UK: Liquidators powers to settle proceedings

Last Updated: 5 November 1998
Liquidators powers to settle proceedings

A decision of the Court of Appeal in the recent case of Re Greenhaven Motors Limited; Mayers -v- BG Funding Limited and Others, dated 31 July 1998, has helped to clarify the Courts approach when a liquidator applies for leave to compromise proceedings under section 167 of the Insolvency Act 1986.

A liquidator for Greenhaven Motors Limited ("Greenhaven") had been appointed in 1995 and the case related to a number of plots of land that had once been owned by the company, and which had all been subject to charges. The plots of land were sold by the mortgagees and they were all ultimately acquired by BG Funding Limited ("BGFL"). In 1994, BGFL commenced proceedings for possession of one of the plots and Mr Ronald Mayers, a shareholder and director of Greenhaven, and Greenhaven itself were joined to those proceedings. Greenhaven asserted a claim to one of the plots on the basis that the mortgagee sale to BGFL was a collusive sale at an under value.

During the course of the proceedings, the liquidator became aware that he might be exposed to a personal liability for costs and he therefore took steps to try and settle the proceedings between Greenhaven and BGFL. Eventually, BGFL, Greenhaven and the liquidator entered into a settlement agreement and the liquidator obtained leave from the registrar to compromise the proceedings. An order for possession of the land was then made against Greenhaven. Mr Mayers appealed against the registrar's order but it was held that the settlement was one a reasonable liquidator could have made under section 167(3) of the Insolvency Act 1986 and the appeal was dismissed. Mr Mayers decided to appeal that decision.

The Court of Appeal decided that the power which the liquidator had wanted to exercise actually fell within section 167(1)(a) of the Insolvency Act 1986 and that the liquidator could not enter into the settlement agreement without obtaining the sanction of the Court (there being no liquidation committee). The Court of Appeal decided that this was not a case within section 167(3) of the Insolvency Act 1986.

The Court of Appeal further held that when asked to sanction the exercise of a power under section 167(1)(a), the Courts should have regard to the wishes of creditors and contributors. If a creditor or contributor wanted to comment on the settlement and these comments were made bona fide and were not misconceived, the claimant should be heard. It was then a matter for the Court to decide whether or not to sanction the compromise. The Court should attach considerable weight to the liquidator's views but, in this case, the Court had applied the wrong test in holding that the liquidator's wish to exercise the power should prevail unless he was not acting bona fide or was acting as no reasonable liquidator would act. The Court should consider whether the interest of those with a real interest in the assets of the company would be best served by entering into the compromise.

On considering the terms of this specific compromise, the Court of Appeal decided that it appeared to confer no discernible benefit on any creditor or contributory of Greenhaven (other than Mr Mayers, who opposed the settlement).

It was noted that the settlement might have conferred some benefit on the liquidator personally but this was not a reason to sanction the compromise. In addition, the Court of Appeal held that there was a risk that the very wide terms of the release might also cause loss to Greenhaven. The Court of Appeal therefore allowed the appeal and refused to sanction the compromise.

Comments

This case provides some useful guidelines as to how the Court will deal with an application under section 167(1)(a) and it helps clarify the distinction between an application under that sub-section as compared to an application under sub-section 167(3). Under section 167(1)(a), the Court should take the views of a creditor and/or contributor into account when considering the terms of a compromise. The Court should not be bound by these views but it should also not simply agree with a liquidator. The fact that a liquidator might benefit is not a good enough reason to sanction a compromise. In comparison, under section 167(3), it would be up to a creditor or contributor to apply to the Court for an order to restrain a liquidator from exercising some power that he was otherwise free to exercise.

In these circumstances, the Court will only intervene with a decision of a liquidator if it is shown that the transaction is unsuitable, ie if the liquidator did not exercise a discretion bona fide or acted in a way in which no reasonable liquidator would have acted.

This article was first published in Marcfarlanes' Banking and Insolvency Practice Notes of November 1998.

Macfarlanes' Banking and Insolvency Practice Notes are intended to provide general information about some recent and anticipated developments which may be of interest. They are not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.

If you would like further information or specific advice please contact Tony Evans at Macfarlanes' London office.

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