Henderson v Foxworth Investments Ltd and another

Abstract

Insolvency – Transaction at undervalue. A company sold premises to the second appellant, which granted security over the premises to the first appellant. The company’s liquidator sought the reduction of first appellant’s security on the basis that the disposition of the company’s property had been gratuitous alienation. The Extra Division of the Inner House of the Court of Session set aside the judge’s decision that the sale had been for adequate consideration, under s 242(4) of the Insolvency Act 1986. The Supreme Court, in allowing the appellants’ appeal, held that the judge had not erred in finding that the alienation had been made for adequate consideration and that the Extra Division had erred in finding that he had gone plainly wrong in dealing with the evidence.

Summary

The judgment is available at: [2014] UKSC 41

In November 1994, a company (LGDC) purchased a hotel and golf course (the premises) for slightly over £2m. In February 2001, LGDC sold the premises to the second appellant company (NSL) for consideration recorded as £248,100. In December 2002, LGDC went into liquidation and the respondent was appointed as its liquidator. In January 2003, NSL granted a standard security over the premises in favour of the first appellant company (Foxworth). Later that year, the liquidator began proceedings against NSL, seeking the reduction of the 2001 disposition and ultimately obtained decree by default. The liquidator issued the present proceedings, seeking the reduction of Foxworth’s standard security on the basis that the disposition to NSL was a gratuitous alienation susceptible to reduction, under s 242 of the Insolvency Act 1986. The liquidator submitted that Foxworth could not bring itself within the scope of the proviso in s 242(4) of the Act, since it knew that LGDC was in liquidation and that the sale was open to challenge under s 242, as the relevant decisions of the three companies were made by their common director, L.

The judge held that the sale of the premises by LGDC to NSL had been made for adequate consideration, under s 242(4) of the Act, as NSL had further assumed liability for the debt of £1.85m (see [2011] CSOH 66). He further held that the liquidator was liable to Foxworth and NSL in the expenses of the action on the proviso that the order was not to be enforced without a further order of the court. That was on the basis that it might be unjust to allow Foxworth and NSL to enforce an order for expenses against the liquidator when he held an unsatisfied order against NSL for expenses in his favour in respect of the earlier action. On the liquidator’s appeal against that decision, the Extra Division of the Inner House of the Court of Session held that the judge had erred in law, as ‘part of the loan’ in his judgment could not be read as referable to the £1.85m and L’s evidence, that a decision to assume the indebtedness had been taken on behalf of NSL with the agreement of the relevant members of his family, had indicated a mere statement of intent, rather than an obligation to repay the debt. Further, the judge had failed to give satisfactory reasons for the factual conclusions which he had reached on the evidence before him and had been ‘plainly wrong’. As the matter was at large for the appellate court, it held that the sale by LGDC to NSL had been a gratuitous alienation and that Foxworth had not obtained its rights under the standard security in good faith for value. Decree was granted for the reduction of the standard security. Foxworth and NSL appealed.

The issues for determination were: (i) whether the judge had erred in law in finding that the alienation had been made for adequate consideration; (ii) whether the judge had failed to deal adequately with the evidence; and (iii) whether the judge’s decision as to expenses, insofar as it contained the proviso, should be restored.

The appeal would be allowed.

(1) The judge had clearly understood that the critical issue, under s 242(4)(b) of the Act, was whether the alienation had been made for adequate consideration. He had been aware that an obligation on the part of NSL could only constitute part of the consideration for the sale if it had been undertaken as the counterpart of the obligations undertaken by LGDC in relation to the sale. He had found that the decision had, in fact, been made to assume part of the loan as part of the consideration. It was possible that, when he had referred to ‘part of the loan’, he had meant some wholly indeterminate amount, but only if he had failed to realise that a decision to assume liability for an amount which had been entirely unquantified and incapable of quantification would not give rise to an enforceable obligation. Such an elementary error would not be attributed to an experienced judge, as his words could reasonably be understood to mean that the £1.85m had been ‘part of the loan’. Further, the judge had been entitled to accept L’s evidence that a decision to assume the indebtedness had been taken on behalf of NSL, with the agreement of the relevant members of his family, before the sale had been completed (see [25], [27] of the judgment).

(2) The validity of the findings of fact made by a trial judge was not aptly tested by considering whether the judgment presented a balanced account of the evidence. The trial judge had to consider all the material evidence, although it need not all be discussed in his judgment. However, the weight which he gave to it was pre-eminently a matter for him, subject only to the requirement that his findings be such as might reasonably be made. Therefore, an appellate court could set aside a judgment on the basis that the judge had failed to give the evidence a balanced consideration only if the judge’s conclusion had been rationally insupportable.

On the authorities, the duty of the appellate court was to ask itself whether it was in a position to come to a clear conclusion that the trial judge had been ‘plainly wrong’. The adverb ‘plainly’ did not refer to the degree of confidence felt by the appellate court that it would not have reached the same conclusion as the trial judge. It did not matter, with whatever degree of certainty, that the appellate court considered that it would have reached a different decision. What mattered was whether the decision under appeal was one that no reasonable judge could have reached. The phrase ‘plainly wrong’ could be understood as signifying that the decision of the trial judge could not reasonably be explained or justified. It followed that, in the absence of some other identifiable error, such as a material error of law, the making of a critical finding of fact which had no basis in the evidence, a demonstrable misunderstanding of relevant evidence or a demonstrable failure to consider relevant evidence, an appellate court would interfere with the findings of fact made by the trial judge only if it was satisfied that his decision could not reasonably be explained or justified (see [57], [61], [62], [66], [67] of the judgment).

In the circumstances, the Extra Division had had no proper basis for concluding that the judge had misdirected himself or had failed to give satisfactory reasons for the factual conclusions which he had reached on the evidence, or for concluding that he had gone plainly wrong (see [69] of the judgment).

Thomas v Thomas [1947] AC 484 considered; Thomson v Kvaerner Govan Ltd [2003] All ER (D) 10 (Aug) considered; B (a child) (care order: proportionality: criterion for review), Re [2013] 3 All ER 929 considered.

(3) The question whether the payment of an award of expenses in favour of Foxworth could be withheld on account of NSL’s failure to pay another award of expenses had been governed by the law of compensation, which answered the question in the negative, and had not been a matter of judicial discretion. Questions in relation to awards of expenses in the Court of Session were generally best determined by that court. No prejudice would be occasioned by remitting the question of the expenses of the proceedings, and non-payment by NSL of the award made in the previous proceedings could be considered and taken into account, along with other circumstances relevant to the court’s exercise of its discretion, at the stage when an award was made (see [71], [72] of the judgment).

Decision of Extra Division of the Inner House of the Court of Session [2013] CSIH 13 Reversed.

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