England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BRISTOL DISTRICT REGISTRY

		Bristol Civil Justice Centre 2 Redcliff Street, Bristol, BS1 6GR
		28 July 2017

HHJ Paul Matthews :

Introduction

1. This is my judgment on certain preliminary issues arising in an application by notice dated 23 March 2017 in the liquidation of Officeserve Technologies Limited ("the company"). The application itself is one for various declarations that the respondent (the founder, former shareholder in and executive chairman of the company) has misapplied monies belonging to the company, and that certain payments made to him are void under section 127 of the Insolvency Act 1986, and for an order inter alia that the respondent repay the sum of £535,477.31. It is supported by a witness statement of Paul David Wood dated 31 March 2017.

Procedure

2. The application itself is made in the context of winding up proceedings against the company. The petition to wind up the company was first presented to the High Court, Chancery Division, Bristol District Registry, on 26 October 2016. It was based on a statutory demand that had been served on 3 October 2016. I interpose here to say that, before the petition could be dealt with, the respondent was ousted as a director and executive chairman of the company, on 20 December 2016. On 23 December 2016 an agreement (called a "settlement agreement") was entered into between the company and the respondent, governing certain claims or potential claims by each against the other. I shall return to these events in more detail.
3. Returning to the proceedings concerning the company, on 8 February 2017 HH Judge Purle QC, in the Birmingham District Registry of the Chancery Division, heard an application for an administration order in relation to this company. He dismissed that application, ordered that the petition to wind up the company be transferred to Birmingham District Registry and also appointed Mr Haskew and Mr Wood (now the liquidators) as the joint provisional liquidators of the company. On 22 February 2017 the judge made a winding up order.
4. There then followed proceedings within the winding up. First, a without notice freezing injunction was granted against the respondent, on 20 March 2017, by Mr Justice Newey. Then on 31 March 2017 an on-notice freezing injunction was granted, limited to assets to the value of £535,477.31. I varied that freezing injunction very slightly on 21 April 2017.
5. On 25 April 2017 I made an order by consent that certain preliminary issues should be determined in this application before the application itself was dealt with. The preliminary issues as set out in the order are as follows:

"1. Whether section 127 of the Insolvency Act 1986 has rendered the entire settlement agreement dated 23 December 2016 void;

2. If and to the extent it is held that section 127 Insolvency Act 1986 has rendered the settlement agreement void, whether the settlement agreement should be validated by the court;

3. Whether all or any of the claims brought by the applicants against the respondent are barred pursuant to the terms of the settlement agreement;

4. If some, but not all the claims brought by the applicants against the respondent are so barred, which ones are so barred."

6. These issues arose out of the "settlement agreement" dated 23 December 2016 between the company and the respondent, which might govern the claims made in the application. Put briefly, the respondent's case is that that agreement on its true construction bars all the claims. The company says that it does not, but that in any event section 127 of the Insolvency Act 1986 renders the agreement void. The respondent says that in that case the court should validate the agreement as being in the interests of the company's creditors. On 31 May 2017 I heard those preliminary issues, and this is my judgment on them. I am sorry for the delay in producing this judgment, partly as a result of pressure of other work (the appointment of the specialist mercantile judge having been delayed), and partly because of the flood in June at the Bristol Civil and Family Justice Centre which has disrupted civil and family proceedings in Bristol. At the hearing Mr Simon Passfield appeared for the applicants, and Mr Dakis Hagen QC and Miss Charlotte Beynon appeared for the respondent.

Facts

7. I proceed on the basis of the following facts, gathered from the written evidence filed in this case. For the purposes of the preliminary issues in the application, I should record that there was no application for any of the witnesses to be cross-examined on their affidavits or witness statements. That limits the extent to which it is legitimate for the court to disbelieve any of those written statements: cf Long v Farrer & Co [2004] EWHC 1774 (Ch).
8. The company was incorporated in 2011. The respondent became sole shareholder and director in 2013. It aspired "to disrupt and enter the £15.9 billion lunch at work market, using technology and a national delivery network". It grew rapidly, from a handful of employees at the outset to 200 employees and a market value estimated at £40 million before it crashed. The respondent was originally the 100% shareholder. But between 2015 and 2016 outside investors were brought in, so that by the time of the crash the respondent held only 80% of the equity. Two companies called Westhill Corporate Finance Ltd and Westhill Capital LLP (together "Westhill") were engaged to assist on the raising of capital from outside investors. The prices which such outside investors were willing to pay gave the estimated market value. An experienced management team was put in place, freeing the respondent to concentrate on fundraising, the strategic direction of the business, stock-market listing and strategic relationships.
9. The respondent was appointed a director of the company on 4 November 2013. He later became executive chairman. As already foreshadowed, he resigned on 23 December 2016. In that time, he did not draw a salary from the company. In 2016 the company made two acquisitions. The first was a company called Chiltern Foods Ltd, acquired from a Mr Phillips, on 8 April 2016, at the price of £500,000, but deferred as to part, so that £250,000 would be payable on 31 December 2016. The second was a company called Fruitdrop Ltd, acquired from a Mr Ben Thompson, on 6 May 2016, at the price of £6,050,000, also deferred as to part. Mr Thompson became an employee of Fruitdrop Ltd.
10. However the company was unable to pay instalments of the purchase prices as they fell due. The respondent blames Westhill for failing to secure sufficient private investor funding. On 1 July 2016 Mr Thompson made a loan to the company of £500,000 for working capital. In practice, that simply meant that he was not paid the instalments which he was owed for the purchase of Fruitdrop Ltd. He was still owed the sum of £3,722,671.22 at 3 October 2016, when he served a statutory demand on the company. On 26 October 2016, he presented the petition to wind up the company. It was initially listed for hearing on 22 December 2016, although this date was subsequently adjourned to enable Mr Thompson and the company to continue negotiations.
11. On 2 December 2016 Ben Thompson had resigned from Fruitdrop Ltd and (it is argued) caused significant members of staff also to resign, to join a new company called Officedrop Ltd, which he had set up, and which appeared to occupy the same ground in the lunch at work market as the former Fruitdrop Ltd. (Mr Thompson is not a party to these proceedings, and I make no finding on this, beyond his resignation.) The directors of the company met on 20 December 2016, and noted a number of matters, including that the failure to make deferred consideration payments and Mr Thompson's consequent statutory demand and later winding up petition had not been circulated to the board, and that the respondent had failed to keep the board informed of developments relating to the acquisition of Fruitdrop and the subsequent dispute with Mr Thompson. Members of the board had carried out a review of the company's finances because of the impending hearing of the winding up petition, and reported that the respondent had committed the company to significant levels of expenditure relating either to the respondent's personal affairs or to matters unrelated to the business of the company, which had not been authorised by the board.
12. As set out in the minutes of the board meeting, the expenditure included:

(i) costs relating to the respondent's flat in Bruton Street in the West End of London;

(ii) costs relating to a private corporate vehicle of the respondent called Valentina Capital, and his private staff;

(iii) funding for business ventures unrelated to the business of the company;

(iv) property costs relating to additional premises which were in excess of the company's property needs;

(v) other personal expenditure related to the respondent, including the Bentley motor car, and driver, dry-cleaning and flowers for his flat; the employment of the respondent's sister and housekeeper by the company.

13. According to those minutes,

"the conclusions reached by the directors earlier in the day had been that [the respondent] had:

(a) committed the company to significant levels of unauthorised expenditure, a significant proportion of which was of a personal nature and that this had had a direct impact on the company's solvency and on its ability to satisfy the claims being made by Ben Thompson;

(b) concealed from the board material facts relating to the claims brought by Ben Thompson and the winding up petition generally;

(c) misled the directors as to the financial position of the company and status of his negotiations with Ben Thompson and with David Morris regarding additional funding".

14. The directors had therefore concluded that the respondent had lost the confidence of the board and the independent shareholders. They had decided that a board meeting should be convened, and that the respondent should be invited to attend in order to address these issues. When so invited, the respondent had declined to attend such a meeting in person. He had however agreed to attend by telephone earlier in the day. The board had resolved that, if the respondent

"was not in a position to adequately clarify the company's financial position and to address the directors concerns at the board meeting, his employment should be terminated forthwith and the directors should seek to reach a settlement with Ben Thompson and, as an interim step, to persuade Ben Thompson to agree to an adjournment of the hearing of the winding up petition so that any settlement discussions could be finalised".

15. When the respondent joined the meeting by telephone, a discussion took place in relation to the board's concerns. According to the minutes of the meeting, the respondent "was unable to provide additional assurances beyond what had already been discussed". It was explained to the respondent that the board's conclusion was that so long as the respondent remained in charge the company would not be able to settle the claims made against it, and in addition the board had significant concerns arising from the respondent's handling of the company's finances. The minutes continue:

"it was therefore explained to [the respondent] that accordingly the board had concluded that his employment should be terminated immediately by reason of gross misconduct and that this would be confirmed to him in writing later that day".

16. After the respondent had left the meeting, it was resolved that the letter confirming his termination with immediate effect, which had been drafted by the company's solicitors, Bird & Bird, should be signed on behalf of the company and sent to him forthwith. It was also resolved that

"attempts should be made to conclude a formal compromise agreement with [the respondent] under which [the respondent] would surrender a significant number of his shares which could be used, among other things, to finance settlement of Ben Thompson's claims and the claims of the vendors of Chiltern Foods and under which [the respondent] would be required to assist the company to unwind the various unauthorised commitments that he had made on behalf of the company".

17. The next paragraph of the minutes is of some significance, and needs to be set out verbatim:

"3.2. It was noted as unlikely that a settlement with Ben Thompson and with Mr Phillips (the vendors of Chiltern Foods) could be formalised ahead of the winding up petition being heard but that the directors were confident from discussions to date undertaken by Mr Haschke that:

(a) a settlement could potentially be reached with Ben Thompson (which was confirmed by him on a call from the meeting) and Mr Phillips to capitalise a large part of the amounts owing to them for shares in the company; shares surrendered by [the respondent] could be applied for this purpose without diluting other shareholders. Westhill had indicated that they could raise sufficient cash to finance the remaining commitments and to keep the company solvent if acceptable settlement could be reached with [the respondent], Ben Thompson and Mr Phillips;

(b) a settlement with Ben Thompson would not be concluded before the winding up hearing, Ben Thompson would agree to an adjournment to allow time to conclude negotiations if he was confident [the respondent] had been removed from the company and that the company had access to the shares and cash necessary to conclude a deal. This would require the company to reach a settlement with [the respondent] independently of a settlement with Ben Thompson and to do this the company might need to agree releases with [the respondent] to ensure access to his shares, ideally releases of [the respondent] should not be given other than conditional on a settlement with Ben Thompson so as to fully protect the company's position. However, in practice this would not be possible and the priority was to reach a position when Ben Thompson would agreed to adjourn the petition hearing. The directors concluded that this course of action was in the company's best interests."

18. The board then resolved that Mr Haschke should be authorised to negotiate and conduct a settlement with the respondent "on the basis outlined above", as well as to secure an adjournment of the winding up hearing and advance discussions with Ben Thompson and Mr Phillips for a settlement of their claims.

The "settlement agreement"

19. Three days later, on 23 December 2016, the company and the respondent entered into a document which on its cover page was entitled "Settlement Agreement". Although the document is also stated to be merely an "agreement" (as appears from the opening line on the first operative page) there are references in the body of the document to the fact that it is intended to be executed as a deed, and the final (execution) page states that it is executed as a deed by the company and signed as a deed and delivered by the respondent. It appears that a draft of what became this document was originally put forward by the company's solicitors, Bird & Bird, using its own template. However, the respondent was advised throughout the process of negotiation by his own solicitors, Richard Slade and Company, and in particular a senior associate solicitor with that firm, Peter Emanuel (who made a witness statement dated 5 May 2017 dealing with the background to the negotiations which led to the agreement). I shall have to return to that.
20. Clause 1 of the agreement is headed "Termination of Employment". This provides in part that the respondent

"will receive salary but no further benefits or payments, including any payment in lieu of accrued but untaken holiday up to and including the Termination Date".

In fact, it is common ground that the respondent did not draw a salary, or indeed receive dividends on his shares in the company. Accordingly, this clause has no practical effect, apart from defining the Termination Date to be 20 December 2016.

21. Clause 2 is headed "Consideration", and provides that

"Notwithstanding that this Agreement is executed as a Deed you agree that the Company's waiver of claims against you at clause 7.8 is adequate consideration for your obligations and waivers under this Agreement".

It is common ground that the reference to clause 7.8 is a mistake, and should read 7.7.

22. In clause 4.1 of the Agreement, the respondent agrees to transfer 8.325 million ordinary shares in the company as directed by the company, for nil consideration, to transfer certain intellectual property rights to the company for nil consideration, to return the Bentley motor vehicle used by the respondent to the company in good condition within seven days, to procure the immediate resignation as an employee of the company of the respondent's sister without compensation other than normal salary, and to take certain other steps concerned with the undoing of transactions and engagements into which the company had entered.
23. There are provisions dealing with the transfer of the flat in Bruton Street and associated garage, or alternatively their vacation by the respondent (clause 4.2), the retention of mobile phones and a laptop computer (clause 4.3) and the return of all other physical property of the company in the respondent's possession or control within 14 days (clause 4.5). Certain warranties and undertakings are given (clause 5) and certain restrictions are accepted in consideration of payment to the respondent by the company of £100 (clause 6).
24. Clause 7 is important, and provides as follows:

"7.1. You accept the waivers in your favour and the performance of the obligations set out in clause 7.7 below in full and final settlement of the Employment Claims and all and any claims or rights of action you may have now or may have in the future against the company and any other protected person in connection with or arising from your employment or its termination, the holding and/or loss of any office, or any other related or connected matter including without limitation any claims that you may have in any jurisdiction in the world under statute, common law or European law. The parties both acknowledge that it is their express intention, when entering into this agreement, that it covers all such claims, whether known or unknown to one or the other or neither or both of the parties and whether the factual or legal basis for the claim is known or could have been known to one or the other or neither or both of the parties.

7.2. This agreement shall not prevent you from issuing High Court or County Court proceedings against the company and any other protected person in respect of accrued pension rights or any personal injury of which you are not aware or could not reasonably have been aware at the date of this agreement (Excepted Claims). You warrant that as at the date of this agreement you are not aware of any circumstances that might give rise to any Excepted Claims.

7.3. This agreement is intended to address the matters set out at clause 7.1 and the Employment Claims. It is agreed that you have notified the following possible claims to the company: [a list of typical claims arising out of a termination of employment then follows, several of which relate to salary, which the respondent did not receive].

7.4. It is agreed that this agreement satisfies the conditions governing settlement agreements and compromise agreements in [there follows a list of statutory provisions governing such agreements in relation to a termination of employment].

7.5. The company is entering into this agreement on condition that (i) there are no material liabilities or commitments of the company or any group company entered into by you which either you have not disclosed to the directors of the company, or which the directors of the company or Andrew Trinder or Christoph Haschke are otherwise aware of; (ii) you do not initiate or continue any legal complaint, process or claim against the company or any other protected person in connection with your employment or the matters settled by this agreement.

7.6. You acknowledge that the company acted in reliance on your warranties and undertakings in entering into this agreement.

7.7. The company agrees that it enters into this agreement in full and final settlement of all and any claims or rights of action it may have now or may have in the future against you in connection with or arising from your employment. The parties both acknowledge that it is their express intention, when entering into this agreement, that it covers all such claims, whether known or unknown to one or the other or neither or both of the parties and whether the factual or legal basis for the claim is known or could have been known to one or the other or neither or both of the parties."

25. Clause 8 contains provisions about legal advice received by the respondent, including a warranty and confirmation by the respondent that he received independent legal advice on the terms of the agreement from Peter Emanuel of Richard Slade and Company (clause 8.1), representations and warranties by the respondent as to the instructions to the adviser and the provision of information to the adviser, as well as the advice given (clause 8.2), and an agreement by the company to pay a contribution towards the costs (clause 8.3).
26. Clause 10.2 provides that the respondent acknowledges that he has

"not relied on any representation or undertaking by the company (whether written or oral) in entering into this agreement, except as expressly incorporated in this agreement."

27. Clause 12 contains certain definitions of terms used in the agreement. In particular, it contains a lengthy definition of "Employment Claims", as

"any allegation or claim against the company, any group company or any other protected person in connection with any of the following:

[There then follows a list of some 31 items, beginning with unfair dismissal, and passing through claims in respect of pay in lieu of notice, redundancy payments, unlawful deductions from wages, discrimination on various grounds, including colour, race, nationality, sex, marital status, pregnancy or maternity, disability, religion or belief, equal pay, working time regulations, minimum wage, and claims under various employment law statutes or regulations, and also under the Data Protection Act, and concluding with]

30. Tort or breach of statutory duty; and

31. Any other claims at common law."

The applicant's case

28. Of the four preliminary issues ordered to be decided, Mr Passfield for the applicants began with the third and fourth, that is, the questions whether the provisions in the settlement agreement on their true construction barred any and if so which of the claims which the company was now putting forward in its application notice. He did this because, as he put it, if the provisions did not bar those claims, that was an end of the matter, and there would be no need to consider the first and second preliminary issues.
29. Mr Passfield addressed me on the principles that govern the interpretation of contracts, and referred to a number of authorities, which I shall discuss later. He drew particular attention to the distinction between the language used in clause 7.1 (under which the respondent gave up claims which he might have against the company) and that used in clause 7.7 (under which the company gave up claims which it might have against the respondent). Whereas the company by clause 7.7 gave up claims against the respondent "in connection with or arising from your employment", the respondent by clause 7.1 gave up not only "the Employment Claims" (as defined), but also all claims against the company "in connection with or arising from your employment or its termination, the holding and/or loss of any office, or any other related or connected matter…"
30. It was common ground that in the present case the respondent never had a written contract of employment. But the distinction in terminology between the two clauses had to mean something. There would be some claims which would be given up by 7.1 which would not be given up by 7.7. Even if all claims against the respondent in connection with or arising from his employment were waived, that still left claims against the respondent as a director of the company, in respect of any loan which had been made to the respondent, and any claim made against the respondent as a recipient of monies from the company paid after the presentation of the petition, under section 127 of the 1986 Act. The claims being advanced in the present application against the respondent were in respect of his acts as a director of the company, and not in connection with his employment.
31. If the court was not with him on the construction of the settlement agreement, Mr Passfield submitted that section 127 of the Insolvency Act 1986 rendered void, not the settlement agreement itself, but the extinguishing of the company's claims against the respondent by the settlement agreement. Those claims were "property" within the meaning of the section, which rendered void "any disposition of the company's property" made after the presentation of the petition. He referred me to the most recent authority on section 127, namely the decision of the Supreme Court in Akers v Samba Financial Group [2017] AC 424, and also discussion of that provision by Adrian Walters, in Vulnerable Transactions in Corporate Law, edited by Armour and Bennett. I shall return to these later. It was however common ground that there was no authority precisely in point.
32. If the court was with him on that, then Mr Passfield argued that the court should not validate the extinguishing provisions of the settlement agreement under section 127. He referred me to the decision of the Court of Appeal in Express Electrical Distributors Ltd v Beavis [2016] 1 WLR 4783, [20], where Lord Justice Sales spoke of the need to show "special circumstances". He also referred to the question whether the court on such an application to validate these provisions was entitled to take into account events post-dating the transaction ("the benefit of hindsight"), or whether the matter should be judged as at the time of the transaction itself. On this matter he referred me to the observations of Lord Justice Buckley in Re Gray's Inn Construction Co Ltd [1980] 1 WLR 711. In his submission it would not be in the interests of the creditors of the company for the company to have given up the claims it undoubtedly had against the respondent.

The respondent's case

33. Mr Dakis Hagen QC, for the respondent, laid stress on the factual matrix in which the agreement was made, and submitted that that factual matrix was as important today in construing the agreement as it had been in the past. He referred to the observations of Lord Hodge in the Supreme Court in Wood v Capita Insurance Services Ltd [2017] 2 WLR 1095, [13]. He addressed me on the company's financial position in the months leading up to the settlement agreement. He accepted that the company was then making a loss, but submitted that it was set to expand by way of capital injections. He took me to the prospectus addressed to prospective investors. He submitted that it was the disagreement with Ben Thompson that led to the company's difficulties after the acquisition of Fruitdrop Ltd in May 2016. Although the sale and purchase agreement under which that company had been acquired deferred about half of the consideration of £6 million over until the 31 December 2016, the respondent by email on 1 July 2016 had in effect given Mr Thompson the right to accelerate those payments. In November 2016 Mr Thompson had procured the mass resignation of employees of the company to go and work for his own newly-formed company Officedrop Ltd, which was just a continuation of the business of Fruitdrop. By the end of 2016, Mr Thompson had the company's back against the wall. All they could give him would be shares in the company itself. Since the respondent was the largest single shareholder, they needed to obtain these shares from him.
34. He took me through the minutes of the board meeting of the 20 December 2016 in some detail. He submitted that when, in paragraph 3.2(b), reference was made to "releases" with the respondent "to ensure access to his shares", this referred to releases from the claims against the respondent which had been articulated on the first two pages of the minutes under paragraph 1.1 (d) (i) – (vi). Accordingly, the releases given by clause 7.7 of the settlement agreement should be construed not only as covering those claims in connection with or arising from the respondent's employment, but also as extending to claims in connection with or arising from his office as a director.
35. So far as concerned the comparison between clauses 7.1 and 7.7 in the settlement agreement, Mr Hagen QC submitted that clause 7.1 was in any event tautologous, since the definition of "Employment Claims" was wide enough to include "any other claims at common law", which meant that nothing was added by referring also to "and all or any claims or right of action you may have now or may have in the future against the company". He submitted that clause 7.1 ceased to be a useful aid to the construction of the later clause. He pointed out that it was the company's draft, and not that of his client. It was the company that proffered it.
36. I suggested to Mr Hagen QC that, supposing he were right to say that the company on 20 December 2016 was thinking of releasing the respondent from the claims which it had been discussing earlier in the minutes, that did not mean that those were the claims which the company actually was releasing the respondent from when it entered the settlement agreement three days later. They might have made a better deal in the end compared with what they were thinking of earlier. Mr Hagen QC submitted that that line of reasoning would require the court to speculate about what had happened in the negotiations. But in that case the evidence of Peter Emanuel, the respondent's solicitor in the negotiations, could be looked at. He pointed out that there had been no application to cross-examine Mr Emanuel, and no evidence had been filed in rebuttal.
37. Mr Hagen QC took me to a number of authorities, including Arnold v Britton [2015] AC 1619, HL, and Line Trust Corporation v Fielding, CA unreported, 26 July 1999. The former case dealt with the matters which the court should take into account in construing a commercial agreement. The latter was relied on for the remarks of Lord Justice Chadwick on the penultimate page of the transcript regarding the use of the disjunctive "or" in the phrase "in connection with or arising from". He submitted that on the applicants' case the words "in connection with" would be otiose. There was no division between the respondent's duties as an employee of the company and as a director. There must therefore be some connection between the claims being advanced by the company and the respondent's employment.
38. He further submitted that the natural meaning of clause 7.7 was not affected by those words including the phrase "holding of office". Because the terminology in clause 7.1 was overlapping, these words were otiose in that clause. As a result, any ambiguity created by clause 7.1 was not enough to displace the natural meaning of the words in clause 7.7. But he also pointed out that the obligations placed on the respondent to return property and other things to the company and to resolve other situations, under clause 4.1, were just as applicable to a director as to an employee.
39. On the purpose of the clause, Mr Hagen QC submitted that there really was no choice available to the company, except to strike a deal with the respondent enabling them to make an offer of shares to Ben Thompson. In order to do that, they had to offer the respondent a release of the particular claims which were mentioned in the minutes. He submitted that if the release had been restricted to claims about employment, the agreement would make no commercial sense. The reason that the respondent settled with the company was because that way he managed to keep a small percentage of his shares, because he believed that there was a possibility of those shares going up in value. Otherwise, he just wanted to get on with his life, as he was an entrepreneur.
40. So far as concerned the effect of section 127 of the Insolvency Act 1986 on the settlement agreement, Mr Hagen QC submitted that there might be problems for liquidators in future in trying to downsize, if settlement agreements with employees were to be caught by this section. In his submission, however, the extinguishing of claims against an ex-employee or ex-director was not caught by this section. He submitted that it was settled that the effect was not to invalidate contracts in themselves, but only dispositions under contracts. He referred me to the decision of the Queen's Bench Divisional Court in Rudge v Bowman (1868) LR 3 QB 689. The legislator could have used the word "transaction", but did not. In this respect section 127 is plainly different from, say, section 423, or section 339. He also referred me to a passage in Foskett on Compromise, 8^th ed, at paragraph 6 – 01. He submitted that it was not in the nature of compromise of claims that there was any need for the extinguishment of a cause of action. But even if causes of action were extinguished, there might also be new rights of action created.
41. However, even if this settlement agreement was also a deed of release, Mr Hagen QC submitted that it was still not a disposition of property within section 127. For him, the starting point was not Akers v Samba Financial Group, but Re Mal Bower's Macquarie Electrical Centre Pty Limited [1974] 1 NSWLR 254, a decision of Street J, Chief Judge in Equity in the Supreme Court of New South Wales. This decision was extensively cited and followed by Judge Rich QC in Re Barn Crown Ltd [1995] 1 WLR 147, and it was also referred to by Mr Justice Lightman as expressing "preferred reasoning" in Coutts v Stock [2000] 1 WLR 906. The decision in Re Mal Bower's Macquarie Electrical Centre Pty Limited was referred to in Akers v Samba Financial Group and not dissented from.
42. Mr Hagen QC had a further argument. Even if section 127 applied to avoid the extinguishment of claims against the respondent, and negate the contractual effect of any contract not to sue in respect of those claims, nevertheless the company had effectively promised not to bring claims against the respondent. The respondent had relied on that promise to his detriment, by performing his side of the bargain, such as transferring IP rights and executing a stock transfer form. That promise should be nevertheless enforced by the court, if not by contract, then by promissory estoppel. This was different from extinguishment.
43. On the question of possible validation of the extinguishing provisions by court order under section 127, Mr Hagen QC referred to the Beavis case at [26], per Lord Justice Sales. But he pointed out that Lord Justice Sales had not seen the decision in Clifton Place Garage [1970] Ch 477 at page 493. In Gray's Inn Construction Co Ltd at page 719, the decision in Clifton Place Garage is mentioned without dissent. He submitted that the court should look at the question as at the date of the transaction, and not with the benefit of hindsight. The 23 December 2016 was a critical moment for the company to get itself back on its feet. This was an emergency, so the "special circumstances" test was satisfied.
44. If the court looked at the question of validation with the benefit of hindsight, then nevertheless Mr Hagen QC submitted that it would be in the general interest of the general body of creditors of the company. Today the company had such limited resources that it was not in the creditors' interest to spend those resources on these claims against the respondent, when there were potential claims against Mr Ben Thompson, under section 217 of the Insolvency Act 1986 (the "anti-phoenix" provisions), and who received £2.3 million in cash for a company which in effect he has since taken back. Mr Hagen QC likened the situation for the court as being similar to that which would arise on a Beddoe application. He referred me to RBG Resources plc v Rastogi [2005] 2 BCLC 592, at 603.

Construction of the agreement

45. I begin with the question of the true construction of clause 7.7 of the settlement agreement. The Supreme Court has revisited the principles of construction of commercial agreements of this kind in recent years, including Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, and Arnold v Britton [2015] AC 161. Those principles have also been summarised more recently by the Court of Appeal.
46. In Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2017] 1 All ER (Comm) 601, CA, Beatson LJ said:

"56 The professed object of a common law court in interpreting or construing a written contract is to discover the mutual intention of the parties. It is now generally accepted that this is not to be done by a purely literal approach. The formulations by appellate judges have differed, but the differences have primarily been ones of emphasis rather than of principle. They relate to the extent to which the approach to construction should be contextual, the role of background material, and the relationship between the approach to construction and the approach to the implication of a term. The wealth of authority on the topic and the differences of formulation suggest that, as Sir Anthony Clarke MR stated in Pratt v Aigaion Insurance Co SA [2008] EWCA Civ 1314; [2008] 2 CLC 756 at [9], care must be taken to avoid over-elaboration.

57 Since 1997, the starting point has generally been the five principles distilled from the authorities by Lord Hoffmann in his seminal judgment in Investors Compensation Scheme v West Bromwich Building Society [1997] CLC 1243 at 1257–8; [1998] 1 WLR 896 at 912–3 ('the ICS case'). Those principles were refined by him in later decisions, in particular BCCI v Ali [2001] UKHL 8; [2002] 1 AC 251, Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101 , and Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10; [2009] 1 WLR 1988. In the last of these he reappraised the process of implying terms and its relationship to the exercise of interpreting the express terms.

58 The most recent adjustments of emphasis occurred in 2015 when, in Arnold v Britton [2015] UKSC 36; [2015] AC 1619 and Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72; [2016] AC 742, the Supreme Court revisited Lord Hoffmann's statements of the principles. Both those cases involved leases. In the first, the change of emphasis was to give greater weight to the words used in the document. In the second it concerned the relationship between interpretation and implication. A majority of the Supreme Court stated (see [25], [26] and [76]) that, while interpreting the words which the parties have used and implying words into the contract both involve determining the scope and meaning of the contract in the broad sense, 'construing the words used and implying additional words are different processes governed by different rules'.

59 I consider that in the present case two statements of the general approach suffice. The first is the elegant, concise and unelaborate pre- ICS statement by Sir Thomas Bingham MR in Arbuthnott v Fagan [1995] CLC 1396, at 1400:

'Courts will never construe words in a vacuum. To a greater or lesser extent, depending on the subject matter, they will wish to be informed of what may variously be described as the context, the background, the factual matrix or the mischief. To seek to construe any instrument in ignorance or disregard of the circumstances which gave rise to it or the situation in which it is expected to take effect is in my view pedantic, sterile and productive of error. But that is not to say that an initial judgment of what an instrument was or should reasonably have been intended to achieve should be permitted to override the clear language of the instrument, since what an author says is usually the surest guide to what he means. To my mind construction is a composite exercise, neither uncompromisingly literal nor unswervingly purposive: the instrument must speak for itself, but it must do so in situ and not be transported to the laboratory for microscopic analysis.'

The second is the summary of the current position by Lord Neuberger in Arnold v Britton [2015] UKSC 36; [2015] AC 1619 at [15]. He stated:

'When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to "what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean", to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, para 14. And it does so by focussing on the meaning of the relevant words, in this case clause 3(2) of each of the 25 leases, in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the [contract], (iii) the overall purpose of the clause and the [contract], (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions. …'

This substantially repeats what he stated in Marley v Rawlings [2014] UKSC 2; [2015] AC 129 at [19].

60 In Arnold v Britton, Lord Neuberger also emphasised a number of factors. They include:

(a) 'The less clear [the centrally relevant words] are … the more ready the court can properly be to depart from their natural meaning', but 'the clearer the natural meaning, the more difficult it is to justify departing from it': see [18].

(b) '[W]hen interpreting a contractual provision, one can only take into account facts or circumstances which existed at the time the contract was made, and which were known or reasonably available to both parties': at [21].

(c) The reliance placed on commercial common sense 'should not be invoked to undervalue the importance of the language of the provision which is to be construed' (see [17]) and, (at [19]) that 'commercial common sense is not to be invoked retrospectively' so that the mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly or even disastrously for one of the parties is not a reason for departing from the natural language.

On this last factor, see also Lord Hodge at [76]–[79]. I add that the commercially sensible meaning is often not obvious, and, where it is not, the court is less likely to be able to conclude that one of two or more alternatives is the commercially more sensible one: see eg Cottonex Anstalt v Patriot Spinning Mills Ltd [2014] EWHC 236 (Comm); [2016] 1 CLC 28 at [57]–[58] per Hamblen J.

61 The position of pre-contractual negotiations did not arise in Arnold v Britton but is of relevance in the present appeal. It is now clearly established by authority that the general rule is that the pre-contractual negotiations of the parties cannot be taken into account in interpreting its terms and determining what they mean. The exceptions are where a party seeks to establish that a fact which may be relevant as background was known to the parties or to support a claim for rectification or estoppel: see Investors Compensation Scheme v West Bromwich Building Society [1997] CLC 1243 at 1258; [1998] 1 WLR 896 at 913 (Lord Hoffmann's third principle) and Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 at [41]–[42] per Lord Hoffmann. The rationale for the general rule is said to be practical policy and the public interest in economy and predictability in obtaining advice and adjudicating disputes. Lord Hoffmann recognised (at [32]–[33]) that the general rule means that, in this respect, legal interpretation differs from the way language is interpreted in ordinary life. He referred to the criticisms of the rule by judges and scholars including Lord Nicholls (2005) 121 LQR 577 and McLauchlan [2005] UQLJ 28. There are other critics, see for example McMeel (2003) 119 LQR 272, The Construction of Contracts (2nd edn) 1.81–1.82, and Burrows, A Restatement of the English Law of Contract (2016), 87–88, but the rule has its supporters, see for example Berg, (2006) 122 LQR 354 and Lewison, The Interpretation of Contracts (6th edn) 106–111 and it has long been the settled position in English law.

62 In summary (see Arnold v Britton at [20]), 'the purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed'. A court 'should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight'."

47. I was also referred to Wood v Capita Insurance Services Limited [2017] 2 WLR 1095, SC. In that case Lord Hodge (with whom the other judges concurred) said this:

"9. It is not appropriate in this case to reformulate the guidance given in the Rainy Sky and Arnold cases; the legal profession has sufficient judicial statements of this nature. But it may assist if I explain briefly why I do not accept the proposition that the Arnold case involved a recalibration of the approach summarised in the Rainy Sky case.

10. The court's task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement. It has long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning. In Prenn v Simmonds [1971] 1 WLR 1381, 1383H–1385D and in Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989, 997, Lord Wilberforce affirmed the potential relevance to the task of interpreting the parties' contract of the factual background known to the parties at or before the date of the contract, excluding evidence of the prior negotiations. When in his celebrated judgment in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912–913, Lord Hoffmann reformulated the principles of contractual interpretation, some saw his second principle, which allowed consideration of the whole relevant factual background available to the parties at the time of the contract, as signalling a break with the past. But Lord Bingham of Cornhill in an extra-judicial writing, "A New Thing Under the Sun? The Interpretation of Contracts and the ICS decision" (2008) 12 Edin LR 374, persuasively demonstrated that the idea of the court putting itself in the shoes of the contracting parties had a long pedigree.

11. Lord Clarke of Stone-cum-Ebony JSC elegantly summarised the approach to construction in the Rainy Sky case [2011] 1 WLR 2900, para 21f. In the Arnold case [2015] AC 1619 all of the judgments confirmed the approach in the Rainy Sky case: Lord Neuberger of Abbotsbury PSC, paras 13–14; Lord Hodge JSC, para 76 and Lord Carnwath JSC, para 108. Interpretation is, as Lord Clarke JSC stated in the Rainy Sky case (para 21), a unitary exercise; where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense. But, in striking a balance between the indications given by the language and the implications of the competing constructions the court must consider the quality of drafting of the clause (the Rainy Sky case, para 26, citing Mance LJ in Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] 2 All ER (Comm) 299, paras 13, 16); and it must also be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest: the Arnold case, paras 20, 77. Similarly, the court must not lose sight of the possibility that a provision may be a negotiated compromise or that the negotiators were not able to agree more precise terms.

12. This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated: the Arnold case, para 77, citing In re Sigma Finance Corpn [2010] 1 All ER 571, para 12, per Lord Mance JSC. To my mind once one has read the language in dispute and the relevant parts of the contract that provide its context, it does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each.

13. Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation. Rather, the lawyer and the judge, when interpreting any contract, can use them as tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement. The extent to which each tool will assist the court in its task will vary according to the circumstances of the particular agreement or agreements. Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance. But negotiators of complex formal contracts may often not achieve a logical and coherent text because of, for example, the conflicting aims of the parties, failures of communication, differing drafting practices, or deadlines which require the parties to compromise in order to reach agreement. There may often therefore be provisions in a detailed professionally drawn contract which lack clarity and the lawyer or judge in interpreting such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type. The iterative process, of which Lord Mance JSC spoke in Sigma Finance Corpn [2010] 1 All ER 571, para 12, assists the lawyer or judge to ascertain the objective meaning of disputed provisions.

14. On the approach to contractual interpretation, the Rainy Sky and Arnold case were saying the same thing."

48. I agree with Mr Hagen QC that the factual matrix remains important. Here there can be no doubt that, first of all, the company was determined to get rid of the respondent, in order to prevent his incurring further expenditure and also his entering into engagements behind the board's back. But at the same time the company needed to resolve the situation with Mr Thompson, and the winding up petition which he had presented. The respondent had something which could be useful to the company in this respect, and those were his shares in the company. So it was undoubtedly a commercial objective of the company, in negotiating with the respondent on the terms of his leaving it, to obtain as many of his shares as they could. In this respect, at least, the respondent had a negotiating position.
49. At the same time, the respondent's position was not cast-iron. He could not simply ask for whatever he wanted. For one thing, there was no certainty that the shares of the respondent would be as attractive to Mr Thompson as the company thought they might. For another, there was Mr Phillips, another creditor, to think of. For a third, the pressure of the winding up petition was acute, and had to be resolved in very short order. It was always possible that this would fail, and that the company would fall off a cliff. What the respondent had to sell was not a sure-fire remedy.
50. The language of clause 7.7, dealing with the extinguishment of claims against the respondent, is in part the same, and in part radically different from that of clause 7.1, dealing with the extinguishment of claims against the company. In both cases the phrase "in connection with or arising from your employment" appears. But in clause 7.1 there are also words referring to (1) the Employment Claims, (2) the termination of the employment, (3) the holding and loss of any office, and (4) any other related or connected matter. Despite the attractive arguments of Mr Hagen QC, I cannot treat these differences as meaningless. Highly experienced and highly paid lawyers negotiated the terms on which the respondent was to leave the company. The extra parts of the clause have to mean something. In my judgment, the natural meaning of the words used in clause 7.7 is narrower than (and to the extent that the words are of general import, therefore limited by) the words used in clause 7.1.
51. As I suggested during the argument, it does not follow that, just because the company might be willing to give releases for all claims of whatever kind against the respondent, up to and including those in connection with his holding of an office, the negotiations should end with such a release being given. That said, I accept that the respondent was prepared to sign the document in the form shown to me. It is possible that he did so under a misapprehension. He might have thought, with or without the benefit of legal advice, that the release in clause 7.7 was wide enough to protect him against claims arising out of his directorship. That kind of mistake might be relevant if an application was made for the rectification of the agreement. But there is no such application here.
52. Perhaps unusually, Mr Anthony-Mike's solicitor, Peter Emanuel, has made a witness statement, dated 5 May 2017, in which he gives evidence of the negotiation of the agreement. This statement has not been challenged. Of course, the evidence of a draughtsman of an agreement is not admissible as an aid to construction of that agreement. Some elements of this statement seek to deal with what was intended by the parties. I ignore those. But I can take this statement into account in considering what events occurred during the course of the negotiations. It says, and I accept, that there was no discussion between the two sides of the possible application of section 127 of the Insolvency Act 1986. It confirms that the form of the agreement was adapted from a template typically used for employer and employee relationships, but that this one went further than normal. The respondent was advised by Mr Emanuel that he could negotiate for payment to himself, but the respondent was resigned to leaving the company, and just wanted to get out as fast as he could. He was prepared to go ahead with the terms as they were so that he could move on to other projects. He did not want to negotiate for consideration to be paid for him giving up his rights.
53. I have not lost sight of Mr Hagen QC's argument that the words "in connection with or arising from your employment" refer to two different concepts and that, if the company is right, the words "in connection with" would be otiose. First, however, I notice that the same phrase occurs both in clause 7.1 and in clause 7.7. So the argument can be turned back against Mr Hagen QC. If in clause 7.7 the words "in connection with" should properly refer to something beyond employment, to the holding of an office, then they must be otiose in clause 7.1, where the holding of an office is specifically referred to. On this argument, therefore, they are otiose in one of two places. I ask myself, rhetorically, why should it be the one which favours the respondent? On the other hand, if the phrase can be understood without referring beyond employment to an office, then they are not otiose in either place.
54. Line Trust Corporation v Fielding, cited by Mr Hagen QC, was a case where the parties to a claim had entered into a Tomlin order, approved by the court, under which all parties "release all claims which they or any of them have or may have against each other in respect of the subject matter of this action or arising out of these proceedings." The question was whether that was effective to release the claims made in the further proceedings then before the court. Millett J had held that it was. The losing party appealed.
55. Lord Justice Peter Gibson gave the leading judgment, similarly holding that it was. Lord Justice Pill added a short concurring judgment. Lord Justice Chadwick, also concurring in the result, said:

"Further, having regard to the terms of Ord.16, r. 8 RSC, the words 'in respect of' used in the Tomlin Order must have been understood by Mr Garrard and Mr Fielding in a sense which was no more restrictive than the words 'relating to' or 'connected with'. The words 'in respect of' are words of connection. They have been described as words which have the widest possible meaning of any expression intended to convey some connection between the two subject matters to which the word relates…"

The appeal was therefore dismissed.

56. With all respect to Mr Hagen QC, I cannot see how this helps the respondent. I do not see that Lord Justice Chadwick was distinguishing significantly between the phrases "in respect of", "relating to" and "connected with". As far as it goes, he treats them all as meaning much the same thing. And the phrase "arising from" (which appears in the settlement agreement in the present case) was not used at all, so far as I can see.
57. On principle, it seems to me that, if some claim "arises from" a legal relationship, such as employment, then it is a claim itself foreseen by the relationship, either expressly, such as a claim to remuneration or holidays, or impliedly, such as a claim for failing to account for monies received for the employer. The claim arises in either case from a term of the employment. On the other hand, if it is a claim "in connection with" a legal relationship then it extends more widely. As Lord Justice Chadwick said in relation to the phrase "in respect of", which I treat as equivalent to "in connection with", it comprises "words which have the widest possible meaning of any expression intended to convey some connection between the two subject matters to which the word relates". So a claim by an employee for occupiers' liability or under health and safety legislation against an employer may not arise from the employment, but it is certainly one in connection with it. In my judgment the two phrases express different degrees of connection to a legal relationship, one closer and one more distant. Both can apply to employment.
58. In these circumstances, all I can do is look at the words and construe them in their context against the factual background. In my judgment, the ordinary and natural meaning of the words used was to release the respondent from claims connected with or arising out of his employment, and not connected with or arising out of his holding an office.
59. The claims put forward in the present litigation against the respondent, however, arise out of the respondent's holding of an office. I therefore conclude that on its true construction the settlement agreement does not in any event protect the respondent against claims of the kind which are being put forward now. But, in case I am wrong, I will go on to consider the applicability of section 127 of the Insolvency Act 1986 to this situation.

Insolvency Act 1986, section 127: applicability

60. That section currently provides as follows:

"127. Avoidance of property dispositions, etc.

(1) In a winding up by the court, any disposition of the company's property, and any transfer of shares, or alteration in the status of the company's members, made after the commencement of the winding up is, unless the court otherwise orders, void.

(2) This section has no effect in respect of anything done by an administrator of a company while a winding-up petition is suspended under paragraph 40 of Schedule B1."

Subsection (2) was added by the Enterprise Act 2002, but it is not relevant in this case.

61. By section 436,

"'property' includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property…"

Despite the width of this definition, it should be noted that the concept of property is specific. It does not extend to the whole 'patrimony' of the company, in the civilian sense of its economic position generally. So merely engaging the liability of the company, and burdening it with further debt, is not without more within the scope of s 127.

62. It is clear that a transfer of tangible movable or immovable property belonging to the company to another person between the presentation of the petition and the making of the winding up order is caught by that section. But the definition of "property" is wider still, and extends to intangible property, including choses in action. Thus, if the company owned a debt, and it assigned the debt to another person, that assignment would be caught by the section. But, in the present case, it is not so straightforward. Here the company has either promised not to sue on the debt, or released it. By doing so, the person to whom the economic benefit of the debt has been transferred is also the person who owes or owed the debt. The question is whether that makes any difference. From the point of view of the mischief to be caught by the section, one might have thought that it should not matter whether a debt belonging to the company was transferred to a third person, or was simply released to the debtor. The mischief, ie reducing the company's assets with which to pay debts, is the same in either case.
63. Mr Hagen QC submitted that it was clear that the section only caught transfers of property and not contracts to transfer property. In support, he cited the decision of the Queen's Bench Divisional Court in Rudge v Bowman (1868) LR 3 QB 689. This was decided on section 153 of the Companies Act 1862, which was in materially the same terms as the current section 127. It was a pre-1875 pleading point, in which the truth of the plea made had to be assumed for the point of law to be decided.
64. The plaintiff's claim was pleaded to have arisen in this way. On 7 March 1866 a petition was presented for winding up the company. On 17 March 1866, the court made the winding up order. On 15 March 1866, however, the parties had agreed that the plaintiff should sell his interest in 50 shares in the company to the defendant at a certain price, the plaintiff to transfer the interest to the defendant, and the defendant to indemnify the plaintiff from all calls thereafter to be made upon the shares whilst the defendant should continue to be entitled to them, and pursuant to that agreement the plaintiff did indeed transfer his interest to the defendant. Subsequently calls were made upon the plaintiff in respect of the shares, but the defendant did not indemnify the plaintiff. The defendant argued that section 153 was a defence to the claim.
65. Mr Justice Lush rejected the argument. He said at page 698:

"First, I think the contract of sale was not within the prohibition of section 153.… Then it is said no sanction of the court has been obtained; that is not necessary; section 153 does not avoid such a contract, but only makes a transfer in the interval between the petition and order void…"

Mr Justice Blackburn was the other member of the court, but he gave a separate judgment, not containing similar language.

66. However, it must be noted that this was not a case of the property of the company being transferred to another person. Section 153 then, like section 127 now, was directed at two quite different actions. The first is a transfer of property from the company. The second (which was this case) is a transfer of shares in the company by anyone, to anyone else. In the second case, it is not required that the shares be transferred by or away from the company. So what Mr Justice Lush was considering was whether a contract of sale made by a shareholder of the shares themselves (under which the right to indemnity arose) was made void by section 153. He was not considering whether a contract made by the company (whether to sell something or not) was made void by that section. In my judgment, the observations of Mr Justice Lush do not assist the respondent.
67. Mr Hagen QC also referred me to a chapter by Adrian Walters in Armour and Bennett (eds), Vulnerable Transactions in Corporate Insolvency, entitled Void Dispositions in Compulsory Winding up. At paragraph 8.24 it is said that:

"Section 127 does not affect contracts or transactions per se. It only affects the passing of title to property under a contract."

No authority is cited for this proposition. The author goes on to discuss various cases connected with the sale of goods, none of which is relevant to this case. But there is – or may be – some assistance from succeeding paragraphs.

68. At paragraph 8.26, the author says:

"Section 127 does not impact on the company's use, consumption or exhaustion of its assets. Thus, while an agreed overdraft limit is treated in the criminal law as property capable of being stolen by the presentation of forged cheques, the use, consumption or exhaustion of that overdraft limit by the company is not a disposition within the section. No rights in any identifiable property are transferred to or conferred on any other party. Conversely, where there is a credit balance on the company's bank account, it is clear that the act of cashing a cheque drawn on the account extinguishes an asset in the form of the bank's debt the amount of the check. However, the cashing of a cheque does not involve an assignment of the company's claim on the bank and for as long as the company retains the cash proceeds, there is no disposition within the section because, again, the property rights have not passed from the company to any other party."

For the final proposition, the Australian decision in Re Mal Bower's Macquarie Electrical Centre Pty Ltd [1974] 1 NSWLR 254 is cited as authority.

69. In that case, a petition to wind up a company was presented on 30 April 1971, and a winding-up order was made on 21 June 1971. After presentation of the petition, some $13,237.71 was paid out of the company's bank account to third parties, until on 26 August 1971 the account was closed. The liquidator demanded that the bank repay that sum to the company, by virtue of s 227(1) of the Companies Act 1961. The bank sought a declaration that payment by it of cheques drawn by the company on its account was not a disposition of the company's property under s 227(1). So the bank was the claimant, and the liquidator was the defendant.
70. That subsection provided:

"Any disposition of the property of the company including things in action and any transfer of shares, or alteration in the status of the members of the company made after the commencement of the winding up by the Court shall unless the court otherwise orders be void."

It will be seen that this is, with immaterial variations, the same as s 127(1) of the Insolvency Act 1986 and its statutory predecessors.

71. It was argued for the bank by Mr Malcolm McLelland (later Chief Judge in Equity of the Supreme Court of New South Wales) that the dispositions avoided by s 227 in this case were "the paying of persons on whose behalf the cheques were presented to the bank for payment". The "giving of cheques by the company to such trading associates involved conditional dispositions of the property of the company to the trading associates" (see at 256B-C). It "would be both disruptive to the ordinary flow of commerce, and destructive of the legislative policy evidenced by the safeguards in s 227, to regard payments made by a bank during the pendency of a winding-up petition as void unless the court otherwise orders," and "such a view of the law would, for practical purposes, result in the automatic freezing of bank accounts on the presentation of a winding-up petition" (see at 256D-E).
72. It was argued for the liquidator by Mr Murray Gleeson (later Chief Justice of New South Wales, and thereafter Chief Justice of Australia) that the section was "not limited so as to protect any actions done by an agent of the company in the course of effectuating a disposition by it of any of its property". He said that the disposition was void, "and that this of necessity avoids the integral steps constituting the disposition, including, in a case such as the present, the payment out by the bank in response to the presentation to it of cheques drawn by the company". He also relied on a statement in the 7th edition of Paget's Law of Banking, at pp 299-301, to the effect that cheques drawn by directors of a company after "the commencement of its winding-up are not the cheques of the company".
73. Street J, Chief Judge in Equity (also later Chief Justice of New South Wales), discussed the phrase "disposition of the property" in s 227. He considered, without explanation, that it was likely to have originated from the Scottish law term "dispone", meaning to transfer or alienate. It is not clear from his judgment why he thought that. There was (for example) no tracing back of the statutory provision to a Scottish statute, or even a Scottish case. It is well known that Scottish and English law are very different. Even if company law is (more or less) the same on either side of the border, it is clear that Scottish insolvency law is not the same as English insolvency law. There is no obvious reason why the word "disposition" in a technical English statute dealing with insolvency should be referred back to a technical term of Scottish law dealing with the conveyancing of Scottish land.
74. Moreover, so far as appears from the report, the Australian judge's attention was not drawn to any of the English law contexts where the word "disposition" is commonly used, such as s 53(1)(c) of the Law of Property Act 1925, and the case-law then existing on the meaning of that word in those contexts, such as Grey v IRC [1960] AC 1, Oughtred v IRC [1960] AC 206, and Vandervell v IRC [1967] 2 AC 291.
75. Street J went on to say this:

"There is, in my view, great force in Mr McClellan's argument that the paying by bank of the company's cheque, presented by a stranger, does not involve the bank in a disposition of the property of the company so as to disentitle the bank to debit the amount of the cheque to the company's account. The word 'disposition' connotes in my view both a disponor and a disponee. The section operates to render the disposition void so far as concerns the disponee. It does not operate to affect the agencies interposing between the company, as disponor, and the recipient of the property, as disponee. As was put in the course of argument, if a company, after presentation of the petition, delivered goods to a carrier consigned to a purchaser, the purchaser would face the avoidance of the transaction under section 227, but the carrier would not be placed in the position of a tortious handling of the goods. Again, if a company were to send its wages clerk up to the bank to cash the weekly wages cheque and bring back the proceeds for making out the pay packets, the payment of the cheque would involve no disposition of the company's property: the company's property belongs to it just as much when it was in the bank as when it was in the form of cash in the hands of the wages clerk. The element of disposition only enters into the situation when something passes out from the company to a disponee. It is the passing to the disponee which is the relevant disposition avoided by section 227. Taking further the example of a wages cheque, the giving by a company to the employee of his wages out of the cash brought back by the wages clerk would be disposition of property of the company to the employee. Alternatively, if the company gave to the employee directly a cheque for him to present to collector himself, the handing over of that cheque would be a conditional disposition within section 227. The intermediary functions fulfilled by the bank in respect of paying cheques drawn by a company in favour of and presented on behalf of a third party do not implicate the bank in the consequences of the statutory avoidance prescribed by section 227.

The conclusion I have reached is that section 227 avoids in the hands of or as against a disponee any disposition of the property of the company made after the commencement of the winding up by the court. I do not regard this as a reading additional words into the section that the legislature has not itself put there. Rather, I consider that the legislative intention, as disclosed by the terms of section 227(1), is such as to require an investigation of what happened to the property, that is to say, what was the disposition, and then to enable the liquidator to recover it upon the basis that the disposition was void. It is recovering from the disponee that forms the basic legislative purpose of section 227."

76. The first point to notice is that this decision was all about the position, and the liability, of the bank as an agent of the company. The judge specifically referred to "the agencies interposing between the company, as disponor, and the recipient of the property, as disponee" as not being affected by the section. One example given was of the wages clerk going to the bank to cash a wages cheque and bring back the proceeds for making up pay packets. The proceeds of the cheque brought back to the company still belong to the company. In economic terms at least, there has been no disposition of the company's property, and, it may be added, the creditors would be no worse off at that stage. The judge was not considering the position of the ultimate recipients of the proceeds of the cheques. He was considering only the position of the intermediate agents.
77. What is harder to understand is why the judge considered that, when the bank paid out the proceeds of cheques to third-party recipients, and debited the company's bank account, there was not then a series of dispositions to the bank. The judge accepted that a disposition would take place only "when something passes out from the company to a disponee". Before the payments, the company had property in the form of its credit balance with the bank, a chose in action. After the payments, and the debits to its account, the company had a different, smaller balance (therefore, less valuable) with the bank. The bank may be an agent of the company for some purposes, but in relation to debiting its customer's account, it is surely acting as a principal.
78. Although the judge does not say this expressly, he must have assumed that there was no disposition to the bank when the bank debits the company's account because there was no transfer of ownership of an asset, tangible or intangible, from the company to the bank. Yet what there is, in accordance with the normal banking contract between bank and customer, is a pro tanto release of the debt due from the bank to the customer, to the extent of the value paid on the customer's behalf to a third party recipient of a cheque.
79. The question is why this is not a disposition of the company's property for the purposes of the section. The bank balance is clearly the company's property. There is less of it after the debit than before, and the bank is better off, owing a smaller debt to the company than previously. Indeed, one analysis would be that the old chose in action has been given up and replaced by a new (less valuable) one. But all that the judge says is that "the concept associated with the use of such word [ie 'disposition'] involves the presence of both a disponor and a disponee". It seems to be axiomatic, rather than analytic.
80. So, on this view, the surrender of a lease to the landlord, or of a life interest to trustees, and the release of even a whole (rather than partial) debt to a debtor would not amount to a disposition within the section, although it plainly damages the interests of the creditors. Of course it could be said, in the case of a bank paying on cheques and debiting its account with the company, that the company can still make a claim against the ultimate payee(s) of the proceeds. That is true, at least in principle, but a claim against a single bank is generally more useful than one against one or more third parties, and so creditors are still harmed by not being able to insist on the company's bank balance being restored. And it does not help at all in the other cases. Of course, I am not bound by the decision of the New South Wales Supreme Court, although any decision of Street J on a matter such as this is entitled to the highest consideration.
81. The decision in Re Mal Bower's Macquarie Electrical Centre Pty Ltd was referred to with apparent approval by Judge Rich QC in Re Barn Crown Ltd [1995] 1 WLR 147, and also referred to by Mr Justice Lightman as expressing "preferred reasoning" in Coutts & Co v Stock [2000] 1 WLR 906. In the former case, the liquidator of the company complained that, by collecting the proceeds of cheques in favour of the company paid into its bank and crediting them to the company's account, which was then already in credit, there had been a disposition of the company's property within the meaning of the section.
82. The judge disagreed. He said:

"In collecting payment upon a cheque the bank credits the customer's account with the amount of the cheque. If the account is already in credit, no disposition of the property of the customer takes place in favour of the bank. The amount standing to the credit of a customer's account is increased in return for the surrender of the cheque, which becomes a voucher for payment. It is the drawer of the cheque whose property is disposed of. All that happens between the customer and the banker is an adjustment of entries in the statement recording the accounts between them."

83. This decision is plainly confined to the case where the proceeds of cheques in favour of the company are collected by its bank for the credit of its account with the bank, and that account is already in credit. In such a case, the creditors of the company are no worse off, and the conversion of the cheques into money is outside the mischief of the section. On those facts, I respectfully agree with that decision. Although the judge cited the observations of Street J in Re Mal Bower's Macquarie Electrical Centre Pty Ltd set out above (which he called "helpful"), he does not take any further the matter which I have to decide.
84. In Coutts & Co v Stock the bank brought a claim against the guarantor of the overdraft facility on the bank account of a corporate customer. A petition was presented for the winding up of the company at a time when the company's account was in credit. By the time the petition was advertised, the account was already overdrawn. The bank continued to pay cheques drawn on the company's account in favour of third parties until the winding up order was made. No application was made for validation of the payments under section 127.
85. The question was whether, absent any validation order, section 127 disentitled the bank from debiting the company's account in respect of cheques paid after the presentation of the petition or from recovering the amount of the overdraft from the guarantor. Lightman J held that section 127 avoided the disposition of the company's money as between the company and the payee, but that there was no disposition of the company's money by the company to the bank. As between the company and the bank the money was validly borrowed and paid by the company to the payee.
86. In so holding, the judge declined to follow the decision of Blackburne J in Hollicourt Contracts Ltd v Bank of Ireland [2000] 1 WLR 895. That was a case with similar facts, except that, in contrast to the Coutts case, the company's account had been in credit throughout the period after presentation of the petition. Blackburne J held that in those circumstances the bank was not able to debit payments on cheques presented to the company's accounts. The honouring by the bank of the company's cheques after the date of presentation of the petition constituted dispositions of the monies standing to the credit of the company in that it reduced the bank's liability to the company.
87. Lightman J only referred to Re Mal Bower's Macquarie Electrical Centre Pty Ltd in the context of a comment on certain Commonwealth authorities (including that case) cited to him, which he said "hold that section 127 merely invalidates a disposition as between the company and the payee of the company's money, and not as between the company and the payee". Blackburne J in Hollicourt had preferred a different view, but Lightman J said (at 913D):

"I prefer the reasoning in the three Commonwealth authorities as entirely in accord and supportive of the principles which I have stated."

88. It appears that Lightman J disagreed with Blackburne J on the principle, even though the facts of the two cases were different, in that in one case the account was in credit and in the other it was in overdraft. Yet that circumstance must matter, because if it is in credit a specific asset (the "property") of the company is being dissipated, whereas if the company owes money to the bank, no specific asset (and thus no "property") is being dissipated merely by enlarging the liability. The creditors may lose out either way, but the express words of the section, referring to the property of the company, catch the one case and not the other. On the particular facts of Coutts & Co v Stock, and in particular the fact that the account was in overdraft at the material time, I respectfully agree with the decision of Lightman J. But I consider that I am not constrained to follow his expression of opinion with regard to the case where the company's account was in credit. So far as necessary, I would respectfully disagree with it, and prefer the view taken by Blackburne J.
89. Adrian Walters, in Armour and Bennett, op cit, says this:

"8.28. We saw above that there is no disposition where the company simply uses, consumes or exhausts its assets. Goode asserts that the position is different in relation to transactions which have the effect of reducing or extinguishing the company's rights in an asset, and which in so doing transfer value to another person. On this basis he argues the phrase "disposition of company property" is capable of embracing: (i) an agreement by which the company surrenders a lease or gives up contractual rights; (ii) the conferment and exercise of rights of contractual or equitable set off by a company debtor; and (iii) a post-petition payment to a judgment creditor made by a company debtor under a garnishee order.

8.29. At first sight, Goode's argument is attractive. As all of these forms of transaction may subtract value from the insolvent estate, they arguably fall within the mischief of the section. However, the case for saying that an agreement for surrender of the lease would constitute a "disposition of the company's property" is not entirely compelling. The surrender of the lease involves the extinction of the lessees property rights rather than their grant transfer. The lessor does not acquire any new proprietary rights in the process even though his property may well have a greater value freed from the lessees interest.

8.30. Equally, it is not immediately clear that the other transactions mentioned by Goode involve the company in granting or transferring an interest in its assets in favour of a third party. …"

90. With respect, this is an unduly formalistic approach. In considering what is and what is not a disposition for the purposes of section 127, it is necessary not to be constrained by what, in formal terms, may be the transfer of one interest in property, wholly and separately, to another person. The mischief against which the section is directed is clear. The destruction, or at least the reduction in value, of a property right belonging to the company, causing an immediate and equivalent accrual in value to another person, is well within that mischief. The question is whether there is anything other than a purely formalistic reason for not construing the section appropriately, so as to cover the release of a debt.
91. However, the English authorities cited to me do not end there. In Akers v Samba Financial Group [2017] AC 424, a Mr Al-Sanea (a Saudi Arabian citizen) was the registered owner of valuable shares in certain Saudi banks. A Cayman Island company called SICL claimed that he had declared trusts of those shares for its benefit. For present purposes the trusts were to be treated as governed by Cayman law. But it was common ground that Saudi law did not recognise the trust institution. Subsequently Mr Al-Sanea, being indebted to Samba Financial Group, transferred the shares to his creditor, in apparent satisfaction of his debts.
92. SICL having gone into liquidation, the ultimate question was whether SICL's creditors or Samba had the better claim to the shares. Originally the question argued over in the courts below

"was identified as being whether SICL had equitable proprietary interests in the shares in respect of which Mr Al-Sanea had purportedly constituted himself trustee".

But in the Supreme Court the question of the applicability of s 127 was raised, and so the question for the court was reformulated as

"(a) whether there was any "disposition" within section 127, even if SICL had equitable proprietary interests in the shares, and (b) why, if there was, it could not also be said that there was such a disposition, even if SICL only enjoyed personal rights in respect of the shares."

Hence the question of the applicability of s 127 was discussed only in the Supreme Court.

93. On this question, Lord Mance (with whom all the other judges agreed) said:

"52. In these circumstances, I conclude that section 127 is neither aimed at, nor apt to cover, the present situation. Section 127 addresses cases where assets legally owned by a company in winding up are disposed of. The section is necessary to enable the company to recover them, by treating the disposition as void. The court's power to validate the disposition is a necessary safety valve, to cater for situations in which validation would be appropriate, bearing in mind the position of creditors as well as that of the other party to the transaction. Any such disposition will involve issues which arise directly between the company (embracing in that concept its creditors in liquidation) whose property is disposed of and the other party to the transaction, although the section embraces situations where the company's property is held by, for example, a director or agent and is disposed of by him to a third party: In re J Leslie Engineers Co Ltd [1976] 1 WLR 292.

54. The holder of interests such as SICL's does not need protection on the lines of section 127, in order to protect its property or to protect or enforce its interests. Mr Al-Sanea disposed of his legal interest in the shares. That involved him in a breach of trust. But it did not involve any disposition of SICL's property. SICL's property, whether it consisted of an equitable proprietary interest or personal rights to have the shares held for its benefit, continued, despite the disposal of the legal title, unless and until that disposal overrode it. If the disposal overrode SICL's interest as regards a third party transferee of the legal title such as Samba, that was not because of any disposal of SICL's interest. It was because SICL's interest was always limited in this respect.

55. In some circumstances, the term "disposition" may, as Lord Neuberger demonstrates, embrace destruction or extinction of an interest. In the present context, one might also pray in aid academic descriptions of the wrongful alienation of trust property (even if it did not override any beneficial interest in such property) as a "misapplication of trust assets" (see Snell's Equity (33rd ed), paras 30-013, 30-050 and 30-067) and a "disposition ... in breach of trust" (see Swadling in Burrows, English Private Law (3rd ed), para 4.151). But the natural meaning of "disposition" in the context of section 127 is in my view that it refers to a transfer by a disponor to a disponee of the relevant property (here the beneficial interest), not least when the section goes on to render any disposition "void" unless the court otherwise orders. I agree with Lord Neuberger's and Lord Sumption's further reasoning on this point."

94. As foreshadowed in the judgment of Lord Mance, Lord Neuberger went into the question of the meaning of "disposition" in s 127 in more detail. Presumably, because all the judges agreed with Lord Mance, and he agreed with Lord Neuberger on this point, that must mean that all the judges also agreed with Lord Neuberger's comments.
95. He said this:

"62. As Lord Mance says, where a legal estate is sold to a bona fide purchaser for value without notice, any equitable interest is not transferred to the purchaser: it is overridden, or to put it more colloquially, it is lost or disappears. Lloyd LJ accurately summarised the position in Independent Trustee Services Ltd v GP Noble Trustees Ltd [2013] Ch 91, para 106, when he said that a "trustee acting in breach of trust ... cannot vest the beneficial interest in the property in a bona fide purchaser for value without notice, since he does not own that title and is not acting in a way which enables him, under the trust, to overreach the beneficiaries' equitable interest"; but, nonetheless, "the availability of the bona fide purchaser defence means that a transaction in favour of a bona fide purchaser for value without notice is as effective as it would be if he could vest the beneficial title in the purchaser".

63.              As Lord Mance also points out, where the legal owner transfers the legal estate to a bona fide purchaser for value with no notice of the beneficial interest in breach of trust, the person who owned the beneficial interest does not by any means lose all its other rights. In particular, it retains all its personal rights against the trustee, ie the party who sold the legal estate. In other words, following the transfer of the shares in this case, SICL retained its personal rights against Mr Al-Sanea, but (assuming Samba was a bona fide purchaser for value without notice and subject to section 127), SICL lost any proprietary rights or interest it had in the shares.

64.              The fact that SICL retains its personal rights against Mr Al-Sanea notwithstanding the loss of its beneficial interest in the shares appears to me to be irrelevant to the issue whether section 127 applies. If a transaction would otherwise be a disposition within the section, there is no reason for disapplying the section merely because the company in question would not be deprived of its personal rights by the disposition. Similarly, the fact that an equitable interest is more precarious than a legal interest appears to me to be nothing to the point. The very purpose of section 127 is to impeach transactions which would otherwise be effective, and it seems to me to be inconsistent with that purpose to exclude from its ambit a transaction which would otherwise be lawful, and to which a particular right or interest is otherwise susceptible of being defeated.

65.              There is undoubtedly a powerful argument for saying that a transfer by the legal owner of the legal estate for value in an asset to a bona fide purchaser who has no notice of the existence of an equitable interest in that asset cannot amount to a disposition of that equitable interest. As already mentioned, and as Lord Mance demonstrates, there is no question of Mr Al-Sanea having transferred SICL's equitable interest in the shares to Samba: he simply transferred his legal ownership of the shares to Samba, and, on the assumption that Samba was a bona fide purchaser for value without notice, the equitable interest effectively disappeared. In those circumstances, at least on the basis of the meaning which it naturally conveys, section 127 simply does not apply: a "disposition" normally involves a disponor and a disponee, and so there has simply been no disposition. Indeed, in an Australian first instance decision, In re Mal Bower's Macquarie Electrical Centre Pty Ltd (in liquidation) [1974] 1 NSWLR 254, 258, Street CJ in Eq expressly so stated, albeit in a very different context from the present.

66.              However, it is fair to say that the word "disposition" is linguistically capable of applying to a transaction which involves the destruction or termination of an interest. Etymological analyses can fairly be said to be suspect in this sort of context, but it seems to me to involve a perfectly natural use of language to describe SICL's interest in the shares as having been "disposed of" by the transfer of those shares to a bona fide purchaser.

67.              And it is possible to claim support for such a view in relation to section 127 from respected authors. Thus, Professor Sir Roy Goode in Principles of Corporate Insolvency Law, 4th ed (2011) at para 13-127 states that "[s]ection 127 bites on beneficial ownership, not necessarily on the legal title". And at para 13-128, he says that "[t]he word 'disposition' ... must be given a wide meaning if the purpose of the section is to be achieved, particularly in view of the fact that there is no exception in favour of transfers for full value"; particularly relevantly for present purposes, this passage continues: "'[d]isposition' should therefore be considered to include not only any dealing in the company's ... assets by sale, exchange, lease, charge, gift or loan but also ... any other act which in reducing or extinguishing the company's rights in an asset, transfers value to another person". Sir Roy then explains that on this basis "'disposition' includes an agreement whereby the company surrenders a lease or gives up contractual rights". And McPherson's Law of Company Liquidation, 3rd ed (2013), para 7-015, states that section 127 "only [applies to] property which belongs in equity to the company" and "is confined to the company's beneficial interest in property".

68.              There is also some judicial support for the notion that "disposition" can extend to extinguishment. Thus, Wynn-Parry J said in In re Earl Leven, Inland Revenue Comrs v Williams Deacon's Bank Ltd [1954] 1 WLR 1228, 1233, that "[t]he word 'disposition', taken by itself, and used in its most extended meaning, is no doubt wide enough to include the act of extinguishment". However, he rejected such a wide interpretation of that word in the Finance Act 1940, partly because it produced "a quite unexpected result" and partly because in other sections of that Act "it is clear that where the legislature intended that ... 'disposition' should include 'extinguishment', it was at pains to make express provision". Accordingly, the extinguishment of a liability to pay insurance premiums did not amount to a "disposition" for the purposes of section 44(1) of the 1940 Act.

69.              In another revenue case, Inland Revenue Comrs v Buchanan [1958] Ch 289, the Court of Appeal held that the surrender of a life interest under a will trust in favour of those people entitled in remainder operated as a "disposition" of that life interest for the purposes of sections 20 and 21 of the Finance Act 1943. At p 298, Jenkins LJ specifically rejected the argument that there was no disposition because "a surrender of a life interest destroys the interest and there is nothing left". This again provides support for the notion that the fact that property ceases to exist as a result of a transaction does not prevent the transaction involving a "disposition" of that property. But, of course, all depends on the statutory context and how they apply to the facts of the particular case.

70.              There is also a policy argument for concluding that in a case such as the present, the equitable interest is the subject of a "disposition" for the purposes of section 127, particularly bearing in mind the fact that the court has a dispensing power. The purpose of section 127 is to ensure that, at least once the winding up procedure has been started, a company's property is retained, in particular for the purpose of being available in order to be distributed pro rata, ie fairly, among its creditors. On the face of it, at any rate, that should apply as much to property which is held for it by a third party as to property which it holds in its own name.

71.              It would appear that Mr Al-Sanea was a bare trustee of the shares - ie the whole of the beneficial interest in the shares was vested in SICL. A transfer of the bare legal estate by the trustee to a purchaser with notice of the trust would not be caught, because he would only acquire the bare legal interest, which would normally be worth nothing, and no disposition of the company's property would have occurred. And a transfer by the company of its equitable interest would undoubtedly be caught by section 127 as it would involve a disposition by the company of that interest. It can therefore be said to be surprising if a transfer by the trustee which involved the transferee effectively obtaining the whole of the equitable interest previously owned by the company was not caught by the section.

72.              Nonetheless, I have reached the conclusion, in agreement with Lord Mance, that there is no "disposition" of an equitable interest within section 127, when there is a transfer by the legal owner of the legal estate, which is subject to that equitable interest, to a bona fide purchaser for value without notice of that equitable interest.

73.              As already mentioned, the natural meaning of section 127 appears to me to carry with it the notion of a disponor transferring property to a disponee, and on that basis there was no disposition of SICL's equitable interest in the shares in this case. Although, as explained above, there are arguments for departing from the natural meaning of section 127, I consider that they are outweighed by the arguments the other way.

74.              In my view, Sir Roy Goode is right when he says that the surrender of a lease or the giving up of contractual rights by a company would be a "disposition" within section 127, as would a surrender of a life interest (and a company can no doubt have such an interest, at least if it is contingent on an individual's life) as discussed in Buchanan. However, there are differences between a surrender (whether of a lease, contractual rights, or a life interest) and the loss of a beneficial interest on a transfer of the legal estate to a bona fide purchaser for value without notice of that interest. In the former case, the person who is the disponor is the same as the person who loses the property; whereas in the latter case the disponor is, ex hypothesi, not the person who loses the property. And, in the former case the disponee is well aware of the property which is ceasing to exist: as far as he is concerned, its extinction is the purpose of the transaction; in the latter case, the disponee is, by definition, unaware of the property which is being disposed of.

75.              Section 127 can operate harshly so far as people dealing in good faith with a company are concerned. In many cases, a person dealing with a company will be unaware that a petition has been presented (particularly if the presentation occurred very recently), and the section contains no exception for transactions in the ordinary course of business or for transactions for which the company receives full value. The fact that the court will often sanction transactions in the ordinary course of business under its statutory dispensing power is by no means a wholly satisfactory answer to this. As Fox LJ explained in In re SA & D Wright Ltd [1992] BCC 503, 505, when deciding whether to validate a disposition under section 127, the court "must always do its best to ensure that the interests of the unsecured creditors will not be prejudiced", and, where there is said to have been a benefit in validating, "the court must carry out a balancing exercise". And, as Sales LJ put it more recently in Express Electrical Distributors Ltd v Beavis [2016] 1 WLR 4783, para 56, validation will ordinarily only be granted "if there is some special circumstance which shows that the disposition in question ... has been ... for the benefit of the general body of unsecured creditors".

76.              But it would not merely be harsh, but positively unfair for a bona fide purchaser of a legal estate from a third party to find that, because of section 127, the transaction in question was liable to be held void owing to the existence of an equitable interest held by a company of which he had no notice. As explained in para 74 above, the position is very different from the surrender of a lease or of contractual rights. A person taking a surrender of a lease or contractual rights from a company knows both that he is dealing with the company and that he is dealing in the lease or the rights. A bona fide purchaser for value of an asset without notice of a company's equitable interest in the asset would be unaware both of the company (or at least that it had an equitable interest) and of the equitable interest (as if he knew about it he would be bound by it, as he would not be a bona fide purchaser)."

96. In addition to what Lord Neuberger said, Lord Sumption said this:

"89. It is arguable, as Lord Neuberger observes, that the transfer of the legal interest in movables may constitute a "disposition" of an equitable interest if its effect is that the equitable interest is extinguished. But the difficulty about the argument, and the reason why I would reject it, is that equitable interests arise from equity's recognition that in some circumstances the conscience of the holder of the legal interest may be affected. When the asset is transferred to a third party, the question becomes whether the conscience of the transferee is affected. On the facts pleaded in the present case, the equitable interest of SICL was defeated not by the act of the transferor (Mr Al-Sanea) but by absence of anything affecting the conscience of the transferee (Samba). The rules of equity which protect transferees acquiring in good faith and without notice are among the fundamental conditions on which equitable interests can exist without injustice.

90.              The reality is that the transaction of 16 September 2009 was simply a transfer of the shares in breach of trust, and any rights of SICL against Samba depend on the law relating to constructive trusts and not on section 127 of the Insolvency Act. The law relating to constructive trusts has achieved a high level of development, reflecting a careful balance between the competing interests engaged in such cases. Wide as the term "disposition" is, the coherence of the law in this area would not be assisted by giving it a meaning inconsistent with the basic principles governing the creation and recognition of equitable interests and founded on a very different balance of the relevant interests. There is no claim in this case to make Samba accountable as a constructive trustee, and no allegation of notice. For that reason, the proceedings as presently framed must fail."

97. From this discussion, it is clear in my judgment that the approach taken in Re Mal Bower's Macquarie Electrical Centre Pty Ltd and in Coutts & Co v Stock to the (partial) release of the bank's debt to the company (in a case where the company's account is in credit) is too restrictive. As Lord Neuberger says,

"74. … the surrender of a lease or the giving up of contractual rights by a company would be a 'disposition' within section 127, as would a surrender of a life interest (and a company can no doubt have such an interest, at least if it is contingent on an individual's life) as discussed in Buchanan."

98. In the light of these comments, I consider that I am therefore free to hold that the release of contractual rights such as a debt by a creditor company in favour of the debtor constitutes a 'disposition' of the property of the company within the meaning of s 127. I accept that the word 'disposition' is not apt to cover mere effluxion of time of a wasting asset, such as a lease. Nor is it apt to cover deliberate consumption or waste by the company of its assets. But there is nothing in the section to require that the disposition of the company's property should be one by which the same identifiable property should leave the ownership of the company and become the identifiable property of another person.
99. In my judgment, it is sufficient that identifiable property by some act having legal consequences (so excluding mere effluxion of time) ceases to be in the ownership of the company, so that it is no longer available to the liquidator of the company for the statutory purposes, and the value accrues to some other person (so excluding consumption or waste), even though that other person cannot necessarily be said to become the owner of the same property. So a surrender of a lease to a landlord, the release of a debt to the debtor, and the cancellation of a charge on property are all cases which, in my judgment, can in principle fall within section 127 of the 1986 Act.
100. Mr Hagen QC however distinguishes the case of the release of a debt from that of a promise not to sue on a debt. That is the case, not of the destruction or extinguishment of a right, but instead of the creation of a new right in the debtor, the right not to be sued. He referred me to McCallum v Country Residences Ltd [1965] 1 WLR 657, 660F, where Lord Denning MR said:

"When an action is compromised by an agreement to pay a sum in satisfaction, it gives rise to a new cause of action."

101. Mr Hagen QC submits that this applies also to an agreement where, instead of a promise to pay, there is any other valuable consideration. It is in fact not necessary to decide whether that is correct. This is because here the compromise was effected by a mutual release of obligations, effected in a document stated to be, and apparently executed as, a deed. The release is effective at law because it is in a deed, rather than because there is valuable consideration. Such a release gives rise to a defence, not to a cause of action. What Lord Denning MR said applied to promises to pay, and not to deeds. But even if this were the case simply of a promise not to sue, there would be nothing in the point.
102. As mentioned above, Mr Hagen QC cited Foskett on Compromise, 8^th ed, [6-01]:

"An unimpeached compromise represents the end of the dispute or disputes from which it arose. Any issues of fact or law that may have formed the subject matter of the original dispute are buried beneath the surface of the compromise. The court will not permit them to be raised afresh in the context of a new action. If the parties have agreed that their original dispute may be resurrected in certain circumstances then, of course, the position may be different."

103. I accept that the satisfaction of a debt (eg by payment) or the release of a debt (eg by deed) is technically a different juridical mechanism from a promise not to sue. At the same time, however, it seems to me that, in 2017, or even in 1986 when the Act was passed, we must look to the substance of what is happening. We are no longer hamstrung by the forms of action. Assuming that section 127 did not itself invalidate the transaction, if the company were to sue on the debt, and the debtor were to respond by successfully pleading the promise not to sue (whether contractual or by estoppel), there would clearly be an issue as to set off. That set off would either be operative at law, in which case it would cancel the debt, or in equity, in which case it would operate as in effect an equitable defence to the claim: see eg Hanak v Green [1958] 2 QB 9, CA. Either way, if the promise not to sue were established, the claim on the debt would fail, in equity if not at law. I therefore see no reason why the result should be different from that where there was a formal release of the debt. A promise not to sue on a specific debt, if enforceable, is plainly so closely connected with the original debt as to amount to an equitable set-off within Hanak v Green.
104. Accordingly, in my judgment, if the settlement agreement on its true construction extended to the claims being made against the respondent in the present application, that agreement would be void pursuant to s 127, to the extent that it operated either to release the respondent from those claims or to create an enforceable promise not to sue on them. I heard no argument as to whether the remainder of the agreement could stand if such parts were void. But the agreement is expressed to be made as a deed, and so (at least in principle) consideration does not enter into the matter.
105. In case his submission should not find favour, Mr Hagen QC made a deft variation upon it. He submitted also that, where the formal release of an obligation, and even a contractual promise not to sue on that obligation, might be void under section 127, the same could not be said of a promissory estoppel to the same effect arising where the promisee relied on the promise (not to sue) by changing his position on the faith of it. So, although the contractual promise not to sue was void, yet the promise made enforceable by estoppel was not.
106. However, the mischief against which s 127 is directed is not about the mechanism that makes the promise enforceable, but the substantive effect. As to mechanism, a proprietary estoppel takes effect only once the promisee later incurs a detriment in reliance upon it, unlike a contract, which is enforceable upon being made, ie even before counter-performance. So the mechanism (ie the contract) can be forbidden, but the result can still be achieved another way: cf Muhammad v ARY Properties Ltd [2016] EWHC 1698 (Ch), [32]-[49]. Instead, as I say, this argument is about the effect of the promise, ie to destroy in substance the obligation owed by the respondent to the company. In my judgment, for the purposes of s 127 it cannot matter what is the mechanism employed to destroy the obligation owed to the company. If the mechanism is effective, it destroys that obligation, and therefore falls within both the mischief and the scope of the section.

Insolvency Act 1986, section 127: validation

107. Lastly, on the footing that section 127 operates to avoid the settlement agreement so far as it either extinguishes the company's claims or amounts to a promise not to sue on them, I turn to the question whether the court should validate the agreement under section 127 on the basis that it was in the interests of the company to enter into it. For many years the leading case in this area was Re Gray's Inn Construction Company [1980] 1 WLR 711, CA. In 2016 that case was explained and amplified by the Court of Appeal in Express Electrical Distributors Ltd v Beavis [2016] 1 WLR 4783. I shall come back shortly to those cases, and to the criteria for making a validation order.
108. First, however, there is a question as to whether the court judges the matter as at the time of the agreement, or whether it is entitled to take account of what has happened subsequently. In Express Electrical Distributors Ltd v Beavis Lord Justice Sales pointed out (at [26]) that in Re Gray's Inn Construction Company Lord Justice Buckley had suggested that the latter was correct, though in Beavis it did not matter which approach was adopted. Mr Hagen QC referred me to a passage in the judgment of Lord Justice Sachs in Clifton Place Garage (at 493B) which he said suggested the former approach and, pointed out that, perhaps significantly, that decision was not referred to by the court in Beavis.
109. I do not agree with Mr Hagen QC that Lord Justice Sachs in Clifton Place Garage should be read as supporting the view that on a retrospective validation exercise one must ignore hindsight. For one thing, the approach of Lord Justice Sachs is not reflected in either of the other two judgments given, of Lord Justice Harman and Lord Justice Phillimore. If it were important in that case, one would have expected the other judges to mention the point. For another, the decision in Clifton Place Garage was cited with seeming approval by Lord Justice Buckley in Gray's Inn Construction. If Lord Justice Buckley and Lord Justice Sachs were at odds on this, it would be curious that Lord Justice Buckley did not allude to the point. It seems to me more likely that what Lord Justice Sachs was dealing with in the passage at 493D was the criticism made at first instance by Megarry J of the receiver in that case that he acted unreasonably when making his decision on Christmas Eve to go on with the business of the company (see at 485G-486D). Lord Justice Sachs was plainly exercised by this criticism, and wished "to emphasise certain points which may not have been fully appreciated in the courts through which this matter has passed" (491H).
110. In my judgment, s 127 is not, and is not intended to be, a prescription for the behaviour of company directors in future. Instead it is intended to, and does, help resolve problems of the past, each on the particular facts of their case. If a decision taken at the time (which according to the legislative rule is to be treated as void unless validated) has turned out well for the creditors, then the decision-maker may be given credit for that. If on the other hand the decision has turned out badly for the creditors, then it is not easy to see what legislative policy is being served by foisting a bad bargain on the creditors. Accordingly, the court in considering whether to make a validation order is entitled to take account of what has happened subsequently.
111. In Express Electrical Distributors Ltd v Beavis [2016] 1 WLR 4783, the company installed electrical equipment in high value properties. For this purpose it bought such electrical goods wholesale. From about 2011 it bought such goods from the applicant. It regularly paid for such goods in accordance with the applicant's standard terms, that is, on the last day of the calendar month following that in which the delivery took place. But from November 2012 the company paid later and later. In May 2013 the applicant put the company on credit hold, although it made a small delivery nevertheless. On 22 May 2013 another creditor of the company presented a winding up petition. This was not advertised until 17 June 2013. On 29 May 2013, the company paid £30,000 to the applicant. On 31 May, £25,160.43 would become contractually due. The remaining £4,839.57 would not become due for more than a month after that. No explanation was given in the evidence as to why the company for once was paying in advance of its legal obligation. There was however a conflict of evidence as to whether the applicant knew about the winding up petition at any time before it was advertised on 17 June. Because the evidence was given in writing and there was no cross-examination, the court proceeded on the basis that it could not be said that the applicant was acting in bad faith, that is, in receiving the payment with knowledge of the petition.
112. Lord Justice Sales both cited from and summarised the decision in Re Gray's Inn Construction Company [1980] 1 WLR 711, CA. He concluded:

"20. … Thus, the policy of the law in favour of distribution of the assets of an insolvent company in the course of the liquidation process on a pari passu basis between its unsecured creditors is a strong one, and it needs to be shown that special circumstances exist which makes it a particular transaction one in the interests of the creditors as a whole before a validation order will be made to override the usual application of the pari passu principle.

21. Sometimes the court may be justified in making a validation order where the making of a payment or the supply of assets by the company is a way of, say, fulfilling its obligations under a particularly profitable contract where the eventual profits will exceed the consumption of the company's assets and will inure to the overall advantage of the general body of creditors. There is no suggestion of that in this case. Sometimes the court may be justified in making a validation order simply to allow the company to carry on its business in the usual way; but, as Buckley LJ pointed out, it will be more speculative whether this is really desirable in the interests of the general body of creditors and this 'will be likely to depend on whether a sale of the business as a going concern will probably be more beneficial than a breakup realisation of the company's assets' [1980] 1 WLR 711, 717H.

[ … ]

24. As Buckley LJ pointed out, there may be circumstances in which a validation order is not sought in advance of a transaction, but only retrospectively. That will be so where, in a case like the present one, the parties are "unaware at the time when the transaction is entered into that a petition has been presented" (p 718E). However, in my judgment the same governing principles apply in such a case. The court has to look to see whether the transaction in issue, for which validation is sought retrospectively, was one which could properly be regarded as being for the benefit of the general body of creditors, despite the departure from the application of the pari passu principle which will be the consequence of making the validation order which is sought. …

25. In a case where a retrospective validation order is sought, as distinct from a prospective order, the range of evidence available is likely to be different. In a case where a retrospective audit is sought it may have become clear whether a particular transaction or the carrying on of the company's general business in fact turned out to be for the benefit of the general body of creditors or not, whereas in a case where a prospective order is sought the court will have to make an assessment on the basis of such evidence as is available and what is likely to transpire in the future.

26. In an appropriate retrospective order case, an interesting question could arise as to whether the court should try to assess whether a validating order would have been made if the court had been asked the question at the time of the transaction to be validated or should look at the matter with the benefit of hindsight. Observations of Buckley LJ in the Grays Inn Construction case [1980] 1 WLR 711 at pages 720B and 723F – 724C suggest that it should be the latter. However, I do not think that it matters in this case which of the two approaches is adopted.

27. The goods to which the £30,000 payment related had all been supplied by the applicant on credit prior to the making of that payment and were already available for use in Edge's business whether that payment was made or not. Therefore, absent some special circumstance, it was not in the interests of the general body of creditors that the applicant should receive that £30,000 in payment for those already delivered goods, in breach of the pari passu principle.

[ … ]

30. The question in our case, therefore, is whether it is in the interests of the general body of creditors that there should be validation of the payment of £30,000 on the basis that such payment was necessary in order to secure the continued supply of goods to [the company] after 29^th of May 2013. (It is worth pointing out that no validation order was sought by the applicant in relation to its ordinary trading transactions with [the company] after 29 May 2013)."

The court concluded that on the facts the answer to that question was No.

113. The present case is one of an application for the retrospective validation of a transaction. In the present case, on the assumption that the settlement agreement extended to any rights of the company against the respondent in his capacity as a director, and on the basis that section 127 of the 1986 Act operates to invalidate the release by that agreement of those rights, the question is whether validating that release would be in the interests of the general body of creditors of the company. Mr Hagen QC urged that the company had insufficient resources to take proceedings against the respondent, and that therefore it was in the interests of the general body of creditors today to validate the release.
114. He said the process gone through by the court was not dissimilar from that of a Beddoe's application in relation to trustees. He referred me to RBG Resources plc v Rastogi [2005] BCLC 692, [52]. That was an application by a company in liquidation for permission to discontinue an action brought against the fourth defendant, Mr Patel with no order as to costs. Mr Patel resisted this application, on the basis that although he could not force the company to continue with its claim so that (as he saw it) he could successfully defend and thereby clear his name, any discontinuance should be on the basis of indemnity costs paid to him.
115. Mr Justice Lightman said:

"52. Whilst the grant of summary judgment against Mr Rastogi and Mr Jain was a circumstance which placed beyond question the fact that the pursuit of the claim against Mr Patel was neither commercial nor viable, this was foreseeable and foreseen beforehand and, once the application for summary judgment was made, the liquidators were confident of its outcome. The Claimant was in law entitled to take the course which it did of keeping Mr Patel a defendant in the action unless and until he agreed terms of settlement which were acceptable to the Claimant and until judgment was obtained against Mr Rastogi and Mr Jain, but the exercise of this choice carries with it in a case such as the present the price (in particular since the outcome was reasonably foreseeable if not actually foreseen), that the ordinary rule should prima facie apply on the subsequent discontinuance and the Claimant should pay Mr Patel's costs. Subject to one matter as it seems to me there is no good reason to depart from the normal rule. It is of course no answer to Mr Patel's claim for costs that the Claimant has at all times had a good arguable case and continues to do so. It is of course no reason to depart from the normal rule that any costs order to be paid by the Claimant will have to be funded out of monies already paid or set aside for payment of the liquidators' remuneration. The liquidators should have appreciated the risk of commencing and continuing the proceedings against Mr Patel. Liquidators should think very carefully before making decisions to bring or continue expensive proceedings for damages against impecunious defendants, most particularly when they involve serious allegations such as fraud. They should realise that they may not be able to extract themselves from those proceedings save on terms requiring payment of the defendant's costs of those proceedings. If to the mind of the liquidators the defendant acts unreasonably in refusing to agree terms of settlement, in the ordinary case the prudent course for the liquidator is to apply to the court for permission to discontinue and leave it to the court to decide what (if any) terms should be imposed.

53. The question however arises whether the conduct of Mr Patel and the attitude which he adopted in negotiations for settlement affords a good reason to depart (in whole or in part) from the normal rule. CPR 44.3 requires the court in exercising its discretion as to costs to have regard to the conduct of the parties and admissible offers to settle made by the parties. There can be no doubt that the Claimant did wish to negotiate terms with Mr Patel in particular for discontinuance and made a series of offers. I do not think that the offers were generous, but they afforded the basis for negotiations and (most particularly with the Royal as insurers liable to pick up the tab for any shortfall in recovery from the Claimant of Mr Patel's costs incurred from the 14^th June 2002) a settlement should have been achievable. There was substance in Magwells' letter to Lovells dated the 4^th October 2002 that the Royal might be expected to adopt a more conciliatory approach to a settlement than Mr Patel. But success in the negotiations was totally stymied by the insistence by Mr Patel that he receive (as well as costs on an indemnity basis) a public statement of exoneration and an apology. This was something which he (or at least his solicitors) must have known the liquidators could not properly furnish. In view of their belief in his guilt, the liquidators could never have honestly or reasonably met his request. The attitude taken by Mr Patel in this regard is all one with the serious and (so far as I can see) unfounded allegations made throughout this litigation (including in the evidence on this application) against the liquidators. His unnecessarily aggressive approach in the litigation has been calculated to increase costs, make any compromise at any stage the more difficult and occasioned the cost of rebuttal of his allegations against the liquidators. It seems to me that the totally unreasonable and unjustified stance adopted by Mr Patel is a good reason to order that Mr Patel should be deprived of a proportion of his costs. A fair proportion in my judgment is forty per cent reflecting the real prospect that a settlement might and should have been reached at an early date, and the saving of costs, if Mr Patel had not adopted the attitude and stance which he did. I can take into account the fact that Mr Patel was insured for the purpose of evaluating the prospects of settlement if Mr Patel had acted reasonably and indeed rationally."

The judge concluded that Mr Patel had not shown any basis for an award of costs in his favour on the indemnity basis, and awarded him sixty percent of his costs on the standard basis.

116. Of course I agree with Lightman J when he said

"Liquidators should think very carefully before making decisions to bring or continue expensive proceedings for damages against impecunious defendants…"

They are, after all, deciding how best to use the creditors' money for the creditors' benefit. But, unless the liquidators seek the directions of the court, it is their decision and not mine. Here, they have not sought the directions of the court.

117. In the present case, with the benefit of hindsight, it can be seen that the company has collapsed, despite its decision to get rid of the respondent and bring in new management. It does not follow that if the court does not validate the release conditions the litigation against the respondent will be pursued. There is of course the question of funding to be got over. But to deprive the company permanently of an asset of which it should not, according to section 127, have been deprived, does not seem to me to be the obvious thing to do. The settlement agreement did not, in the event, save the company, and, if the company has rights against the respondent which could be vindicated, then it is a matter for the liquidators as to whether they should take steps to do so. As to the analogy with Beddoe's applications, pressed on me by Mr Hagen QC, I will only repeat that I was not asked to give directions to the liquidators, and was in any event not given the kind of evidence or other information which would be necessary for the court to give such directions on such an application. Accordingly I am not able to deal with it on that basis.

Conclusion

118. In the result, I hold that, on its true construction, the settlement agreement does not release the respondent from his obligations to the company in his capacity as a director, but that, if it did, section 127 of the Insolvency Act 1986 would operate on the releases of such obligations and avoid them, and that I would not validate such releases under the discretion given to the court by section 127 itself.