The insolvency arm of accounting firm Smith & Williamson is facing a damages claim of up to £18m over an "invalid" receivership.
Smith & Williamson, which has the UK's sixth-largest insolvency practice, was appointed as the receiver for a small utilities contractor, OBG, in 1992. The company had experienced cashflow problems after a dispute with its major customer, NorthWest Water, over a £30m contract.
One of OBG's sub-contractors, Raymond International, an international engineering and construction firm, had applied for the company to be put into receivership.
The company went into liquidation shortly afterwards. But in 1995, the liquidator, Begbies Traynor, took two of Smith & Williamson's insolvency practitioners to court on behalf of the creditors, claiming that the company should not have been put into receivership. It said that the company had come close to resolving its dispute, but that Smith & Williamson had not given the company enough time.
"Smith & Williamson accepted the receivership without knowing the [company's] situation at all," said Ron Robinson, a partner at Begbies Traynor, an insolvency specialist. "OBG's chairman had presented an opportunity to resolve the problem with NorthWest Water, but the receivers stopped that happening. Within a week, they had closed the company down."
Judge Maddocks found in favour of OBG in 2001, and awarded interim damages of £750,000. The judge's ruling said that the appointment of receivers was "invalid and of no effect".
However, the judge is still hearing arguments for the level of damages to be awarded to OBG's creditors. Begbies argues that the company could have continued as a going concern, and is therefore suing for the amount the creditors have lost - the total claim adds up to £18m.
It is understood that Smith & Williamson argues that the company was troubled, and that creditors would not ultimately have seen a return, so they are not due damages. However, S&W declined to comment on the case.
Both sides will put in submissions to Judge Maddocks in Manchester High Court during September and October, and they hope to have a final judgment by the end of the year.
Michael Stevenson and Iain Allan were named as defendants in the case, although it is believed they will be indemnified by S&W's insurers.
Mr Stevenson has now left the firm, but it declined to give out further information on his whereabouts. Separately, the industry regulator, the Institute of Chartered Accountants of England & Wales, is investigating the circumstances surrounding the collapse of Hareb Group, in which Mr Stevenson acted as liquidator.
Mr Allan is a director of the corporate recovery practice at Smith & Williamson. He joined the company in 1992, the year of OBG's collapse.
For the year to the end of March 1991, the last accounts available for OBG, the company had a turnover of £12.5m and profits of £355,000.