England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(Sir John Vinelott)

		Royal Courts of Justice Strand, London WC2
		21st May 1996

LORD JUSTICE NOURSE:

Introduction

By an order of the Companies Court made on 14th November 1994 by Sir John Vinelott, sitting as a judge of the Chancery Division, an assignment made on 28th July 1994 by the liquidator of Edennote Ltd. was set aside, the liquidator was removed from office and new joint liquidators were appointed in his place. With the leave of this court, the assignee under the assignment appeals both against its setting aside and the removal of the liquidator. Although he opposed the application in the court below, the liquidator does not himself appeal. The judge's order has been stayed pending the determination of the appeal.

The proceedings before Sir John Vinelott are reported at [1995] 2 BCLC 248. We are indebted to him for the amplitude and clarity of his judgment. A full account of the background to the dispute, the various proceedings between the parties to it and the material events up to the Secretary of State's appointment of Mr S. B. Ryman as the liquidator of Edennote appears between pp. 250F and 253G. It need not be repeated. I adopt the definitions used by the judge. Between pp. 253G and 254H he referred to the terms of the disputed assignment in favour of Mr Venables, recorded a concession made on behalf of the applicants that the application should proceed on the footing that the assignment was or included an assignment of Edennote's cause of action against Tottenham Ltd. in the Queen's Bench action and, after referring to authority, held that the cause of action could be validly assigned after the action had been commenced. He said the question he had to decide was whether the assignment should be set aside as an improper exercise of the liquidator's power of sale. It is important to emphasise at the outset that, although it was not suggested that Mr Venables had acted improperly - indeed in his unreported judgment on costs the judge observed that he could not say that there was anything approaching impropriety of conduct on his part - no formal defence was raised that, in taking the assignment, Mr Venables had been a bona fide purchaser for value without notice.

Setting aside - the statutory provisions

The statutory provisions material to the setting aside of the assignment are contained in sections 167 and 168 of the Insolvency Act 1986, which appear in chapter VII under the heading "Liquidators" and the subheading "Liquidator's powers and duties". Section 167, to which the marginal note is "Winding up by the court", provides, by subsection (1)(b), that where a company is being wound up by the court the liquidator may, with or without the sanction of the court or the liquidation committee, exercise any of the general powers specified in part III of schedule 4 to the Act, which, in paragraph 6, include a power to sell any of the company's property by public auction or private contract. Section 167(3) provides:

"The exercise by the liquidator in a winding up by the court of the powers conferred by this section is subject to the control of the court, and any creditor or contributory may apply to the court with respect to any exercise or proposed exercise of any of those powers."

Section 168, to which the marginal note is "Supplementary powers (England and Wales)", provides, by subsection (1), that it applies in the case of a company which is being wound up by the court in England and Wales. Subsection (3) provides that the liquidator may apply to the court for directions in relation to any particular matter arising in the winding up and subsection (4) that, subject to the provisions of the Act, the liquidator shall use his own discretion in the management of the assets and their distribution among the creditors. Subsection (5) provides:

"If any person is aggrieved by an act or decision of the liquidator, that person may apply to the court; and the court may confirm, reverse or modify the act or decision complained of, and make such order in the case as it thinks just."

In order to understand the application of those provisions to the present case, the following facts must be highlighted. At all material times Edennote was being wound up by the court in England and Wales. The assignment to Mr Venables, being a sale to him of one of Edennote's assets, could be made by Mr Ryman, as indeed it was made, without the sanction of the court or the liquidation committee. Mr Venables was both an unsecured creditor and a contributory of Edennote. The applicants (Tottenham plc, Amshold Limited and Mr Sugar) were unsecured creditors of Edennote. They were also persons who claimed that, if they had been approached by Mr Ryman before the assignment was made, they might well have made a more valuable offer than Mr Venables.

Sir John Vinelott was of the opinion that the application to set the assignment aside could be brought either under section 167(3) or under section 168(5). Mr Rayner James QC, for Mr Venables, submitted that the judge was wrong on both counts. He said that section 167(3) enabled creditors and contributories to seek the directions of the court as to the conduct of the liquidation but not to impugn transactions already entered into between the liquidator and third parties. That, he said, was the function of section 168(5), although that did not avail the applicants because they were not "persons aggrieved" within that provision.

Quite apart from the improbability, not to say the absurdity, of the applicants being unable to apply to the court in circumstances such as these, the construction of sections 167(3) and 168(5) urged upon us by Mr Rayner James is contrary to their plain wording. Section 167(3) provides, first, that the exercise of the liquidator's powers is subject to the "control" of the court and, secondly, that any creditor or contributory may apply to the court with respect not only to any "proposed exercise" but also to any "exercise" of any of those powers. It is therefore plain that the court can control a past exercise of the powers and can, if appropriate, undo a transaction to which it has led. In any event, the notion that creditors and contributories should be able to seek the directions of the court in an uncontroversial way is a curious one. That would be the function of the liquidator, who, where the company is being would up in England and Wales, has an express power to do so under section 168(3).

As for section 168, it is to be noted that, unlike section 167, it is expressed to apply only to companies being wound up in England and Wales, whereas section 167 applies to companies being wound up in Scotland as well. Moreover, the marginal note to section 168 describes the powers thereby conferred as being supplementary. Undoubtedly there is some overlap between sections 167(3) and 168(5), but the application of one but not the other to Scotland seems to preclude that as a reason for cutting down the effect of either provision. In any event, however narrowly the expression "any person aggrieved" is construed it cannot exclude the applicants in this case.

It is neither necessary nor desirable to attempt a classification of those who may be persons aggrieved by an act or decision of a liquidator in a compulsory winding up. On the footing that the claims of secured creditors have been or will be satisfied, it is perfectly clear that unless and until there proves to be a surplus available for contributories (a most improbable event) "persons aggrieved" must include the company's unsecured creditors. If the liquidator disposes of an asset of the company at an undervalue, their interests are prejudiced and each of them can claim to be a person aggrieved by his act. Such was the position of the applicants here. Mr Rayner James submitted that they brought the application not as creditors but as persons who had not been given an opportunity to make an offer for the asset. In the latter capacity alone, like any other outsider to the liquidation, they would not have had the locus standi to apply under section 168(5). But even if that were wrong, they would still have been able to apply in a dual capacity.

Mr Heslop QC, for the applicants, referred us to section 20 of the Bankruptcy Act 1869 which, by its third paragraph, provided:

"The bankrupt, or any creditor, debtor, or other person aggrieved by any act of the trustee may apply to the Court, and the Court may confirm, reverse, or modify the act complained of, and make such order in the premises as it thinks just."

He said, no doubt correctly, that that was the progenitor of section 168(5), so that "any person aggrieved" can be seen to be mere shorthand for "any creditor, debtor or other person aggrieved. " That appears to be self-evident, although I should record that the legislative development, in particular the importation of the expression into companies winding up, was not fully traced. It did not have to be. Even without the legislative history the meaning now is perfectly plain.

For these reasons I am in no doubt that the applicants had the locus standi to make their application and that the judge had jurisdiction to hear and determine it.
 


Setting aside - the correct test

Next, Mr Rayner James submitted that, in deciding to set the assignment aside, Sir John Vinelott applied the wrong test. The judge reviewed the relevant authorities at [1995] 2 BCLC, pp. 256E to 257H. They are Re Peters, ex p Lloyd (1882) 47 LT 64; Re a debtor, ex p the debtor v. Dodwell (trustee) [1949] Ch. 236; Leon v. York-o-Matic Ltd. [1966] 1 WLR 1450 and Harold M. Pitman & Co. v. Top Business Systems (Nottingham) Ltd. (1985) 1 BCC 99, 345. Mr Rayner James accepts and asserts that those authorities propound the correct test, namely (fraud and bad faith apart) that the court will only interfere with the act of a liquidator if he has done something so utterly unreasonable and absurd that no reasonable man would have done it. His complaint is that the judge then proceeded to apply an unwarranted gloss which had the effect of lowering the test. The judge said, at p. 257H:

"I must not be taken as in any way differing from these authoritative statements of the law if I add that in the light of the modern development of the law of judicial review an exercise by a liquidator of powers conferred on him by statute must be judged by reference to what is commonly referred to as the Wednesbury test (see Associated Provincial Picture Houses Ltd. v. Wednesbury Corp. [1948] 1 KB 223), that is that an exercise of a statutory power or discretion may be called in question, not only if it can be shown that the exercise of the power is utterly unreasonable - that it went beyond what any reasonable person properly instructed could have considered proper - but also if it is shown that the person exercising the power, though acting in good faith, took into account considerations which he ought not to have taken into account or failed to take into account considerations which he ought to have taken into account."

I sympathise with Mr Rayner James's submissions to the extent that it is unnecessary, rather it may be confusing, to introduce into the court's control of the acts and decisions of liquidators the language of its control of administrative action. In the latter case the court is usually concerned with the supervision of public servants performing statutory functions; in the former with the supervision of persons who must, in most of what they do, act as prudent businessmen. In general there seems to be something unrealistic in judging the propriety of the acts and decisions of a businessman by asking whether he took into account something he ought not to have taken into account or failed to take into account something he ought to have taken into account.

That said, it is certainly possible for a liquidator to do something so utterly unreasonable and absurd that no reasonable man would have done it, simply by selling an asset of the company without taking into account the possibility that a third party might well have made a better offer than he to whom it was sold. That was what Sir John Vinelott found that Mr Ryman had done in this case and that, no doubt, was why he expressed himself as he did. It does not mean that he applied the wrong test. I am satisfied that he did not.

Setting aside - the facts

Mr Rayner James further submitted that, even if the judge applied the right test, he wrongly applied it to the facts of the case. At [1995] 2 BCLC, pp. 258B-263B the judge made a detailed examination of the events between the appointment of Mr Ryman as liquidator on 15th June 1994 and August of that year, after the execution of the assignment on 28th July. Again, they need not be repeated. Having referred to the submissions made on behalf of Mr Venables and Mr Ryman, the judge stated the essential reasons for his decision of this question at p. 264F-G:

"I have after careful consideration come to the conclusion that I cannot accept these submissions. I accept that it is only in very exceptional circumstances that the court will interfere with the exercise by a liquidator of his discretion to sell the assets of an insolvent company. However, in my judgment it should have been obvious to Mr Ryman as soon as he was approached by Mr Venables that the possibility of a sale of Edennote's right of action to Mr Venables put into his, Mr Venables', hands a very powerful weapon which he could use in negotiations for the settlement of both claims. In everyday language, the claim in the hands of Mr Venables, whose personal claim against Tottenham plc was confronted with the contention that he had fully mitigated his loss, had a very considerable nuisance value. In the event Tottenham plc was prepared to pay or to cause Tottenham Ltd. to pay £75, 000 to avoid that risk. At the very least Mr Ryman should have enquired from Herbert Smith whether they were willing to enter into negotiations and, if they proved protracted, to have asked them either to adjourn the application for security or not to apply for judgment in default of compliance while the negotiations were pursued. Whatever may have been Mr Ryman's motives for not doing so, he in fact failed to consider one of the two possible ways of realising the company's claim in an advantageous way."

After considering and rejecting other points made by or on behalf of Mr Venables and Mr Ryman, the judge stated his view, at p. 266A, that the assignment could not stand.

The judge's reasoning can be summarised by saying that he thought that it ought to have been obvious to Mr Ryman that if Mr Venables acquired Edennote's cause of action in the Queen's Bench action, it would give him a very considerable nuisance value in the settlement of the action as a whole, so that Mr Ryman ought to have enquired from the applicants' solicitors whether they were prepared to make a better offer than Mr Venables. In other words, it ought to have been obvious to Mr Ryman that he should make that approach. By assigning the cause of action to Mr Venables without first doing so, he did something so utterly unreasonable and absurd that no reasonable man would have done it.

Mr Rayner James submitted that the judge's finding as to what ought to have been obvious to Mr Ryman was unjustified, principally on the ground that the applicants had never given an inkling of their willingness to settle the Queen's Bench action and, moreover, were clearly relying on their anticipated order for security for costs against Edennote as a means of killing it off altogether. He also questioned how the possibility of an approach to them ought to have been obvious to Mr Ryman when it did not in fact occur to him and his solicitors and counsel, nor to Mr Venables and his solicitors, nor to the Official Receiver when his sanction to the assignment was sought. While Mr Rayner James accepted that Mr Ryman's action must be judged objectively, he said, correctly, that the question was how a reasonable liquidator would have acted in the circumstances prevailing at the time, a question the court must answer eschewing the wisdom of hindsight.

I have felt the force of Mr Rayner James's submissions on this question. But they overlook an important point. A reasonable liquidator must be taken to be one who is properly advised. If support be needed for that proposition, it can be found in Re Hans Place Ltd. [1993] BCLC 768, 778I, where Mr John McDonnell QC is recorded as having submitted that the court can only reverse a decision of a liquidator under section 168(5) where it is satisfied that it was taken in some way mala fide or "was so perverse as to demonstrate that no liquidator properly advised could have taken it." Although Evans- Lombe J's acceptance of Mr McDonnell's submissions at p. 779A was a general one and not specifically directed to the need for proper advice, it nevertheless confirms the view that a reasonable liquidator must be taken to be one who has such advice where he needs it. Very often a liquidator will not need advice before he acts. Here he clearly did. If Mr Ryman had been properly advised, he would have been told that the applicants, once apprised of the possibility of an assignment to Mr Venables, would see that their application for security was likely to avail them nothing and, as the judge observed, that Mr Venables would acquire a very considerable nuisance value in the settlement of the action as a whole. Thus it would have become obvious to a liquidator in Mr Ryman's position, properly advised, that an approach should be made to the applicants.

For these reasons I have come to the conclusion that the judge correctly applied the correct test to the facts of the case. I would therefore affirm his decision to set the assignment aside.

The removal of Mr Ryman as liquidator

I turn to Mr Ryman's removal from office. Section 172 of the Act provides, by subsection (1), that the section applies with respect to the removal from office of the liquidator of a company which is being wound up by the court. So far as material, subsections (2), (3) and (4) provide:

"(2) Subject as follows, the liquidator may be removed from office only by an order of the court or by a general meeting of the company's creditors summoned specially for that purpose in accordance with the rules...

(3) Where -

(a)....

(b)the liquidator... was appointed by the Secretary of State,

a general meeting of the company's creditors shall be summoned for the purpose of replacing him only if he thinks fit, or the court so directs, or the meeting is requested, in accordance with the rules, by not less than one-quarter, in value, of the creditors.

(4)If appointed by the Secretary of State, the liquidator may be removed from office by a direction of the Secretary of State."

Having explained how the application to remove Mr Ryman had come to be made to the court and not to the Secretary of State, the judge, at [1995] 2 BCLC, pp. 266D to 268A referred to the decision of Lord Justice Millett, then a judge of the High Court, in Re Kevpak Homecare Ltd. [1987] BCLC 409.

Between pp. 268C and 269E, the judge considered three criticisms that had been made of Mr Ryman's conduct. Having expressed the view that they would not by themselves justify his removal, he said, at p. 269E-F:

"However, I have come to the conclusion after some hesitation that the right course is to remove Mr Ryman. I reach this conclusion primarily on the ground that the first task that will confront the liquidator will be to consider whether to accept the offer of £75, 000 now made in settlement of the claim against Tottenham Ltd., whether to invite Mr Venables to make a further offer of an increased share of the proceeds of the liquidation, and, if he does, how to evaluate the likely prospects of recovery in proceedings which are bound to be costly and protracted and the expense of which is unlikely to be fully reflected in any order for costs. I do not think that the applicants or the other creditors can fairly be asked to accept the decision of Mr Ryman now that it has been shown that he was willing to enter into an assignment to Mr Venables without giving any consideration to the possibility of negotiating a satisfactory compromise with Tottenham plc and Tottenham Ltd. and in proceeding with the assignment (by his attorney Mr O'Reilly) after objection had been made by Mr Watts. That, I think, is sufficient in itself. "

After adding two subsidiary grounds for Mr Ryman's removal, the judge said, at p. 270C:

"As I am removing Mr Ryman as liquidator I think I should stress that no attack has been made on his integrity and good faith. It would be wrong to conclude on the evidence that I have seen that his intention to assign the benefit of the claim to Mr Venables was deliberately concealed from the applicants. But in my judgment fairness to the other creditors, in particular the applicants, requires that the disposal of the claim against Tottenham Ltd., whether by assignment or compromise, be confided to a new liquidator who can bring a fresh mind to bear on this question."

Re Kevpak Homecare Ltd. was a decision under section 108(2) of the 1986 Act, which provides that the court may "on cause shown" remove a liquidator in a voluntary winding up. Although those words do not appear in section 172(2), I agree with Sir John Vinelott that the difference in the language of the two provisions is immaterial for the purposes of this case. Indeed, it is not easy to think of any circumstances in which the court would remove a liquidator without cause being shown. In Kevpak Lord Justice Millett, having referred to three earlier authorities, the last of which was the decision of this court in Re Adam Eyton Ltd. (1887) 36 Ch D 299, said at p.416E:

"There were special circumstances in that case, but I do not read the general principle laid down by the Court of Appeal as being limited to cases in which special circumstances can be shown. On the contrary, the words of the statute are very wide and it would be dangerous and wrong for a court to seek to limit or define the kind of cause which is required. Circumstances vary widely, and it may be appropriate to remove a liquidator even though nothing can be said against him, either personally or in his conduct of the particular litigation."

I respectfully agree. In that case an order was made for the removal of the liquidator but the facts were very different.

Although he was a professional, independent and experienced liquidator, against whom nothing could be said so far as his personal integrity was concerned and there was no evidence of any misconduct or wrongdoing, the judge was not impressed by his performance in the conduct of the liquidation. He took the view that he was unlikely to pursue the directors with anything like sufficient vigour in respect of their having improperly removed the company's stock and traded with it on their own account before the liquidation.

At [1995] 2 BCLC 268B, Sir John Vinelott said that the decision in Keypak was founded on and usefully illustrated the general principle that a liquidator must act in the interests of the general body of creditors and should not continue in office if in the circumstances the creditors no longer had confidence in his ability to realise the assets of the company to their best advantage and to pursue claims with due diligence. Again, I respectfully agree. But there is an important qualification, which is indeed accepted by Mr Heslop. The creditors' loss of confidence must be reasonable. Moreover, the court does not lightly remove its own officer and will, amongst other considerations, pay a due regard to the impact of a removal on his professional standing and reputation.

In addition to the three criticisms referred to by the judge, Mr Heslop maintained that Mr Ryman had shown an inclination to favour the interests of Mr Venables (he relied particularly on Mr Ryman's solicitors' letter of 3rd August 1994 referred to by the judge at p. 262A); that Edennote required independent investigation; and that the liquidation was not being efficiently administered. Mr Heslop summarised the applicants' case by saying that through a combination of errors and misfortunes the position had been arrived at where they had reasonably lost confidence in Mr Ryman.

In my view no adequate grounds for a reasonable loss of confidence have been shown. I agree with the judge that the three criticisms considered by him would not justify Mr Ryman's removal. Nor do Mr Heslop's additional criticisms tip the balance. Nor is there enough in the primary and subsidiary grounds relied on by the judge. As to the primary ground, the steps which Mr Ryman will now have to take in order to do what he did not do before making the assignment to Mr Venables are neither complicated nor likely in themselves to give rise to fresh controversy. It is simply a question of getting the best deal for Edennote. I do not understand why Mr Ryman should be thought to be incapacitated from taking those steps.

The judge did not think that the applicants or the other creditors could fairly be asked to accept the decision of Mr Ryman once it had been shown that he was willing to enter into an assignment to Mr Venables, without giving any consideration to the possibility of negotiating a satisfactory compromise of the Queen's Bench action, and in proceeding with the assignment after objection had been made on behalf of the applicants. If I have a single criticism of the judge's judgment it is that he there apparently implied that Mr Ryman had known that he ought to make an approach to the applicants. But that was manifestly not the case. He was acting under advice. True, he made a serious mistake. But it was honest. His integrity and good faith were accepted. His entry into the assignment was not willing in the sense apparently implied by the judge.

A final matter must be mentioned. The joint liquidators appointed in Mr Ryman's place were described in Mr Venables' notice of appeal as "nominees" of the applicants. If by that it was simply meant that the applicants had proposed their names for an appointment by the judge which Mr Venables did not oppose, no objection could be taken. But it might have meant something more. Understandably enough, the appointees' solicitors have written to the court expressing their extreme concern at the description. In so far as it implies any actual or potential lack of impartiality on their part, it is clear that it is wholly unjustified.

In my judgment the judge erred in removing Mr Ryman from office. I would discharge that part of his order and allow the appeal to that extent.

LORD JUSTICE MILLETT:

I agree.

Order: judge's order setting aside the assignment affirmed but appeal allowed to the extent of discharging his order removing the liquidator; judge's order for costs below to stand; the applicants to have two-thirds of their costs of the appeal.