Henderson v Foxworth Investments Ltd

Court:Supreme Court
Docket Number:No 12
Judge:Lord Reed, Lord Kerr, Lord Sumption, Lord Carnwath, Lord Toulson
Judgment Date:02 Jul 2014
Jurisdiction:Scotland
Neutral Citation:[2014] UKSC 41

[2014] UKSC 41

THE SUPREME COURT

Trinity Term

On appeal from: [2013] CSIH 13

before

Lord Kerr

Lord Sumption

Lord Reed

Lord Carnwath

Lord Toulson

Henderson
(Respondent)
and
Foxworth Investments Limited and another
(Appellants) (Scotland)

Appellant

Craig Sandison QC Usman Tariq

(Instructed by Halliday Campbell WS)

Respondent

Lord Davidson of Glen Clova QC David Thomson

(Instructed by Burness Paull & Williamsons)

Heard on 14 May 2014

Lord Reed (with whom Lord Kerr, Lord Sumption, Lord Carnwath and Lord Toulson agree)

Introduction
1

Letham Grange is a neoclassical mansion built in the 1820s, with extensive landscaped grounds. In modern times the house was converted into a hotel, and the grounds were laid out as two golf courses. The hotel became popular with golfers, and was also used by judges sitting on circuit in the nearby town of Forfar. The hotel closed in 2011, but remains known to Scottish judges as the subject-matter of a long-running legal dispute. That dispute has now made its second appearance in the United Kingdom's highest court.

2

The hotel and its golf courses ("the subjects") were bought in November 1994 by Letham Grange Development Company Ltd ("LGDC") for slightly over £2m. On 12 February 2001 LGDC sold them to the second appellant, 3052775 Nova Scotia Ltd ("NSL"), a company based in Canada. The consideration recorded in the disposition was £248,100. In December 2002 LGDC went into liquidation, and the respondent, Mr Henderson, was appointed as its liquidator. The value of the subjects at that time was estimated at about £1.8m. In January 2003 NSL granted a standard security (ie a charge) over the subjects in favour of the first appellant, Foxworth Investments Ltd ("Foxworth"), another company based in Canada. Later that year the liquidator began proceedings against NSL in the Court of Session, in which he sought the reduction (ie setting aside) of the 2001 disposition on the grounds that the sale was a gratuitous alienation, an unfair preference or a fraudulent preference. The action had a lengthy history. Ultimately, the liquidator obtained decree by default in 2009, when NSL failed to be represented at the hearing fixed for the proof (ie trial). It is not argued that that decree gives rise to any plea of res judicata in the present proceedings.

3

The liquidator then began these proceedings, in which he seeks the reduction of Foxworth's standard security. His action is brought on the basis that the disposition to NSL was a gratuitous alienation susceptible to reduction under section 242 of the Insolvency Act 1986 ("the 1986 Act"). That section, so far as material, provides that an alienation made by a company within two years of the commencement of its winding up is challengeable by the liquidator, and that on such a challenge being brought, the court shall grant decree of reduction unless, in particular, "the alienation was made for adequate consideration": section 242(4)(b). Although a proviso to section 242(4) preserves "any right or interest acquired in good faith and for value from or through the transferee in the alienation", the liquidator argues that Foxworth cannot bring itself within the scope of that proviso, since it knew, at the time when it obtained the standard security, that LGDC was in liquidation and that the sale by LGDC to NSL was open to challenge under section 242. In that regard, reliance is placed on the fact that the relevant decisions of all three companies – LGDC, NSL and Foxworth – were made by their common director, Mr Liu, who was their directing mind and had full knowledge of all the material circumstances.

4

The proceedings are defended primarily on the basis that the sale by LGDC to NSL was made for adequate consideration: in addition to the sale price of £248,100 recorded in the disposition, NSL had, it is claimed, also assumed debts of £1.85m owed by LGDC to Mr Liu and members of his family. On that basis, it is argued, Foxworth fell within the scope of the proviso to section 242(4): it had obtained the standard security in good faith and for value.

5

The Lord Ordinary, Lord Glennie, held after a nine day proof that the sale of the subjects by LGDC to NSL had been made for adequate consideration. Although the price recorded in the disposition was far below the value of the subjects, that price had not, he held, been the entire consideration for the sale: NSL had in addition assumed liability for debts of £1.85m owed by LGDC to Mr Liu and members of his family. The disposition had not therefore been susceptible to reduction under section 242. It followed that Foxworth had obtained its rights under the standard security in good faith. There was no live issue as to whether the standard security had been obtained for value. The standard security was therefore not liable to reduction: [2011] CSOH 66; 2011 SLT 1152.

6

On the liquidator's appeal against that decision, an Extra Division of the Inner House held, after a hearing which lasted six days, that the Lord Ordinary had erred in law: he had not made a finding that the assumption of any debts by NSL had occurred at the time of the sale, and had therefore formed part of the consideration for the sale. In the absence of such a finding, it was held, the Lord Ordinary had not been entitled to hold that the alienation of LGDC's property had been made for adequate consideration or, given Mr Liu's knowledge of the circumstances, that Foxworth had obtained the standard security in good faith.

7

Furthermore, the Extra Division considered that the Lord Ordinary had in any event failed to give satisfactory reasons for the factual conclusions which he had reached on the evidence before him, and that the matter was therefore at large for the appellate court. On the basis of the material which it considered, the Extra Division held that the sale by LGDC to NSL had been a gratuitous alienation, and that Foxworth had not obtained its rights under the standard security in good faith or for value. Decree was therefore granted for the reduction of the standard security: [2013] CSIH 13; 2013 SLT 445. The Extra Division did not require to deal with a cross-appeal by Foxworth and NSL against the Lord Ordinary's decision in relation to expenses ( [2011] CSOH 104).

8

Foxworth and NSL now appeal to this court against the decision of the Extra Division, and also against the Lord Ordinary's decision in relation to expenses.

An outline of the evidence
9

It may be helpful at this stage to summarise the principal aspects of the evidence.

10

In his evidence, Mr Liu explained that LGDC had been established as a special purchase vehicle for the acquisition of the subjects in 1994. He was its sole shareholder. The purchase was financed out of loans of over £2.3m made to LGDC by himself, his wife and his parents. The loans came from accounts held with Sanwa Bank in Canada. £200,000 was borrowed from the bank, the borrowing being guaranteed by another family company, Coquihalla.

11

A contemporary letter dated 4 November 1994 from Mr Gardner, a partner in MacRoberts, the solicitors acting for LGDC in connection with the purchase, confirmed that he had received a transfer of £1.9m from Sanwa Bank in Canada and a further £350,000 from Mr Liu's father. Mr Liu also produced letters sent by himself, as a director of LGDC, to his wife and his parents, setting out the amounts which each of them had lent to LGDC and the terms as to repayment. A similar letter to Coquihalla was also produced. The letters purport to have been signed by Mr Liu and the recipients on various dates in December 1994. A fax dated 2 December 1994, containing the same details as to the loans, was also produced, which Mr Liu said had been sent to Mr Gardner after he had requested such details.

12

The borrowing from Sanwa was due to be repaid in October 2000. By then it amounted to £248,100 inclusive of interest. In his evidence, Mr Liu said that LGDC was at that time in dispute with its former accountants, and did not have accountants who could properly record an injection of funding into the company. In those circumstances he decided that the easiest way to repay Sanwa would be for LGDC to sell the subjects to another vehicle company for the amount required. The new vehicle company was NSL.

13

In relation to this evidence, the Lord Ordinary observed that Mr Liu did not explain in detail, perhaps because he was never asked, why the sum could not have been advanced to LGDC as a loan. The absence of accountants did not appear to him to be a credible explanation, given the lack of formality surrounding the initial family loans to LGDC. The Lord Ordinary commented that the reason for the transaction remained a mystery.

14

According to Mr Liu, he was told by Mr Gardner that the proposed price was not enough, since it did not reflect the value of the subjects. Mr Liu responded that, if the cash price was not enough, he would have NSL assume the liability to repay part of the sums lent by himself and his family to LGDC. After Mr Gardner confirmed in writing that £248,100 was not enough, Mr Liu agreed with his wife and parents that NSL would assume LGDC's liability to the extent of £1.85m. He did not tell Mr Gardner that the assumption of liability had occurred. Mr Liu gave unchallenged evidence that, following the sale to NSL, the sums due to Sanwa in respect of the Coquihalla loan were repaid.

15

Mr Liu accepted in cross-examination that he and his wife and parents made claims in February 2003 in the liquidation of LGDC, in respect of the loans described in the letters dated December 1994, which were excessive if, as he claimed, liability for £1.85m of the debts had been assumed by NSL. He stated that a mistake had been made by Brodies, the solicitors acting on his behalf. He had not corrected the mistake when he signed his claim form. The claims were subsequently...

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