The case of Simpson v Diamandis & Ors [2024] EWHC 851 (Ch) holds significant importance for insolvency practitioners due to several critical legal principles and practical implications that arose from the judgment.

The case highlights the risks associated with undervaluing assets during corporate restructurings or sales, particularly when a company is nearing insolvency.

Litigation finance, funding arrangements and insurance allow insolvency practitioners to pursue claims on behalf of their clients whilst reducing financial risks. At Annecto Legal, we can assist clients by helping them secure funding and insurance for insolvency cases.

Simpson v Diamandis & Ors [2024] EWHC 851 (Ch)

Simpson v Diamandis & Ors [2024] EWHC 851 (Ch) is a pivotal case from the Chancery Division of the High Court. The case involved John Simpson, a minority shareholder in the company Tilon CG, who brought a claim against Diamandis and others for unfair prejudice regarding the sale price paid for the company.

The dispute arose when Tilon CG was sold to a new holding company, Tilon Holdings, at an undervalued price of £150,050. However, expert valuations showed the actual worth to be around £2.9 million, meaning Simpson lost around £2.75 million. Simpson claimed that the sale unfairly favoured the majority shareholders, including Diamandis, and that he had been excluded from key discussions regarding the sale and restructuring, leading to his detriment.

Simpson’s claim was grounded in section 994 of the Companies Act 2006, which allows minority shareholders to seek relief when they are unfairly prejudiced by the actions of majority shareholders or directors. He argued that the sale undervalued his stake and that he had been sidelined from decision-making, breaching his rights as a shareholder.

The court also addressed the fiduciary duties of directors, particularly regarding fair treatment of all shareholders during corporate restructuring and sale processes.

The court ruled in favour of Simpson, finding that the undervaluation of the company’s assets and exclusion of Simpson from key decisions amounted to unfair prejudice. High Court Judge Caroline Shea KC held that Diamandis failed to act in the best interests of all shareholders, which led to a breach of his duty.

Moreover, the court rejected the respondents’ attempt to delay the trial through an application to adjourn, viewing it as a tactical manoeuvre to stall proceedings. This demonstrated the court’s stance against undue delays and the importance of adhering to procedural fairness.

Why is this case important for insolvency practitioners?

The case centred around the undervaluation of shares during a company restructuring. This shows how undervaluing assets in financial distress, especially in a sale to a related party or a new holding company, can trigger legal challenges. Insolvency practitioners must ensure that asset sales reflect fair value to avoid legal claims.

Insolvency practitioners regularly work with directors of distressed companies and must remind them of their duties to act in the best interests of the company and its shareholders, especially when insolvency is imminent. Failure to uphold these duties can result in personal liability and legal challenges.

The respondents in the case unsuccessfully sought to delay the trial on grounds of needing more time due to financial deterioration. The court rejected this request, emphasising that such tactical delays, especially without supporting evidence, would not be tolerated. Insolvency practitioners must be wary of using similar tactics during proceedings, as courts will prioritise efficiency and fair adjudication over delaying tactics​.

Insolvency litigation funding options

Litigation funding, the assignment of claims and/or ATE insurance can play a pivotal role in assisting insolvency practitioners (IPs) in meeting their obligations. Insolvency practitioners involved in insolvency litigation can make use of the following funding methods:

• After-the-event (ATE) legal insurance– ATE insurance is generally used to protect from adverse costs risks & Security for Costs requirements. After-the-event (ATE) legal expenses insurance is perhaps best thought as a similar to a ‘swap’. For either no upfront fee or a small upfront fee, the insurer takes on all of the risk of the potential adverse costs award. The claimant has swapped their obligation to pay the defendants in the event of a loss, with the obligation to pay the insurer in the event of a win. This ‘swap’ is generally an attractive swap as the client is likely to be in a better financial position following a win than following a loss. Also, the payment to the insurer will only be a percentage of the adverse costs rather than the whole amount.
• Third party litigation funding– In some cases, third party litigation funders may be willing to provide funding for a claim in exchange for a share of any financial settlement or damages awarded. This option can be attractive when there are no funds to pursue a strong case. ATE insurance is often used in conjunction with this type of funding.
• Assignment of litigation – Some types of disputes can be assigned to a third party, usually for an upfront payment and a share of recoveries (after costs). This model can be useful on smaller cases when the ATE and CFA model would not deliver value. But giving up control can sometimes be costly, especially on larger claim disputes.

How can Annecto Legal assist?

When handling insolvency and unfair prejudice matters, insolvency practitioners are obligated to explore all options available in such cases. At Annecto Legal, we assist a wide range of clients in finding the appropriate insolvency litigation funding, assignment options and after-the-event (ATE) insurance.

Annecto Legal regularly assists licensed insolvency practitioners who are involved in dealing with insolvency and unfair prejudice matters. If you are in the process of bringing or defending an insolvency dispute and want to find out whether we can assist in helping you fulfil your obligations and secure the right deal, then contact Annecto Legal now.