Summary

On an application made under s.167(1)(a) Insolvency Act 1986 it is inappropriate for the court to embark on a detailed examination of the question whether a person wishing to be heard is a creditor or contributory. It is enough that the court should be satisfied that the claim is made bona fide and that it is not plainly misconceived. If the claimant satisfies that test he should be heard, although it is a matter for the court what weight should be given to his wishes.

Facts

Appeal of the appellant from the order of Harman J made on 13 December 1996 in the Companies Court whereby he dismissed an appeal from the order of Mr Registrar Buckley made on 22 November 1996 who had sanctioned a compromise agreement under s.167 Insolvency Act 1986. The second respondent ('GML') was ordered to be wound up on 17 October 1990. The appellant was the principal shareholder in, and director of, GML at the date of the liquidation. The sixth respondent was the liquidator of GML. Until 1991 GML was the registered proprietor of four plots of land, one of which was known as the Elcon land. Between 26 June 1991 and 2 July 1991 the first respondent ('BGFL') or one of its subsidiaries, GBC Properties Ltd ('GBC'), acquired all the property on a sale by the mortgagee. On 10 January 1992 the plots held by GBC were transferred to BGFL. On 2 February 1994 BGFL commenced proceedings in the Croydon County Court against Jay Gee Car Sales Ltd for possession of the Elcon land ('the Croydon proceedings'). On 23 March 1994 the appellant was joined as a defendant in those proceedings on his own application and on 22 March 1996 GML was joined as defendant on the application of its liquidator, the sixth respondent. In the Croydon proceedings GML asserted in its defence and counterclaim that GBC had, with the knowledge of BGFL, acquired the Elcon land pursuant to a collusive sale at an undervalue. BGFL amended its particulars of claim to rely on its own title as mortgagee under a legal charge of 15 September 1989 made between GML and BGFL. The appellant and the liquidator were advised by counsel that unless the charge of 15 September 1989 could be set aside there was no defence to BGFL's claim for possession in the Croydon proceedings. The liquidator took steps, independent of the appellant to settle the Croydon proceedings. On 1 November 1996 BGFL, GML and the liquidator entered into a settlement agreement with the third, fourth and fifth respondents expressed to be in full and final settlement of all issues between the parties arising out of the Croydon proceedings. The liquidator then applied ex parte to the Registrar of the Companies Court for leave to compromise the Croydon proceedings, the order sought being made by Mr Registrar Buckley on 19 November 1996. On learning of the settlement agreement the appellant applied to the Registrar inter partes for an order that the agreement should not be approved. The inter partes application was heard on 22 November 1996 and was dismissed. When the Croydon proceedings came on for trial an order for possession was made in accordance with the settlement agreement. The appellant's appeal against the decision of the Registrar of 22 November 1996 was dismissed by Harman J on 13 December 1996. The judge treated the inter partes hearing before the Registrar as having been made pursuant to s.167(3) of the Act and in reaching his conclusion directed himself in accordance with the decisions in Re Rica Gold Washing Co (1879) 11 Ch.D 36 and Leon v York-o-Matic Ltd (1966) 1 WLR 1450. Based on the test in Re Rica Gold Washing Co (supra) the judge held that he was not satisfied that the appellant had shown any substantial interest as a contributory in the assets of GML. The appellant appealed.

Held

(1) It was trite law that the Court of Appeal would not interfere with a discretion exercised by a judge unless satisfied that the judge had erred in principle. The question was whether the judge had been correct in applying the test in Leon v York-o-Matic (supra). (2) The settlement agreement included a compromise with a person (BGFL) having a claim against the company. It included a compromise or release of the company's claims against the first, third, fourth and fifth respondents. The power which the liquidator wished to exercise fell within paras.2 and 3 in Part I of Sch.4, and s.167(1)(a) of the Act. It followed that the liquidator could not enter into the settlement agreement without obtaining the sanction of the court. (3) Accordingly, this was not a case within s.167(3) of the Act. It was not for a creditor or contributory to apply to the court for an order to restrain the liquidator from exercising some power which he was otherwise free to exercise. It was for the liquidator himself to obtain sanction to what he was proposing to do. (4) For that purpose it was necessary for the liquidator to make an application under part 7 of the Insolvency Rules 1986 and that was an application on which any person claiming to be a creditor or a contributory was entitled to attend (see r.7.53(1)). (5) In deciding whether or not to sanction the exercise of a power under s.167(1)(a) of the Act the court could have regard to the wishes of the creditors or contributories (see s.195(1)(a)). Accordingly a creditor or contributory was entitled to be heard on an application by a liquidator under s.167(1)(a) but those proceedings were not suitable for determining whether or not a person claiming to be a creditor was indeed a creditor. If the court was satisfied that the claim was made bona fide and was not plainly misconceived the claimant should be heard. (6) The correct approach to cases under s.167(1)(a) was that identified by Lightman J in Re Edennote (No.2) (1997) 2 BCLC 89 at 92 G-H. (7) Having approached the case on the basis that the application had been made pursuant to s.167(3) of the Act the judge had erred in principle and in so doing had directed himself in accordance with the wrong test. (8) In exercising its own discretion the Court of Appeal compared the position if GML were permitted to enter into the proposed settlement and the position if it were not so permitted. (9) Any benefits to GML were illusory because GML had no assets other than its claims which were themselves to be released by the settlement agreement. By contrast there was no detriment to GML if it were not permitted to enter into the agreement. (10) The court would not sanction a compromise which provided no discernible benefits but which just might do some harm to creditors and contributories.

Appeal allowed.