Earlier this month, the English Insolvency and Companies Court (the “ICC”) made a limited civil restraint order against a shareholder who had repeatedly sought, unmeritoriously, to challenge the 2017 restructuring of Paragon Offshore plc (in liquidation) (“Paragon”) (Hammersley v Soden & Ors  EWHC 223 (Ch)).
This is a helpful example of a limited civil restraint order being made in the context of repeated challenges to a restructuring, and reflects a proactive approach to protecting a restructuring from such challenges, which will be welcome to parties and officeholders facing similar issues.
As set out in further detail below, a limited civil restraint order restrains a party from making any further applications in the proceedings in which the order is made.
The judgment highlights factors that practitioners should bear in mind when considering whether to apply for a limited civil restraint order, and gives useful guidance on the ICC’s approach to making such orders.
Importantly, the judgment confirms that, in a restructuring and insolvency context, the Courts recognise and give weight to the limited extent of the estate’s resources, which should not have to be spent defending repeated unmeritorious applications.
Facts and decision
The shareholder’s challenges stemmed from a restructuring completed in 2017. Paragon and certain of its subsidiaries commenced Chapter 11 proceedings in the U.S. Bankruptcy Court in Delaware in early 2016. A Chapter 11 Plan was confirmed by the U.S. Bankruptcy Court on 7 June 2017 and then implemented via a UK pre-pack administration sale of Paragon’s assets.
Both the Chapter 11 Plan and UK implementation have been challenged repeatedly by a shareholder on both sides of the Atlantic. At the Joint Liquidators’ request, two of the shareholder’s applications have been declared to be totally without merit:
- an application brought pursuant to Insolvency Rule 12.59 of the Insolvency (England and Wales) Rules 2016 for the Court to review, vary or set aside an order previously made by it in the proceedings discharging the former joint administrators of Paragon pursuant to paragraph 98 of Schedule B1 to the Insolvency Act 1986 (Soden & Ors v Hammersley  EWHC 2740 (Ch), a copy of our article on this judgment is available here); and
- an application brought pursuant to Insolvency Rule 14.11 for the Court to exclude (as an alleged proof of debt) a loan note instrument issued as part of the restructuring and seeking to direct the Joint Liquidators to make a distribution to shareholders (Hammersley v Soden & Ors  EWHC 2275 (Ch)).
Following the dismissal of the second application, the Joint Liquidators requested that the ICC make a limited civil restraint order (“LCRO”) to prevent further applications by the shareholder in the proceedings.
On hearing the application, Deputy ICC Judge Agnello QC was satisfied that the LCRO threshold requirements were satisfied because, by virtue of being issued within the same insolvency proceedings, the two unmeritorious applications related to the same proceedings: “They both relate to the insolvency process which commenced with the administration and also relate to the conduct of the relevant insolvency proceedings”.
In deciding whether to make the LCRO, the Deputy ICC Judge referred to the following factors:
- the shareholder’s various applications occupying a considerable amount of Court time in the proceedings, which were accompanied by lengthy witness statements and exhibits that were often irrelevant to the issues to be determined;
- the requirement on the Joint Liquidators to expend considerable costs in dealing with those applications;
- the shareholder continuing to issue further applications in the proceedings even after the LCRO application was made, and a disproportionate amount of the Court’s resources having been allocated to the case in general; and
- the shareholder referring to the same arguments in all applications, effectively seeking to re-litigate points previously found against him and “refusing to take no for an answer”.
Civil restraint orders
A civil restraint order restrains a party from making claims or applications in proceedings without first obtaining Court permission. There are three types of civil restraint order set out in Practice Direction 3C:
- an LCRO, which restrains a party from making any further applications in the proceedings in which the order is made;
- an extended civil restraint order, which restrains a party from issuing claims or making applications in specified Courts concerning any matter relating to the proceedings in which the order is made; and
- a general civil restraint order, which restrains a party from issuing any claim or making any application in specified Courts.
Under CPR 23.12, CPR 3.11 and Practice Direction 3C, a Court can make a civil restraint order on the application of a party to the proceedings, or on its own motion. In the case of an LCRO, an application can be made before an ICC or Deputy ICC Judge, as noted by Deputy ICC Judge Agnello QC in her judgment.
The precise threshold requirements for such orders are set out in Practice Direction 3C, and differ depending on the type of civil restraint order sought. However, they all have in common the requirement that the claims issued or applications made are “totally without merit.” As ruled previously by the Court of Appeal, a claim or application is “totally without merit” if it is bound to fail in the sense that there is no rational basis on which it could succeed.
In relation to an LCRO, the Court may only grant such an order where “a party has made two or more applications that are totally without merit.” These applications must be in the same set of proceedings within which the judge is considering the LCRO. Following the Paragon judgment, in an insolvency context that can mean applications made in an estate’s administration and subsequent liquidation.
If the party subject to the LCRO makes a further application in the proceedings without first obtaining the permission of a judge identified in the order, the application will automatically be dismissed without the further need for a response from the other party.
Weil acted for David Soden and Ian Wormleighton of Teneo as the Joint Liquidators of Paragon Offshore plc (in liquidation), led by London Restructuring partner Mark Lawford and assisted by associates Wupya Nandap, Maeve Brady and trainee associate Asha Phakey. The Joint Liquidators were represented in Court by Mark Arnold QC of South Square.
Weil acted for Paragon Offshore plc on its Chapter 11 restructuring, which was implemented via a UK administration sale in 2017. The Weil team in the US was led by Restructuring partners Gary Holtzer and Alfredo Perez, while the Weil team in London was led by Restructuring partners Andrew Wilkinson and Mark Lawford.
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