Phillips and Another v. Brewin Dolphin Bell Lawrie and Another

Factual and Procedural Background

Company A, a stock-broking firm in serious financial difficulty, decided in late 1989 to sell its business. On 10 November 1989 it executed two linked agreements:

• A share-sale agreement transferring all shares in its wholly-owned subsidiary, Company F, to Company B.
• A computer-equipment sub-lease under which Company C covenanted to pay Company A four annual “rent” instalments of £312,500 (totalling £1.25 million), a sum identical to the negotiated purchase price for the stock-broking business.

The leasing structure was adopted to obtain tax benefits for Company C and to avoid regulatory capital requirements for Company B. The computer equipment, however, was subject to head-leases with Company D and Company E, each prohibiting sub-letting. When Company A defaulted on rental payments, the head-leases were terminated and the equipment repossessed in early 1990, before any “rent” fell due.

Company A was compulsorily wound up on 25 April 1990 and a receiver was appointed on 4 May 1990. On 24 June 1994 the Plaintiff (Company A’s liquidator) and Company A issued proceedings. Relying on section 238 of the Insolvency Act 1986, they alleged that the share-sale was a transaction at an undervalue and sought an order against Company B; they also sued Company C for the four instalments.

Judge Evans-Lombe held that the transaction was at an undervalue and ordered Company B to pay £725,000 plus interest, rejecting the claim against Company C. The Court of Appeal dismissed appeals by Company B and Company C (and a cross-appeal by the Plaintiff), albeit on reasoning differing from the trial judge. Company B and Company C appealed to the House of Lords.

Legal Issues Presented

1. Whether the covenant by Company C to pay four annual sums of £312,500 under the sub-lease formed part of the “consideration” for Company A’s sale of Company F’s shares to Company B for the purposes of section 238(4)(b) of the Insolvency Act 1986.
2. How to value (a) the consideration received by Company A and (b) the business transferred, in determining if the sale occurred at an undervalue.
3. Whether relief under section 238 should be adjusted to reflect a £312,500 loan made by Company C to Company A on 9 November 1989.

Arguments of the Parties

Appellants' Arguments (Company B and Company C)

• The covenant to pay £1.25 million “rent” constituted part of the consideration for the share-sale and should therefore be credited when assessing value.
• Even if the covenant were ignored, Company A’s business was worthless because it was insolvent and trading at a substantial daily loss; hence no undervalue arose.
• Ex post events (termination of the head-leases and non-payment) were said to be irrelevant when valuing the covenant as at 10 November 1989.

Respondents' Arguments (Plaintiff)

• The true consideration must exclude the covenant, because the sub-lease was structurally independent, precarious and never produced any payments.
• Market evidence—namely what Company B had been prepared to pay—supported a valuation of approximately £1.05 million for the business.
• The covenant’s precarious nature rendered its actual value nil; thus the transaction occurred at a significant undervalue.

Table of Precedents Cited

Court's Reasoning and Analysis

Judge Scott (with whom the other Law Lords agreed) held:

1. Identification of consideration. Section 238(4)(b) focuses on the consideration for which the company entered into the transaction; it does not prescribe who must provide that consideration. On the facts, the only potentially relevant external consideration beyond Company B’s redundancy-cost assumption was Company C’s covenant.
2. Value of Company C’s covenant. Although facially worth £1.25 million, the covenant was “precarious” from the outset: the sub-lease breached absolute non-subletting clauses, giving Company D and Company E an immediate right to repossess the equipment and thereby terminate Company C’s payment obligation. Repossession and insolvency events occurred within months, confirming the risk. In this statutory context the court preferred “reality over speculation” and valued the covenant at nil.
3. Value of the business transferred. Accepting factual findings of Judge Evans-Lombe, endorsed by Judge Morritt, the House assessed the market value of the shares/business at £1.05 million—reflecting the arm’s-length price Company B was initially willing to pay.
4. Consideration actually received. Company B’s net assumption of redundancy liabilities (valued at £325,000) was the only real consideration. Accordingly, the undervalue was £1.05 million – £325,000 = £725,000.
5. The £312,500 loan. The loan advanced by Company C immediately before completion was, in substance, part of the purchase price; the House exercised its discretionary power under section 238(3) to credit that sum (with interest) against the amount payable by Company B.

Holding and Implications

Appeal DISMISSED subject to variation of the monetary order. The House of Lords confirmed that the share-sale was a transaction at an undervalue but reduced the recovery ordered against Company B by £312,500 (plus corresponding interest) to reflect the prior loan.

Implications: The decision clarifies that, under section 238, courts will analyse the substance of consideration and may look at subsequent events when valuing precarious obligations. Parties relying on complex, multi-party structures bear the burden of proving actual value. The ruling reinforces judicial readiness to discount nominal consideration that has no realisable worth, while also demonstrating the flexible remedial discretion available to “restore the position” equitably.