Paul Stanley and Another v Tmk Finance Ltd and Another
| Jurisdiction | England & Wales |
| Judge | Mr Justice David Richards |
| Judgment Date | 21 December 2010 |
| Neutral Citation | [2010] EWHC 3349 (Ch) |
| Docket Number | Case No: 1942 of 2009 |
| Court | Chancery Division |
| Date | 21 December 2010 |
[2010] EWHC 3349 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MANCHESTER DISTRICT REGISTRY
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice David Richards
Case No: 1942 of 2009
Mr Giles Maynard-Connor (instructed by Kennedys LLP) for the Applicants
Mr David Alexander QC (instructed by Bowcock & Pursaill LLP) for the Respondents
Hearing dates: 5,6,7,8,11,12,13,14,15 October, 5 November 2010
Introduction
This is a claim by the joint liquidators of New Grass of Manchester Limited, formerly called Holdcroft Properties Limited (the company), for relief under ss.238 and 241 of the Insolvency Act 1986. The claim arises out of the sale of a freehold property in Hanley, Stoke on Trent on 11 May 2005 by the company to an associated company, TMK Finance Limited (TMK). The price was £2,279,331 which, the liquidators allege, was about £1m less than its market value at that date.
The relief claimed is against TMK an order for payment of the alleged undervalue, together with interest, and against its holding company TG Holdcroft (Holdings) Limited (Holdings) an order for payment of just over £1.55m, being the amount of a dividend paid to it out of the profits arising on a subsequent sale of the property.
Section 238, so far as relevant, provides as follows:
"(1) This section applies in the case of a company where—
(a) the company enters administration,
(b)the company goes into liquidation;
and "the office-holder" means the administrator or the liquidator, as the case may be.
(2) Where the company has at a relevant time (defined in section 240) entered into a transaction with any person at an undervalue, the office-holder may apply to the court for an order under this section.
(3) Subject as follows, the court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction.
(4) For the purposes of this section and section 241, a company enters into a transaction with a person at an undervalue if—
(a) the company makes a gift to that person or otherwise enters into a transaction with that person on terms that provide for the company to receive no consideration, or
(b) the company enters into a transaction with that person for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by the company."
The company went into creditors' voluntary liquidation on 23 February 2007 and it is accepted, as is clear, that the sale took place within the "relevant time" of two years before the date of liquidation. It has been accepted by Holdings at trial, although it did not do so in its pleaded defence, that if the sale was at a material undervalue, the court can make an order against it under s.238 (3). Such an order would fall within the very general words of s.238(3) read with s.241(2) although not, I think, within any of the specific examples in s.241(1). Holdings accepts that it will not be able to rebut the presumption imposed on it by s.241(2A).
The parties agree that the sole issue arising for decision is whether the sale was at a significant undervalue and, if so, the amount of such undervalue. The respondents, TMK and Holdings, deny that there was any undervalue in the sale price.
In order to determine this issue, I have heard evidence of fact relating to matters relied on by the applicants in support of their case of undervalue and I have also heard extensive expert evidence called by both sides relevant to the market value of the property on 11 May 2005. Whether the market value exceeded the sale price turns largely on the prospects for planning permission for alternative uses on the property and on the costs of remediation and associated ground works before the property would be fit for development. There are wide disparities on these issues and I accordingly heard evidence from experts in property valuation, planning and remediation works.
The law
For the most part, there is agreement on the legal principles governing the application of s.238. First, the burden of proving that a transaction was entered into at an undervalue lies upon the applicant: Stone & Rolls Ltd v Micro Communications Inc [2005] EWHC 1052 (Ch) at para 93, although the circumstances may be such as to impose an evidential burden on the respondents: Phillips v Brewin Dolphin [2001] WLR 143 at para 27. Secondly, the applicant does not have to establish any intention to sell at an undervalue or other subjective element, although if established it may have an impact on the appropriate remedy under s.241. Thirdly, the consideration passing between the parties is to be valued as at the date of the transaction: Phillips v Brewin at para 26. Fourthly, the value of an asset is prima facie not less than the amount that a reasonably well informed purchaser is prepared, in arms' length negotiations, to pay for it: ibid at para 30. As noted by HHJ David Cooke in Ailyan and Fry (Trustees in Bankruptcy of Kevin Foster) v Smith and others [2010] BPIR 289 at para 69:
"The Court has to assess as best it can on the evidence what [the asset's] value in money or money's worth would be to a rational and reasonably well-informed purchaser, having knowledge of the actual characteristics of what it is he is buying."
This assumes the existence of a market for the asset: Re Thoars (decd) (No 2) [2003] EWHC 1999 (Ch), [2005] IBCLC 331 at para 101 (Judge Norris QC at first instance). Fifthly, it is preferable, but not essential, that the court arrives at precise valuation figures. If that is not possible, the court can decide that the value falls within a range: Re Thoars (decd) (No 2) [2004] EWCA Civ 800, [2005] 1 BCLC 331 at paras 103 – 105 (CA).
The only disputed issue of law between the parties was the extent to which the court was entitled to take account of later events in determining value at an earlier date. Specifically, the issue was whether the court could take account of the sale of the property in October 2006 in determining its value as at May 2005.
Mr Alexander for the respondents submitted that, in general, the court should confine itself to matters capable of being known to a hypothetical purchaser at the valuation date. This is the test which applies to valuations carried out by professional valuers in accordance with the rules and guidelines of the Royal Institute of Chartered Surveyors. These are rules and guidelines carefully prepared by the professional body with the relevant expertise with a view to providing the most reliable basis for an open market valuation as at a particular date and they should therefore be applied by the court when carrying out what is in effect the same exercise.
Mr Maynard-Connor for the applicants submitted that the task of the court is to make a finding as to value based on all the evidence available to it, provided of course it is relevant and cogent. Part of that evidence may well be, as it is in this case, expert valuation evidence prepared in accordance with the RICS rules and guidelines. It is important evidence but the court is not confined by any rule of law to those rules and guidelines nor should it be as a matter of principle. Provided that a later event genuinely sheds light on open market value at an earlier date, evidence of it is relevant and admissible.
There was consideration of this issue by the House of Lords in Phillips v Brewin Dolphin Ltd [2001] 1 WLR 143, also a claim brought under s.238 of the Insolvency Act 1986. A stockbroking business had been sold in consideration, as the House of Lords held, for (i) a nominal sum of £1 and (ii) a sub-lease of the computer equipment used in the business. The sub-lease was made in breach of covenant in the leases of the equipment and, before the sub-lease was entered into, the transferee of the business had decided not to use the equipment. Two months later, and before the first payment under the sub-lease became due, the owner of the equipment terminated the head leases for non-payment of rent and re-possessed the equipment. The relevant issue was the value to be ascribed in these circumstances to the sub-leases as consideration for the transfer of the business. Because of the way the case had been decided below, this issue was not considered by the judge at first instance or the Court of Appeal.
Lord Scott of Foscote, giving the only reasoned speech, noted that, because of the breach of the covenants against sub-letting, the head leases were terminable at any time by the head lessors. What, asked Lord Scott, was "the value, in money or money's worth, of a covenant by [the sub-lessee] that was so precarious?" In addressing this question, Lord Scott considered that the actual events which took place were relevant. Within a week of the sub-lease, the head lessors complained about it and threatened proceedings, and within two months there was a default in the payment of rent under the head lease, leading quickly to its termination. Lord Scott observed that "the sub-lessee's" covenant, which had been precarious at the outset, had become worthless."
At paragraph 26, Lord Scott said:
"Mr Mitchell submitted that these ex post facto events ought not to be taken into account in valuing PCG's sublease covenant as at 10 November 1989. I do not agree. In valuing the covenant as at that date, the critical uncertainty is whether the sublease would survive for the four years necessary to enable all the four £312,500 payments to fall due, or would survive long enough to enable some of them to fall...
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