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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Carillion Construction Ltd v Hussain & Anor (Liquidators of Simon Carves Ltd) & Anor (Rev 1) [2013] EWHC 685 (Ch) (27 March 2013)
URL: http://www.bailii.org/ew/cases/EWHC/Ch/2013/685.html
Cite as: [2013] EWHC 685 (Ch)
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CHANCERY DIVISION
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Strand, London, WC2A 2LL |
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B e f o r e :
____________________
| IN THE MATTER OF SIMON CARVES LIMITED (company number 04169897) AND IN THE MATTER OF THE INSOLVENCY ACT 1986 CARILLION CONSTRUCTION LTD |
Applicant |
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| - and - |
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| (1) ZELF HUSSAIN and ROBERT JONATHAN HUNT (the joint liquidators of Simon Carves Ltd) (2) SIMON CARVES LTD (in liquidation) |
Respondents |
____________________
Stephen Davies QC (instructed by Chadbourne & Parke (London) LLP) for the Respondents
Hearing date: 15 March 2013
____________________
Crown Copyright ©
- This application which is dated 15 October 2012 is by Carillion Construction Ltd ("CCL") for leave under section 424(1)(a) to make an application for relief under section 423 of the Insolvency Act 1986 ("the 1986 Act") against Simon Carves Ltd ("SCL") (now in liquidation) and its ultimate parent company Punj Lloyd Ltd ("PLL").
- PLL, which is a company incorporated and registered in India, is and was at all material times the ultimate parent company of SCL. I mention, because CCL attaches importance to this, that at all material times two of the directors of SCL, a Mr Punj and Mr Chhabra, were respectively chairman and executive director of PLL.
- CCL is the subcontractor under two engineering contracts with SCL. They relate to the design and installation of a bio-ethanol processing plant in Wilton, Teeside. The two contracts were entered into between SCL and CCL on 3 March 2009 and 17 April 2009 respectively. Under those contracts CCL undertook to carry out electrical, control and instrumentation installation works and also mechanical and piping installation works at the plant. The value of the contracts was in the region of £37 million. CCL duly carried out works under the contracts and submitted invoices for payment to SCL. From about October 2009 onwards SCL failed however to pay the amounts which CCL claimed. This led CCL to commence arbitration proceedings. On 17 June 2011 the arbitrator made an award on a number of preliminary issues. On the basis of that award CCL has quantified its claim against SCL in a sum exceeding £12 million.
- Less than a month later, on 7 July 2011, Zelf Hussain, Robert Hunt and David Kelly of PricewaterhouseCooper LLP ("PwC") were appointed joint administrators of SCL. The following day, 8 July 2011, SCL's business and assets were sold to Simon Carves Engineering Ltd ("SCEL") which is a company within the PLL Group and was incorporated for the purpose of the acquisition. The sale was a pre-pack transaction and had been negotiated with the benefit of the involvement and advice of the persons who were appointed SCL's joint administrators.
- The purpose of the proceedings which CCL seeks the court's leave under section 424(1)(a) to bring is to compel PLL to honour what CCL contends is a series of binding obligations which PLL had entered into by way of three separate "letters of support" respectively dated 12 May 2008, 14 May 2009 and 31 March 2010. It was on the basis (or partly on the basis) of those letters that SCL had continued to trade after March 2008 until 7 July 2011(when the administration order was made) notwithstanding that it had posted significant losses over that period. I come later to the letters and the circumstances in which they were provided.
- Because SCL had entered administration, CCL needed and therefore sought the consent of the joint administrators. The joint administrators have declined to give that leave. Hence the present application.
- There is also before the court an application under section 112 of the 1986 Act for the appointment of an additional joint liquidator to investigate and, if thought fit, pursue, subject to the control of the court and subject to funding, claims against PLL under the letters of support. The section 112 application is before the court only for directions. Whether that application will be pursued depends on the court's decision on CCL's application under section 424(1)(a).
- On 19 December 2012, which was after the application under section 424(1)(a) had been issued, SCL went into creditors' voluntary liquidation and Mr Hussain and Mr Hunt, two of the three joint administrators, were appointed joint liquidators for the purposes of the winding up.
- The relevant background to the issues which arise for decision is the following.
- SCL became part of the Punj Lloyd Group in 2006 when PLL purchased 88% of the capital of SCL's then parent company.
- In SCL's financial year ended 31 March 2008 the directors reported a loss before tax of £0.9 million. In their report, accompanying SCL's financial statements for the year, the directors of SCL stated that PLL had provided to them a letter of financial and business support "to ensure that the company continues as a going concern" and that the accounts had been prepared on a going concern basis.
- The letter in question was dated 12 May 2008 and was addressed to "The Board of Directors, Simon Carves Limited". It is headed "Letter of Support". It provided as follows:
- During its financial year to 31 March 2009 SCL recorded a loss before tax of £110.7 million. Its balance sheet, as at 31 March 2009, disclosed an excess of liabilities over assets of just over £107 million. In their report for that year the directors stated:
- The "open letter of continuing financial support" referred to in the above statement was dated 14 May 2009 and was again addressed to "The Board of Directors, Simon Carves Limited…". It was headed "Letter of Support - Financial Year ended 31st March 2009" and stated:
- During its financial year to 31 March 2010 SCL recorded a loss before tax of £96.6 million with the result that its balance sheet disclosed an excess of liabilities over assets in the sum of £203.5 million. In their report accompanying SCL's financial statements the directors stated that:
- The further letter of financial support referred to in that notice was dated 31 March 2010 and was again addressed to "The Board of Directors, Simon Carves Limited". Headed "Letter of Support" it stated that:
- On 7 July 2011 PLL notified the Bombay Stock Exchange that it was withdrawing financial support to SCL. It attributed this to prevailing market conditions and SCL's financial condition. It stated that following such withdrawal of support, SCL was likely to be placed in administration in accordance with the laws of England and Wales and that, subject to those laws and "applicable law" in India, an Indian subsidiary of PLL was likely to enter into an asset purchase agreement with SCL though its UK subsidiary, SCEL, for the transfer of certain of SCL's assets, contracts and employees.
- And this is precisely what happened. It was carried out by means of the so-called "pre-pack" on 8 July 2011. As I have mentioned, the previous day SCL had gone into administration.
- On 12 July, four days after the sale, the joint administrators reported to SCL's creditors (including CCL) on the sale. They did so in accordance with the requirements of SIPs 13 and 16. They reported that PwC had been introduced to SCL and PLL in December 2010. In evidence was a letter dated 15 December 2010 addressed to SCL and PLL in which PwC set out the terms on which they were being engaged. It described the purpose of their engagement as:
- Geographic priority of some competitors to the Company which may have led to attempts to poach the Company's key employees. This would have led to significant loss of value for the business;
- Some potential buyers on the list were identified as being involved in ongoing contractual disputes (either representing customers or suppliers or as a party in the dispute) with the Company and any approach would be prejudicial to these disputes; and
- A few were also eliminated in discussions with management where they were currently in the process of tendering against them on contacts and knowledge of the sale could reduce Simon Carves' ability to win those contacts and therefore diminish the Company's value.
- The report then set out the options open to SCL in the event, which happened, that PLL should withdraw its financial support. It stated that:
- The report went on to explain that, having funded SCL's trading losses and with inter-company unsecured loans totalling approximately £240 million by 2010, PLL was unwilling to continue to support SCL's trading operations and that in addition SCL was forecasting further losses from some existing contracts. It stated that the loans owed to the PL Group made up approximately 80% of the "creditor population" and that, as a consequence, PLL was consulted throughout the sale process. It set out the assets sold and a breakdown of the £1 million consideration received for them.
- The directors' statement of affairs, signed on 25 July 2011, disclosed an overall indebtedness of £292 million. Of that figure £47 million was attributable to trade creditors, included in which was PLL in the sum of £6.84 million. It would appear that SCL's largest single creditor was its Pension Fund in the sum of £33.8 million. I was told that the liquidation is likely to result in a payment of no more than 4p in the £ for unsecured creditors.
- Section 423 of the 1986 Act provides, so far as material, as follows:
- Section 436(1) defines "transaction" as including "a gift, agreement or arrangement" and it was common ground before me that the expression is to be given a wide meaning. Thus, in Feakins v DEFRA [2005] EWCA Civ 1513; [2006] BPIR 896 at [76], the Court of Appeal stated that an "arrangement" was "apt to include an agreement or understanding between the parties, whether formal or informal, oral or in writing".
- Section 423 contains the following features. (1) There must be a transaction and that transaction must be bilateral in nature. In section 423(1), defining the transactions to which the section applies, the reference is to "a person [who] enters into …a transaction with another person" (emphasis added). (2) The transaction must involve a transfer of value out of the insolvent estate. (3) The transaction must be entered into by the debtor for one or other of the purposes - "the statutory purpose" - set out in section 423(3). In establishing the existence of the statutory purpose it is not sufficient to show simply that there has been a transfer of value out of the estate. The actual purpose of the debtor in entering into the transaction has to be investigated: see Royscot Spa Leasing Ltd v Lovett [1995] BCC 502 at 587H (Court of Appeal). Moreover, for something to be a purpose within the meaning of the section that something must be a substantial (and not merely a trivial) purpose. See Commissioners of Inland Revenue v Hashmi & anr [2002] EWCA Civ 981 at [25] (per Arden LJ). Or, as it was put by Laws LJ in that case (at [33]) "… the claimant [must] show that the donor, vendor or settlor was substantially motivated by one or other of the aims set out in section 423(3)(a) and (b) in entering into the transaction in question." (4) If the application under section 423 succeeds, the court's order has a twofold object: "restoring the position to what it would have been if the transaction had not been entered into" and "protecting the interests of persons who are victims of the transaction". Section 425 sets out what an order made under section 423 may provide (subject to the limits set out in section 425(2)) but is expressed to be "without prejudice to the generality of section 423…". By restoring the position to what it would have been if there had been no transaction the relief which the court grants is for the benefit of the creditors as a whole. This is mirrored in section 424(2) to which I next come.
- Section 424, under which this application for leave is made, provides, so far as material, as follows:
- What are the circumstances in which the court will give leave to a victim of the transaction to bring proceedings under section 423 in cases where the debtor, being an individual, has been adjudged bankrupt or, being a body corporate, is being wound up or is in administration? In Menzies v National Bank of Kuwait SAK [1994] BCC 119 at 125H Sir Christopher Slade looked to see whether the applicant had a realistic prospect of establishing his case. He had earlier (at 122C to D) said that:
- The first task is to identify the transaction which is alleged to have been entered into. This is set out in paragraph 31 of CCL's draft particulars of claim.
- Fundamental to the allegation is that the Assurances of Support, as the letters of support are described, gave rise to obligations binding in law on PLL and that PLL did not fulfil those obligations. Mr Millett QC, who with Mr Peter Cranfield appeared for CCL, accepted that if he failed to show a real prospect of establishing those matters, his application must fail and, as a consequence, there would be no point in pursuing the separate application under section 112.
- Whether or not the letters of support gave rise to obligations enforceable in law is a question of construction. It involves understanding what the letters mean and establishing whether the parties to them intended that they should give rise to obligations binding in law. Intention is to be ascertained objectively having regard to the terms of the letters and the surrounding circumstances.
- Mr Millett referred me to Rose and Frank Co v J R Crompton and Bros [1923] KB 261 at 282; Kleinwort Benson Ltd v Mining Corporation Berhad [1989] 1 WLR 379; Re Atlantic Computers plc [1995] BCC 696 at 697-8; and Barbudev v Eurocom Cable Management Bulgaria [2012] 2 All ER (Comm) 963 at [30] in connection with the test to be applied in deciding whether an agreement is intended to have legal consequences and be legally enforceable. I do not need to quote from those cases. The principles are well established. Interestingly, Kleinwort Ltd v Malaysia Mining involved a so-called "comfort letter". The Court of Appeal in that case found it to have had no contractual effect. Inevitably, however, each case must turn on its own particular facts.
- As to the terms of the letter Mr Millett submitted that, properly construed, they obliged PLL to put SCL in sufficient funds to enable it to make payment of all of SCL's liabilities falling due for payment at any time during the period covered by the letter in question. To this, he added a rider made necessary, he said, in order to give the letters business efficacy. This was to the effect that the letters excluded from the liabilities so covered any liability due to PLL itself. Furthermore, he submitted, although addressed to "The Board of Directors" each letter was to be construed as addressed to them as agents for SCL so that PLL's promise of financial support was to be understood as a promise to SCL. SCL, he submitted, gave consideration for the promise of support by continuing as a going concern and incurring liabilities to third parties in the process.
- Coming to context and other circumstances, he submitted that the letters were supplied in a commercial or business context and could only have been safely relied upon by SCL to enable it to continue as a going concern if both SCL and PLL intended them to give rise to enforceable obligations on PLL's part. He submitted that anything less would have rendered the letters little more than worthless scraps of paper. In this connection he drew my attention to an opinion (set out in CCL's evidence) of Richard Knights, an audit partner with Deloitte LLP. In that opinion Mr Knights expressed the view that SCL's auditors would not have signed off SCL's financial statements on a going concern basis unless they had satisfied themselves that the letters were of a legally binding nature. That opinion, said Mr Millett, was credible and, thus far at any rate, unchallenged in the joint liquidators' evidence. It constituted part of the background to which the court should have regard when concluding what the parties' intentions were in agreeing the letters. He referred to references in the directors' reports accompanying the financial statements to having had independent legal assessments of the ongoing trading status of SCL and to SCL's external legal adviser having concluded that SCL remained a going concern. He pointed out that the advice in question had not been disclosed and speculated that it was to the like effect as Mr Knights'. Given that background, he submitted, it was more likely than not that SCL and PLL both intended the letters to give rise to enforceable obligations.
- In my view, the fact that the letters were addressed to "The Board of Directors" and not simply to SCL (see also the reference in each letter to PLL's awareness "of the financial position of your company") was deliberate and the fact that they were provided in the course of the preparation of SCL's year end financial statements is significant. The obvious purpose of each letter was to enable the directors, acting as directors, and also SCL's auditors, to consider whether it was appropriate for the financial statements for that year to be prepared on a going concern basis. This was primarily a matter for the directors, acting as such, to decide upon. They were obliged to make a reasonable assessment, taking all relevant facts and circumstances into account, of the prospects of SCL continuing as a going concern for the following 12 months. The letters themselves state that PLL's support was "to ensure that [SCL] continues as a going concern".
- It is to be noted that the letters do not even purport to be a contract with SCL. What is more, there is no indication in the letters of what the consideration was (if any) passing from SCL (or, for that matter, from the Board of Directors) in return for PLL's financial support. There is, for example, no condition that SCL should continue to trade or be subject to other obligations. The fact that SCL, as opposed to the Directors, may have relied upon the letters to continue trading does not constitute valuable consideration sufficient to support a contract.
- Next, it is, in my view, extravagant to read the letters as committing PLL, immediately upon signature, to ensure that SCL should on demand be provided with funds to meet all of its liabilities then due for payment or falling due for payment before the expiry of the following 12 months. A glance, for example, at SCL's balance sheet as at 31 March 2010 shows that at that date its current liabilities (meaning debts due within one year) amounted to £271.5 million. It is scarcely likely that, by the letter of support dated 31 March 2010, PLL was undertaking to SCL in a contractually binding way to ensure the discharge of so huge an amount (effectively restoring SCL to balance sheet solvency) and, as if that were not enough, committing itself to discharge any others liabilities which SCL should incur and which might fall due for payment during the ensuing 12 months. It is improbable that PLL would have undertaken so extensive and open-ended an obligation in so summary a manner: three sentences in a letter. That improbability is not lessened by Mr Millett's attempt to read into the three letters an exclusion of any liability due by SCL to PLL.
- In my view, the letters of support did not subject PLL to any enforceable obligation and CCL demonstrates no realistic prospect of establishing that they did. Instead, the letters were intended to do no more than provide the directors of SCL, and not SCL itself, with evidence from which they could properly conclude, as they evidently did, that it was proper for SCL's accounts to be prepared on an ongoing concern basis, and no more.
- That conclusion is enough to determine this application. But in case I am wrong and the letters of support did give rise to obligations enforceable against PLL at the instance of SCL I consider next whether CCL demonstrates a real prospect of establishing the existence of a transaction which falls within the scope of section 423(1) and, if that hurdle is crossed, whether it demonstrates a real prospect of establishing that the transaction was entered into by SCL for the statutory purpose.
- I have set out paragraph 31 of the draft particulars of claim which identifies the transaction relied upon.
- There is, to my mind, a non sequitur in the reasoning relied upon in this pleading which is said by the pleader to lead to the inference that there existed an arrangement or understanding between SCL and PLL and which by paragraph 32 is said to constitute a transaction caught by section 423. The pleading infers that because SCL's assets were sold to SCEL for only £1 million SCL and PLL got together to agree that the letters of support would not be enforced. The pleading assumes that SCL and PLL believed that the letters of support were binding and that, holding that belief, they (through their common directors) agreed on some unspecified occasion that, by one means or another, PLL would not be looked to for payment of what was due under them.
- That this is how the two companies viewed the letters of support is not supported by anything in the evidence. On the contrary, the evidence of Mr Chhabra, a director of both SCL and PLL, is that neither he nor any of his fellow directors ever considered that the letters were binding on PLL. Of course, if they did not, it is exceedingly unlikely, to put it no higher, that they then proceeded to make the arrangement which is alleged. What evidence there is - it is set out in the witness statement of Mr Hussain, one of the joint liquidators, and follows what was said in the notification to creditors sent on 12 July 2011 - is to the effect that PwC was closely involved in the attempts to sell SCL's assets and that, having failed to interest any third party, the decision was made, late in the day, to sell the assets to a specially established company - SCEL - in the PL Group. If therefore there was the arrangement set out in paragraph 31 of the draft particulars of claim it is difficult to escape the conclusion that PwC, presumably through one or more of the joint administrators, was privy to it. This, I am bound to say, seems exceedingly unlikely. It would amount to PwC being party to an arrangement contrary to the interests of the creditors of the company in respect of which three of its members had been appointed administrators and, instead, lending assistance to a course of action intended to benefit the commercial interests of the ultimate parent company. It would also mean that Mr Hussain's confirmation (in his witness statement on this application) that "PwC, the Client and all legal advisers during the time of our involvement were operating on the basis that the [letters of support] gave no legal right in [SCL] to oblige PLL to provide further loans or other financial support" was falsely given.
- Those considerations aside, and I am conscious that on an application of this kind it is not for the court to decide issues of fact, the plain fact of the matter is that the existence of the transaction relied upon - the deal between SCL and PLL to release PLL from all liability under the letters - is, as the pleading of it makes clear, based entirely on speculation. It is unsupported by anything in the evidence I have seen. I am wholly unpersuaded therefore that CCL has any prospect, let alone any real prospect, of establishing its case that any such transaction was entered into.
- If CCL fails to show any prospect of establishing the existence of the transaction it must equally fail to show that it has any prospect of establishing the existence of the statutory purpose. This necessary element is as speculative in point of fact as is the existence of the transaction and no less improbable as a matter of realistic likelihood.
- It follows that I see no basis on which it would be proper for me to give to CCL the leave it seeks. The application under section 424(1)(a) will be dismissed.
Sir William Blackburne :
Introduction
The relevant background facts
"This has reference to your request that we provide you with financial support. We are aware of the financial position of your Company, its state of affairs and the results of its operations.
Accordingly, by this letter we, Punj Lloyd Limited, confirm that we shall provide the necessary financial and business support to Simon Carves Limited to ensure that the Company continues as a going concern."
"The Directors have constantly reviewed the going concern status of the Company throughout the year. In particular as a minimum, the Directors have undertaken going concern reviews at each of the quarterly Board meetings in the year. The Directors have also had the benefit of three independent legal assessments on the ongoing trading status of the Company by its panel law firms. Upon each of these independent reviews, the Company's external legal advisers have concluded that the Company remains a going concern and that the Directors may continue to trade the Company as such. The going concern status has been principally confirmed on the basis of the open letter of continuing financial support provided by the Company's ultimate parent company, Punj Lloyd Limited. At the date of this Report, the Directors had no reason to consider that this support will be withdrawn from the Company by the ultimate parent company.
The company has notified its principle [sic] bankers, ICICI Bank UK PLC, that it has during the year breached its banking covenants in respect of a facility agreement originally dated 12 September 2008 for the provision of an overdraft and short-term loan facility. This notification was issued to ICICI Bank pursuant to the terms of the facility agreement. The Company's ultimate parent company has provided guarantees in support of these facilities. ICICI Bank UK PLC has not responded to this notification at the accounts date.
The ultimate parent company Punj Lloyd Limited has agreed to provide sufficient funds to the company for these purposes; it and other group companies has [sic] advanced to the company funding …[the details are set out] On this basis, the Directors consider it appropriate to prepare the financial statements on the going concern basis."
The financial statements were approved on 15 May 2009.
"This has reference to your request that we provide you with financial support.
We are aware of the financial position of your company, its state of affairs and the results of its operations, and we hereby agree to provide sufficient funds to the company for these purposes, to enable it to continue operating and to meet its liabilities as and when they fall due for the period until 31st May 2010, to ensure that the Company continues as going concern.
We are aware that a financial covenant has been breached with respect to the "Secured Overdraft and Loan Facility Agreement" dated 12th Sept 2008 between Simon Carves Limited and ICICI Bank UK plc. We confirm that Punj Lloyd Limited is a guarantor to the agreement and will provide the necessary financial support to meet the financial obligations under the agreement.
We undertake to inform you immediately in the event that circumstances change in a manner such that it would or might no longer be open to us to continue to provide such financial support."
"The Directors have constantly reviewed the going concern status of the Company throughout the year. In particular as a minimum, the Directors have undertaken going concern reviews at each of the quarterly Board meetings in the year. The Directors have also had the benefit of an independent legal assessment of the ongoing trading status of the Company by one of its panel law firms. As part of this independent review, the Company's external legal adviser has concluded that the Company remains a going concern and that the Directors may continue to trade the Company as such. The going concern status has been principally confirmed on the basis of the open letter of support provided by the Company's ultimate parent company, Punj Lloyd Limited. At the date of this Report, the Directors have no reason to consider that this support will be withdrawn from the Company by the ultimate parent company. The parent Company has issued a further letter of financial support in conjunction with the audit of the financial statement for year ending 31 March 2010 undertaken by the Company's auditors."
"This has reference to your request that we provide you with financial support. We are aware of the financial position of your Company, its state of affairs and the results of its operations.
Accordingly, by this letter we, Punj Lloyd Limited, confirm that we shall provide the necessary financial and business support to Simon Carves Limited for a period of not less than 12 months from the date of approval of accounts, to ensure that the Company continues as a going concern."
The accounts were approved on 17 May 2010.
"To provide an assessment of the main available options to [SCL] and its ultimate parent company [PLL] taking into consideration the Company's financial position. This includes the suitability of a sale of the Company's business and assets though an Administrator and the application of this process."
The report disclosed that the decision was made to find a purchaser either for SCL's shares or, more probably, for its business and assets and that work began in March 2011 to find such a buyer. The report set out in some detail the steps taken:
"PwC initially identified a long list of 30 potential buyers for the business across various countries based on its industry knowledge, experience and recent input from the global network.
The Company's management and employees were quickly identified as key to the value in the business. Their specialist design and engineering skills for LDPE plants and knowledge of the worldwide installed base as well as their understanding of existing contacts meant that their retention was crucial to project delivery.
The list of potential buyers was subsequently reduced to a short list of 10 following discussions with the Company's management team and shareholders. The reduction was for the following commercial reasons:-
A sales teaser was circulated to the short list of potential buyers. This was followed by the provision of an information memorandum to those parties who had signed non-disclosure agreements (four parties).
An initial deadline for indicative offers was set at 31 May 2011 but no offers were forthcoming. Following discussions with interested parties and the Company's shareholders, this deadline was extended to 3 June 2011 to allow all prospective purchasers additional time to consider the information memorandum farther.
Following the deadline extension nine of the 10 potential buyers confirmed that they would not be making an indicative offer. One potential buyer declared an interest but was unable to provide an indicative offer by 3 June 2011. In light of this, the deadline for indicative offers was extended for a second time to 9 June 2011.
After the second deadline extension passed on 9 June with no indicative offers having been received, PwC revisited the AMA process and contacted the initial 10 parties plus five newly identified potential buyers from the initial long list, including PLE. Prospective purchasers were notified that the Client required completion by 30 June due to the Company's worsening cash position. Whilst this information disclosed the distress the Company was in and was therefore likely to be used by potential buyers to submit reduced offers, it was considered that finding a buyer for the business on a going concern basis was the only viable option to generate any value for stakeholders. The alternative would have been a break-up sale in a liquidation which would have resulted in the Company ceasing to trade, the loss of jobs and substantial claims from customers for breach of contract.
A final deadline for the submission of indicative offers was set at 5 pm on 15 June 2011. Two offers were received for the Company's business and assets from a Third Party Bidder and PLE. The Third Party Bidder offered a wide range of prices based on various conditions. The Third Party Bidder's proposed timeline for completion extended beyond the final date specified by the Company's shareholders to conclude the transaction. The Third Party Bidder was offered more time to finalise its offer to eliminate as much uncertainty as possible and confirm it could meet the shorter timetable. Regrettably, however, the Third Party Bidder ultimately decided to withdraw its offer on the basis that it would be unable to complete a purchase by the specified extended deadline.
In light of the above, PwC advised the Company's shareholders that unless they were prepared to commit extra funding to the Company's business for a period of 4-6 weeks to allow the Third Party Bidder to complete due diligence enquiries without certainty that the Third Party Bidder would proceed with the acquisition at the end of that period, the shareholders had little choice but to accept the only firm offer for the Company's business and assets from PLE.
The shareholders concluded that the risk of further cash injections into the Company whilst awaiting a definitive offer from a buyer who wished to complete extensive due diligence and extend the timetable for completion was too great. Consequently the shareholders resolved to accept PLE's offer."
"In considering the available options, a key factor was identifying where the economic interest lay with regard to the rights of the creditors. From the evidence available, there appeared to be no prospect of unsecured creditors being repaid in full in any scenario. Further, all of the options aside from the pre-packaged sale to PLE entailed varying levels of real damage being caused to the underlying business which could only adversely impact its overall value and the resultant return to unsecured creditors."
PLE was the parent company of SCEL, which was the vehicle by which the purchase was effected.
The relevant legislation
"423 Transactions defrauding creditors
(1) This section relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if-
(a) he makes a gift to the other person or he otherwise enters into a transaction with the other on terms that provide for him to receive no consideration;
(b) he enters into a transaction with the other in consideration of marriage [or the formation of a civil partnership]; or
(c) he enters into a transaction with the other 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 himself.
(2) Where a person has entered into such a transaction, the court may, if satisfied under the next subsection, make such order as it thinks fit for-
(a) restoring the position to what it would have been if the transaction had not been entered into, and
(b) protecting the interests of persons who are victims of the transaction.
(3) In the case of a person entering into such a transaction, an order shall only be made if the court is satisfied that it was entered into by him for the purpose-
(a) of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or
(b) of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make.
...
(5) In relation to a transaction at an undervalue, references here and below to a victim of the transaction are to a person who is, or is capable of being, prejudiced by it; and in the following two sections the person entering into the transaction is referred to as "the debtor"."
"424 Those who may apply for an order under s 423
(1) An application for an order under section 423 shall not be made in relation to a transaction except-
(a) in a case where the debtor has been adjudged bankrupt or is a body corporate which is being wound up or [is in administration], by the official receiver, by the trustee of the bankrupt's estate or the liquidator or administrator of the body corporate or (with the [permission] of the court) by a victim of the transaction;
(b) in a case where a victim of the transaction is bound by a voluntary arrangement approved under Part I or Part VIII of this Act, by the supervisor of the voluntary arrangement or by any person who (whether or not so bound) is such a victim; or
(c) in any other case, by a victim of the transaction.
(2) An application made under any of the paragraphs of subsection (1) is to be treated as made on behalf of every victim of the transaction."
"…prima facie the proper plaintiff in proceedings to recover property or obtain reimbursement for the benefit of a company in liquidation is the company itself acting through its liquidator; the circumstances in which such proceedings can properly be brought in a winding up by a person other than the company or its liquidator are to be regarded as exceptions to the general statutory principle…"
It is not sufficient, therefore, for the victim, in cases where the office holder declines to bring proceedings to set the transaction in question aside, simply to show that he is a victim of the transaction. The court has a discretion in the matter. The applicant must demonstrate that he has a realistic prospect of establishing, first, that the transaction in question comes within the scope of section 423 and he is a victim of the transaction and, second, that there is good reason why he should bring the proceedings even though the liquidator or administrator does not.
The claim
"Given the terms of each of the 2008, 2009 and 2010 Assurances of Support, the Court is asked to infer that the only reason, as at the date of appointment of the Administrators that the assets of SCL were of such limited amount that it could pay its creditors no more than 4p in the £ was that there was an arrangement or understanding between SCL and PLL, in particular through their common directors, in connection with the anticipated sale of SCL's business and assets to [SCEL], whereby SCL would not enforce its rights under the said Assurances of Support and/or would release and/or waive such rights and/or submit to and not contest the withdrawal by PLL of its binding obligations under the said Assurances of Support, or alternatively would waive the breach by PLL of the Assurances of Support by failing to provide the support to SCL it promised."
Were the letters of support binding in law?
Other considerations
(a) transaction
(b) the statutory purpose
Result