did not even send a copy of the solicitors’ bill with the invoice.” This was “aggressive” but did not amount to abusive, the judge said.
“One thing that plainly can be described as abusive, however, is the letter of 25 July 2024 which McDermott Will & Emery sent to Fintex telling Fintex that they had been ‘forced’ (sic) to serve statutory demands and had given notice to Alpha’s legal representatives that they intended to present a winding up petition on or shortly after 1 August.
“They went on to say that Signal had suffered loss and damage as a result of various [unspecified] unlawful acts perpetrated against [Signal].”
MWE reserved its client’s right to make a claim against Fintex, saying “our client considers it prudent to put you on notice of the issues set out above”.
Judge Baister said: “I described this letter during the hearing as ‘disgraceful’, and I do not draw back from that description. It would have been wrong for a lay client to write in those terms; for a solicitor to do so was, in my view improper.
“The explanation that it was written in the interests of cooperation is disingenuous. What cooperation? Signal and Fintex were competitors.
“The purpose of writing this letter could only have been (a) to put improper pressure on Alpha to pay up without further inquiry, either in the form of direct pressure (the letter says ‘Alpha Schools have been informed that we are contacting you directly’) or by way of indirect pressure exercised on Alpha by Fintex; or (b) to interfere with the business relationship between Alpha and Fintex with a view to damaging Alpha.
“This was abusive conduct. Although it cannot constitute premature advertisement of the presentation of a petition… because no petition had been presented at the time, it is analogous conduct, and as such is to be deprecated and met with an appropriate sanction.”
The judge said it was also “an extraordinarily unwise thing to do”. If Fintex had pulled the plug on Alpha, Alpha would, in all likelihood, have been forced into liquidation or administration, “leaving Signal out of pocket for what might have been years before seeing a dividend”.
Further “abusive behaviour” was serving statutory demands also on two other companies in the Alpha group. There was “no basis I can ascertain on which any company other than Alpha could be liable for the debt claimed by Signal”.
The “convoluted reasoning” behind this rested on the definition of borrower in the terms sheet as “Alpha Schools (Holdings) Ltd, sister companies and/or subsidiaries”.
The judge said: “It is beyond imagining that any solicitor could have reasonably believed that that definition was so plain as to give rise to a liability that was not susceptible of argument in a summary jurisdiction.
“That leads inexorably to the conclusion that the deployment of statutory demands against AS Midco and ASOpco was part of a pattern of abusive conduct.
“The fact that Signal’s solicitors said there was no present intention to petition these companies does not mitigate, it makes things worse: they must or ought to have known that there was absolutely no basis on which they could petition, so any threat to do so was improper.”
Judge Baister said Signal’s abusive conduct supported the exercise of discretion in favour of Alpha.
“But it goes further: it also fortifies my decision on misrepresentation, leading me to wonder whether a company that is prepared to act with the level of aggression Signal has demonstrated might also be unwisely zealous when it comes to pitching for business or negotiating a finance deal.”
Bully boy tactics from American firms charging ridiculous fees is nothing new.