Factual and Procedural Background
Greenhaven Motors Limited ("the Company") was ordered to be wound up by the court on 17 October 1990 due to insolvency. The Appellant, the principal shareholder and a former director of the Company, was involved in subsequent litigation concerning ownership and possession of certain land plots owned by the Company at the time of liquidation. The land had been charged to various creditors including Company A and its subsidiaries.
Following a series of transactions involving the transfer of the land to Company A and its subsidiaries, Company A initiated possession proceedings against a third party. The Appellant and the liquidator of the Company were later joined as defendants to these proceedings. The Company, through its liquidator, asserted claims challenging the title acquired by Company A, alleging a collusive sale at an undervalue.
After legal advice indicated that the Company had no defence unless the relevant legal charge could be set aside on grounds of fraud (which was deemed unlikely), the liquidator independently negotiated a settlement agreement with Company A and other parties, which was conditional on court approval under section 167 of the Insolvency Act 1986.
The liquidator obtained ex parte leave to compromise the proceedings from the Registrar, but the Appellant subsequently applied inter partes to prevent approval of the settlement, which was dismissed. The possession proceedings then proceeded in accordance with the settlement, resulting in possession being granted to Company A.
The Appellant appealed the Registrar's decision, but the appeal was dismissed by the Chancery Division judge. The present appeal concerns the correctness of that dismissal and the proper approach to court sanction of compromises by liquidators under section 167.
Legal Issues Presented
- What is the correct approach for the court when considering an application by a liquidator for leave to compromise proceedings under section 167 of the Insolvency Act 1986?
- Whether the settlement agreement entered into by the liquidator and Company A should be sanctioned by the court.
- Whether the Appellant had locus standi to challenge the compromise as a contributory or creditor.
- The proper exercise of discretion regarding costs orders made against the Appellant in the underlying possession proceedings.
Arguments of the Parties
Appellant's Arguments
- The Appellant challenged the approval of the settlement agreement, arguing it conferred no benefit on the Company or its creditors and contributories and might cause harm.
- The Appellant asserted he had a substantial interest as a contributory to oppose the compromise.
- He contended that the costs order made against him personally in the possession proceedings was unjust, as he was involuntarily caught up in complex litigation not of his own making.
Respondents' Arguments
- The liquidator and Company A argued that the settlement agreement was reasonable and that the liquidator had exercised his discretion bona fide.
- They submitted that the Appellant had no substantial interest as a contributory or creditor to challenge the compromise.
- They maintained that the costs order against the Appellant was appropriate given his active role in the litigation and instigation of the claims.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Re Rica Gold Washing Co Ltd (1879) 11 Ch 36 |
No application by a contributory can be entertained unless there is a substantial prospect of distribution to him. |
The judge relied on this to assess the Appellant's locus as a contributory and found no substantial interest. |
| Leon v York-o-Matic Limited [1966] 1 WLR 1450 |
In applications under section 167(3), the court will not interfere with a liquidator's bona fide discretion unless no reasonable liquidator could have acted as he did. |
The judge applied this test erroneously to a section 167(1)(a) application, which was corrected by the Court of Appeal. |
| Bank of Credit and Commerce International SA (No 2) [1992] BCC 715 |
The court has discretion to sanction compromises and may take into account views of creditors and contributories but is not bound by them. |
The court cited this to explain the discretionary nature of sanctioning compromises under section 167(1)(a). |
| In Re Edennote Ltd (No 2) (1997) 2 BCLC 92 |
The court will generally give considerable weight to the liquidator's bona fide view that compromise is in creditors' best interests unless substantial reasons exist not to. |
The court adopted this approach as the correct test for sanctioning compromises under section 167(1)(a). |
Court's Reasoning and Analysis
The Court of Appeal held that the application before the judge was under section 167(1)(a) of the Insolvency Act 1986, requiring the liquidator to obtain court sanction for the compromise, rather than under section 167(3). The judge erred by applying the test from Leon v York-o-Matic, which is appropriate only for section 167(3) applications where the liquidator does not require court sanction.
The court explained that the power to compromise under section 167(1)(a) is subject to court control, and the court must exercise its own discretion in deciding whether to sanction the compromise. The court should consider whether the compromise serves the best interests of those with a real interest in the assets of the company in liquidation, weighing the benefits and detriments.
The court found that the settlement agreement conferred no real benefit on the Company’s creditors or contributories, as the Company had no assets other than claims which were released by the agreement. The contribution of £10,000 towards the liquidator's costs was of no benefit to creditors or contributories other than the Appellant, who had funded those costs himself. The agreement also risked causing loss to the Company due to the wide release of claims.
Given these considerations, the court concluded that the compromise should not be sanctioned, as it provided no discernible benefit and might cause harm. The court also addressed the Appellant’s locus standi, holding that while a claimant must show a bona fide claim not plainly misconceived to be heard, the Appellant had not demonstrated a substantial interest as a contributory.
Regarding costs, the court found that the order against the Appellant personally was made on a mistaken factual basis that the compromise was binding on the Company. Since the compromise was not sanctioned, the Company remained liable for costs. However, the court dismissed the appeal against the costs order, holding that the Appellant was not an innocent outsider but an active participant who had instigated the complex litigation.
Holding and Implications
The Court of Appeal ALLOWED the appeal against the approval of the settlement agreement and set aside the order of the Registrar granting leave to compromise.
The court refused to sanction the compromise agreement, concluding it conferred no benefit and risked harm to the Company and its creditors/contributories. The direct effect is that the Company is not bound by the settlement agreement and may continue to pursue its claims.
The court also granted leave to appeal the costs order made against the Appellant, but ultimately dismissed the appeal on costs, affirming that the Appellant should bear the costs personally given his active role in the litigation.
No new precedent was established beyond clarifying the correct approach to court sanction of compromises under section 167(1)(a) of the Insolvency Act 1986 and distinguishing it from applications under section 167(3).