The High Court has ruled that a former partner at failed firm Halliwells should pay £120,000 to Royal Bank of Scotland over an unpaid debt.

Michael McCarthy had argued over the course of a five-day trial that his firm should have repaid a loan on his retirement before Manchester firm Halliwells entered administration in 2010.

The insolvency expert had become a full member of the LLP in July 2007 and it was common ground that he was led to believe the firm had only ‘modest’ borrowings and that he knew nothing about financial arrangements surrounding the firm’s move to new premises in Spinningfields, Manchester.

In fact, the court heard, 32 members of the firm had ‘personally and handsomely profited’ from the move while taking out borrowings of £17.8m to finance fit-out costs.

In Royal Bank of Scotland v McCarthy, McCarthy told the High Court those members had been ‘greedy’ and he felt ‘contempt’ for them. The firm was wound up in January 2012.

Two years after joining, McCarthy was placed on 12 months’ notice requiring his compulsory retirement. The LLP agreed to pay directly to RBS the £120,000 standing to the credit of McCarthy’s capital account.

In the event, the LLP did not pay the bank any sum of money, and McCarthy alleged that RBS had actively prevented repayment.

He submitted that RBS ‘thwarted’ repayment obligations and had failed to call on the LLP to discharge its obligation under a letter of undertaking that Halliwells would repay McCarthy’s loan upon his ceasing to be a member.

RBS maintained there was no defence to what was a ‘simple debt claim’.

The bank said it was accepted by McCarthy he is liable under the professional practice loan scheme agreement, and that his case had changed ‘significantly’ over time.

Its lawyers argued there was strong evidence that the LLP would not have repaid McCarthy’s loan regardless, and that his reliance on the Contracts (Rights of Third Parties) Act 1999 was ‘misconceived’.

The Honourable Mr Justice Picken said McCarthy was an ‘honest’ and ‘straightforward’ witness who was willing to accept points that were not favourable to his claim.

But the judge disputed evidence of RBS refusing specific requests regarding McCarthy and the repayment of his loan.

Emails were ‘vague and imprecise’ and it was evident that McCarthy himself doubted whether consent to repay the loan was ever sought.

Picken said it was ultimately for the LLP to decide whether to repay McCarthy’s loan, and whether to do so by seeking RBS’s consent. He rejected the notion that RBS had ‘induced or procured’ any breach of contract by Halliwells, and that the firm had taken the decision to tell McCarthy the retirement deed was rescinded.

‘Without a request, RBS was never called upon to refuse its  consent,’ added Picken.

He rejected the various defences raised by McCarthy and ruled that RBS is entitled to judgment for the £120,000 claimed.

UPDATE 16:37 McCarthy’s case does not appear to have implications for other former Halliwells partners pursued in connection with the defunct firm’s demise. John Lord, a partner at TLT acting for some of them, said: 'This is a unique case as far as I am aware.  Nobody else has challenged any of the professional practice loan-providing banks, so there are no wider implications for the fixed-share members which we represent.  They continue to defend claims brought by HLLP's liquidator, Dermot Power.'

He added: 'I am aware of four other former FSMs being pursued by the PPL banks. I advised one of them and recommended that the claim be settled. In light of this judgment I am very pleased the advice was followed.'

 

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