Summary

A liquidator's application for relief on the grounds that a covenant by the company to make a substantial payment to compromise litigation arising out of a dispute over ownership of the company was a transaction at an undervalue was not dismissed at an interlocutory stage as there were real prospects of success.

Facts

The first defendant (S) applied to have a liquidator's (L) application under Insolvency Act 1986 s.238 and s.239 dismissed as having no real prospect of success. L was the liquidator of a company (R) which owned land at Hayle Harbour in Cornwall that had development potential but no planning permission. A dispute arose between the second defendant (X) and the fourth defendant (C) about who was the beneficial owner of the issued share capital of R. Litigation arising from that dispute was compromised by an agreement that X would abandon his claims in return for a covenant from R to pay to S, which appeared to have received an assignment of X's claims, £6 million secured by a charge on the land at Hayle Harbour. L's claim under s.238 of the 1986 Act was based on the proposition that R either received no consideration for its agreement to pay S £6 million, relying on s.238(4)(a), or alternatively that the consideration received by R had a value that was significantly less than that provided by R within s.238(4)(b). Alternatively L sought relief under s.239 on the ground that the covenant and its associated charge constituted a preference. S submitted that (1) L's application was bound to fail at this stage of the argument and that reliance on s.238(4)(a) could not be in point since on any view R received some consideration for its covenant and that there was no real prospect of L discharging the onus under s.238(4)(b) because R's agreement to pay £6 million was valueless at the time it was made as the only evidence before the court of the value of the land was that it was worth £750,000 and R had creditors in excess of that sum; (2) even if the court were satisfied that there had been a transaction at an undervalue, there was no real prospect that the court would make any order under s.238(3) against S as a result because of the impossibility of putting X or S back into the position in which they would have been in but for the transaction; (3) that the requirements of s.238(5)(a) and (b) were satisfied and the court would not therefore make any order in respect of the transaction at an undervalue.

Held

(1) The court agreed that s.238(4)(b) could have no role to play in this case. Section 238(4)(b) required a comparison to be made between (a) the consideration provided by R and (b) the consideration which was given for it, the onus being on L to show that (b) was significantly less than (a). As an argument for dismissing L's application at an interlocutory stage, the proposition that R's covenant was not bankable did not work. It was open to L to establish by evidence that the covenant to pay £6 million did have a substantial value. (2) The court would not necessarily be deterred from making an order by the fact that X could not be put back into the position he was in immediately prior to the compromise. (3) The difficulty that S faced under s.238(5) was that the principle advantage to R from the transaction lay in its being freed from the corporate paralysis from which it suffered because of the dispute between X and C, and that R was prepared to pay a price which exceeded the value to it of what it was to receive on that basis. Prima facie that could only be established if there was no other means of removing that paralysis. It was not immediately apparent that such means did not exist. The liquidator should not be shut out at this stage from pursuing his case against S under s.238. (4) L's case under s.239 depended on L showing that the preference was given to a "connected person". L accepted that the only basis on which X could be alleged to have been "connected with" R was as a shadow director of R and on the face of the words of s.249(a) it was not enough to constitute X a shadow director on the basis that one of the board members was his nominee. It would have to be shown that all the directors, or at least a consistent majority of them, had been accustomed to act on X's directions. It was a hopeless argument for L to argue that the whole board had been accustomed to act for X. L's application under s.239 was doomed to fail and ought not to proceed to trial.

Application granted in part.