Lord v Sinai Securities Ltd & Ors

Factual and Procedural Background

The liquidator of Company A ("the Company") brought an application seeking relief against the first respondent ("Respondent") under sections 238 and alternatively 239 of the Insolvency Act 1986 ("the 1986 Act"). The claim related to an agreement dated 20th December 2000 ("the 2000 compromise") whereby the Company covenanted to pay £6 million to Respondent and granted a charge to secure that covenant. The alternative claim under section 239 alleged that the covenant and charge constituted a preference.

The Company is incorporated under the laws of the British Virgin Islands and owns 300 acres of land at a harbour in Cornwall with potential for development but no planning permission. The 2000 compromise was entered into to settle litigation initiated by Plaintiff against various defendants concerning the beneficial ownership of the Company's issued share capital. The dispute involved Plaintiff and a controlling party ("Controlling Party") who had influence over a harbour company relevant to the land.

The litigation centered around conflicting claims to the beneficial ownership of the Company’s shares and liabilities purportedly incurred by the Controlling Party on behalf of the Company. The 2000 compromise involved Plaintiff abandoning claims to the shares, leaving control with the Controlling Party, in exchange for the Company’s covenant to pay Respondent £6 million secured by a charge on the land. Other secured creditors were also involved, and the Company’s liability to some creditors was subject to a two-year non-enforcement period.

The Respondent applied to dismiss the liquidator’s application as having no real prospect of success. The court was asked to consider this application under various procedural rules, but no substantive difference arose from the form of application.

Legal Issues Presented

1. Whether the liquidator’s claim under section 238 of the 1986 Act, alleging a transaction at an undervalue, has a real prospect of success against Respondent in respect of the 2000 compromise.
2. Whether the liquidator’s alternative claim under section 239 of the 1986 Act, alleging that the covenant and charge constituted a preference, is sustainable given the timing and connectedness requirements.
3. Whether the Respondent can establish the statutory defence under section 238(5) that the transaction was entered into in good faith for the purpose of carrying on the Company’s business and that there were reasonable grounds to believe it would benefit the Company.
4. The proper interpretation of the definition of "shadow director" under section 251 in the context of the connectedness requirement for preferences under section 239.

Arguments of the Parties

Liquidator's Arguments

• The covenant to pay Respondent £6 million was a transaction at an undervalue because the Company received no or significantly less consideration in return.
• Either Plaintiff was the beneficial owner of the shares, in which case the Company owed him nothing, or Plaintiff was a creditor owed at least £1.3 million, making the transaction undervalued.
• The transaction was not necessary for carrying on the Company’s business and there were no reasonable grounds for believing it would benefit the Company, thus negating the statutory defence under section 238(5).
• Plaintiff was a "shadow director," making him connected to the Company, thereby satisfying the connectedness requirement for a preference under section 239.

Respondent's Arguments

• The liquidator’s application should be dismissed as having no real prospect of success.
• Section 238(4)(a) is inapplicable because the Company received consideration in the form of Plaintiff abandoning claims and the removal of corporate paralysis, which facilitated potential development and business opportunities.
• The covenant to pay £6 million was valueless at the time because the land’s value was significantly less than the covenant amount, supported by precedent regarding the valuation of covenants to pay money.
• Even if the transaction was at an undervalue, no order would be made under section 238(3) because it is impossible to restore Plaintiff or Respondent to their prior positions due to intervening insolvency and further liabilities.
• The transaction was entered into in good faith and for the purpose of carrying on the Company’s business, with reasonable grounds to believe it would benefit the Company, as recorded in detailed board minutes.
• Plaintiff was not a shadow director because the directors were not accustomed to act on his directions, and the statutory definition requires a consistent majority of directors to act on the person’s instructions.
• The preference claim under section 239 is unsustainable because the preference was given outside the relevant six-month period and Respondent is not connected to the Company.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by addressing the liquidator’s claim under section 238 alleging a transaction at an undervalue. The court found that the liquidator was not precluded at this interlocutory stage from establishing that the covenant to pay £6 million had substantial value, especially given evidence of a recent sale of the land at a price exceeding the covenant amount, even without planning permission.

The court noted the difficulty in valuing the consideration received by the Company, as many benefits were intangible and possibly not measurable in money or money's worth, but this did not bar the liquidator’s claim at this stage.

Regarding the statutory defence under section 238(5), the court accepted that the Company’s board approved the transaction in good faith and for the purpose of carrying on its business. However, the court found that the liquidator was entitled to argue that the transaction was not necessary or objectively reasonable to benefit the Company, given alternative possible solutions to the corporate paralysis existed.

The court rejected the Respondent’s submission that no order could be made because it was impossible to restore the parties to their prior positions. It reasoned that the court’s primary concern is restoring the Company’s position, and that full restoration of the counterparty’s position is not required.

On the preference claim under section 239, the court found that the liquidator faced significant hurdles. The preference was given outside the six-month period applicable to non-connected persons, and Respondent was not a connected person. The liquidator’s attempt to establish Plaintiff as a connected person via shadow director status was rejected on statutory interpretation and precedent grounds, as the directors were not accustomed to act on Plaintiff’s directions collectively.

Consequently, the court concluded that the liquidator’s preference claim under section 239 had no real prospect of success and should not proceed to trial.

Holding and Implications

The court allowed the liquidator’s claim under section 238 to proceed, finding that there is a real prospect of success on the claim that the 2000 compromise constituted a transaction at an undervalue. The court emphasized that the liquidator is entitled to pursue evidence and argument on whether the transaction was necessary and beneficial to the Company and whether the statutory defence applies.

The court dismissed the liquidator’s alternative claim under section 239 that the covenant and charge constituted a preference, as it was time-barred and the Respondent was not connected to the Company.

The decision does not establish new precedent but clarifies the application of sections 238 and 239 of the Insolvency Act 1986 in the context of complex corporate disputes involving undervalue transactions and preferences, particularly with regard to the interpretation of "shadow director" and the court’s discretion in making restoration orders.