Keystone Law has advised leading high street retailer L’Occitane en Provence (“L’Occitane”) in a novel application made by liquidators of construction company Castletech Retail Limited (“Castletech”) in a dispute over an alleged sum the liquidators claimed was owed by L’Occitane to Castletech.

In 2017, Castletech was instructed to fit out one of L’Occitane’s London based stores. During the works, a dispute arose regarding what sums were due to and from each party. However, this remained unresolved when Castletech appointed liquidators in May 2018. Following the liquidators’ appointment, L’Occitane submitted a proof of debt as a creditor for approximately £678,000 and the parties both instructed their own quantity surveyors to review the respective claims to see if a resolution could be found.

When an agreement could not be made, the liquidators conducted an exercise described as “An Account pursuant to Rule 14.25 of the Rules”. In this “Account”, the liquidators purported to reject L’Occitane’s proof of debt in part (without expressly stating that they were doing so) and determined instead that an undisputable balance of approximately £310,000 was owed by L’Occitane to Castletech, because L’Occitane had not appealed their “Account” within 21 days.

Shortly afterwards, the liquidators sought to recover the debt they alleged was owed by making an application under Section 234 Insolvency Act 1986 (“IA86”) rather than issuing a Part 7 claim. Section 234 IA86, however, is a summary remedy normally used to enable an officeholder to get in property belonging to a company in the possession and control of a third party.

L’Occitane denied it owed any money to Castletech or had any property of the company in its possession or control.

Last June, the liquidators’ application was dismissed by Insolvency and Companies Court  Judge Burton as being “misconceived” on the basis that they had conflated the process of adjudicating a proof of debt under Rule 14.7 Insolvency (England & Wales) Rules 2016 (“IR16”) and the rules of set off under Rule 14.25 IR16 “to purport to create a form of indisputable property which in my judgment simply does not exist”. Judge Burton also found that the liquidators had not rejected L’Occitane’s proof of debt as they had failed to expressly state that they were doing so.

However, the Liquidators were granted permission to appeal to the High Court and this was heard by Mr Justice Meade on 31 January 2024. In his judgment delivered on 7 February 2024, the Judge dismissed the liquidators’ appeal on the grounds that:

  • Set off does not create “property” in the form of money held by a third party that was recoverable under section 234 IA86. Instead, the officeholder has a cause of action in its possession that it can bring to recover the net balance.
  • Although an officeholder has the power to adjudicate on creditors’ claims, that power did not extend to determining a company’s own claim, which must be resolved either by agreement or via the appropriate dispute resolution process. Set off cannot apply until that has occurred.
  • There had been no rejection of L’Occitane’s proof of debt.
  • Section 234 IA86 was not a process that can be used for resolving complicated disputes, but a summary remedy to get into property belonging to an insolvent company held by a third party.

Keystone Law’s restructuring & insolvency partner Stephen Young advised L’Occitane, who instructed Christopher Brockman of Enterprise Chambers.

Stephen Young said:

“This case is a stark reminder for insolvency officeholders that the process of adjudicating on a proof of debt under Rule 14.7 IR16 and set off that insolvency set off under Rule 14.25 IR16 should not be confused or conflated.

“Set off is a self-executing process that applies only after the final quantification of the respective party’s claims. Furthermore, the case confirms that section 234 IA86 cannot be used by officeholder as a debt recovery tool or for complicated disputes.”

Smithson & Beckingham (as liquidators of Castletech Retail Limited) v L’Occitane Limited [2024] EWHC 474 (Ch) and [2024] 2 WLUK 54.

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