Phillips v Brewin Dolphin Bell Lawrie Ltd
| Jurisdiction | UK Non-devolved |
| Judge | LORD STEYN,LORD HUTTON,LORD HOBHOUSE OF WOODBOROUGH,LORD MILLETT,LORD SCOTT OF FOSCOTE |
| Judgment Date | 18 January 2001 |
| Neutral Citation | [2001] UKHL 2 |
| Court | House of Lords |
| Date | 18 January 2001 |
(Liquidator of A.J. Bekhor & Company) and Another
And Another
[2001] UKHL 2
Lord Steyn
Lord Hutton
Lord Hobhouse of Wood -borough
Lord Millett
Lord Scott of Foscote
HOUSE OF LORDS
My Lords,
For the reasons given by Lord Scott of Foscote in his opinion I would also make the order which he proposes.
My Lords,
I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Scott of Foscote and for the reasons which he gives I would dismiss the appeal and make the order which he proposes.
My Lords,
I have had the advantage of reading in draft the speech to be delivered by my noble and learned friend Lord Scott of Foscote. I agree with the order which he is to propose and with the reasons which he will give.
My Lords,
I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Scott of Foscote.
I agree with it, and with the order he proposes.
My Lords,
Section 238 of the Insolvency Act 1986 provides a remedy where a company goes into liquidation within two years after entering into a transaction at an undervalue. Where the section applies the liquidator may apply to the court for an order (subsection (2)) and 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" (subsection. (3)).
Subsection (4)(b) elucidates the meaning of a transaction at an undervalue:
"… a company enters into a transaction with a person at an undervalue if - … 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 in the present case is A. J. Bekhor & Co ("AJB"). On 10 November 1989 AJB entered into agreements with Brewin Dolphin & Co Ltd ("Brewin Dolphin") and into agreements with Private Capital Group Ltd. ("PCG"). PCG was the parent company of Brewin Dolphin. These agreements were linked. I will describe later the nature of the link and how it arose. The purpose of the agreements was the sale of AJB's stockbroking business to Brewin Dolphin. On 17 October 1989, in order to facilitate and set the stage for the sale, AJB sold its stockbroking business and business assets to Bekhor Securities Ltd ("BSL"), a wholly owned subsidiary, for a consideration of £1. The transfer of the business to Brewin Dolphin was to be brought about by a transfer of the BSL shares. Accordingly, under one of the 10 November 1989 agreements with Brewin Dolphin, AJB transferred to Brewin Dolphin its shares in BSL. Brewin Dolphin thus acquired AJB's business. AJB received in return (i) from Brewin Dolphin, the assumption by Brewin Dolphin of AJB's obligations to its employees, including, in particular, the obligation to make redundancy payments; and (ii) from PCG, under one of the 10 November 1989 agreements between AJB and PCG, a covenant by PCG to pay AJB £312,500 per annum for four years, the first payment to be made on 10 November 1990. This agreement was expressed to be a computer equipment leasing agreement and the payments were expressed to be rent payable for the right to use the computer equipment. The total "rent" to be paid over the four years was £1.25m. It was by no means a coincidence that £1.25m was the sum that it had been agreed would be paid for the stockbroking business. The computer equipment in question was not owned by AJB but had been leased from two lessors, Wirral Equipment Ltd and Asterrose Ltd. Each of the leases required the consent of the lessor to any subletting by AJB. Consent to the subletting of the equipment by AJB to PCG had neither been sought nor given. On account of default by AJB in paying the rent due under these head leases, the head leases were terminated in early 1990 and the computer equipment was recovered by the head lessors. This took place before the date, 10 November 1990, on which the first payment of £312,500 was due to be paid to AJB under the 10 November 1989 sublease to PCG. So PCG treated the sublease as having been brought to an end by the termination of the head leases, and consequently made none of the £312,500 payments.
In the negotiations between AJB and Brewin Dolphin that had led to the 10 November 1989 agreements, the value of AJB's stockbroking business, and the sum to be paid for it, had first been agreed at £2.5m but later negotiated down to the £1.25m. There were two reasons why, under the form the transaction finally took, the £1.25m was to be paid to AJB not by Brewin Dolphin, the purchaser of the business, but by PCG as rent for the computer equipment spread over four years. One reason was that PCG hoped to be able to deduct the "rent" from its taxable profits. The other reason was that the payment of £1.25m for the goodwill of the stockbroking business would have prompted requirements by the regulatory authority for additional capital funding for that business.
AJB was, at the time of these agreements, in deep financial trouble. A winding up order was made against AJB on 25 April 1990. The petitioners were Wirral and Asterrose. On 4 May 1990 an administrative receiver was appointed by AJB's debenture holder. There is no dispute but that AJB is, and was when the winding up order was made, hopelessly insolvent.
On 24 June 1994 Mr Phillips, the liquidator and administrative receiver of AJB, and AJB in liquidation commenced proceedings against Brewin Dolphin and PCG. It was contended that the transaction under which AJB had transferred its shares in BSL to Brewin Dolphin, thereby, in effect, transferring its stockbroking business to Brewin Dolphin, was a sale at an undervalue. An order against Brewin Dolphin under section 238 was sought. As against PCG, payment of the four annual sums of £312,500 was claimed. The payment of these was said to be the means by which "part of the value of the share capital of Bekhor Securities Limited was due to be paid to [AJB]" (para 10 of the amended statement of claim).
The judgment of Evans-Lombe J.
The trial took place before Evans-Lombe J: [1998] 1 BCLC 700. An important issue at the trial was the extent to which the 10 November 1989 agreement under which the BSL shares were transferred to Brewin Dolphin and the 10 November 1989 agreement under which PCG was to make the four annual £312,500 payments should be treated as together providing the consideration for the transfer to Brewin Dolphin of the BSL shares. The judge held that the two agreements were linked "in the sense that it was never contemplated that one would not be entered into without the other". (There is an obviously unintentional double negative in this sentence). This finding of fact by the judge was not challenged in the Court of Appeal or before your Lordships. Brewin Dolphin and PCG were, said the judge, contending on the one hand that the 10 November 1989 sublease of the computer equipment was to be treated as a separate transaction, capable of being treated as at an end on the recovery of the equipment by the head lessors, but contending on the other hand that PCG's covenant in the sublease should be treated as part of the consideration for Brewin Dolphin's purchase of the BSL shares.
The judge said, at pp 723-724:
"It seems to me that it is not open to the defendants to put forward these two contentions simultaneously. If the payments made under the lease agreement were, in truth, part of the consideration for the purchase of the BSL shares under the share purchase agreement, then the lease agreement is not to be treated as a contract for the hire of goods within section 7 of the 1982 Act. Failure to ensure that PCG would be in position to enjoy possession of the leased equipment was not a breach going to the root of the share acquisition agreement nor did it constitute a repudiation of that agreement nor has the consideration for that agreement wholly failed, nor does the doctrine of eviction by title paramount have the effect of terminating that agreement."
PCG and Brewin Dolphin were, he said, trying to "blow hot and cold". He held that it was not open to Brewin Dolphin and PCG to represent the four £312,500 payments as being part of the consideration for the shares, and, thus, of the stockbroking business. PCG's intention had been to set-off the four £312,500 payments against profit for the purposes of corporation tax. This could not be done if the payments were in truth part of the purchase price of the BSL shares. The judge concluded, therefore, that the covenant to make the payments under the computer equipment sublease had to be left out of account in considering whether, in selling the BSL shares to Brewin Dolphin, AJB had entered into a transaction at an undervalue. Leaving out of account the covenant to make the four annual payments of £312,500 the judge then set about the task of considering, on the one hand, what the value was of the shares, ie. in effect what the value was of AJB's stockbroking business, and, on the other hand, what the value was of the consideration that AJB had received.
As to the value of the consideration received by AJB, the judge took account of the obligation cast on Brewin Dolphin under the share-sale agreement to meet redundancy costs. These costs, he noted, were the reason why, in the negotiations, an initial valuation of the business of £2.5m was reduced by £500,000 in early September 1989. The redundancy obligations were in the event discharged by Brewin Dolphin at a net cost,...
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