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PHILLIPS AND ANOTHER v BREWIN
DOLPHIN BELL LAWRIE LTD AND ANOTHER
House of Lords
18 January 2001
Section 238(4)(b) of the Insolvency Act
1986 directed attention to the consideration for which a company
had entered into a transaction and did not stipulate the person
or persons by whom the consideration was to be provided. The
consideration could include the value of a collateral agreement
entered into by the company with a third party.
In assessing the value of the agreement,
the court was entitled to give precedence to reality over
speculation and to have regard to events which occurred after
the agreement had been entered into.
The House of Lords so held, dismissing
an appeal by the defendants, Brewin Dolphin Bell Lawrie Ltd,
formerly Brewin Dolphin and Co Ltd, and Private Capital Group
Ltd, from a decision of the Cort of Appeal (Lord Woolf, Master
of the Rolls, Lord Justice Morrit and Lord Justice Laws) (The
Times March 30, 1999;[1999] 1 WLR 2052) affirming a decision
of Mr Justice Evans-Lombe ([1998] BCLC 700) who ordered the
defendants to pay the first plaintiff, Ian Peter Phillips,
the liquidator of the second plaintiff, A. J. Bekhor and Co,
the sum of £1,005,534 following the sale of part of the second
plaintiff's business and some of its assets to the defendants
at an undervalue.
Mr Gregory Mitchell QC, Mr Ewan McQuater
and Mr Christopher Hare for the company; Mr Michael Briggs
QC and Mr Richard Slade for Mr Phillips.
LORD SCOTT said that section 238 of
the 1986 Act provided a remedy where a company went into liquidation
within two years after entering into a transaction at an undervalue.
Where the section applied, the liquidator
could apply to the court for an order and the court "shall,
on such an application, make such order as it thinks fit for
restoring the position to what it would have been if the company
had not entered into that transaction".
By section 238(4)(b): "A company enters
into a transaction with a person at an undervalue if [the
transaction is entered into] for a consideration the value
of which, in money or money's worth , is significantly less
than the value, in money or money's worth, of the consideration
provided by the company".
The company in the present case was A.
J. Bekhor and Co ("AJB") which on November 10, 1989 entered
into agreements with Brewin Dolphin and Co Ltd and with Private
Capital Group Ltd ("PCG"), Brewin Dolphin's parent company.
Those agreements were linked, their purpose being the sale
of AJB's stockbroking business to Brewin Dolphin.
On October 17, 1989, in order to facilitate
and set the stage for the sale, AJB sold its stockbrokering
business and business assets to Bekhor Securities Ltd ("BSL"),
a wholly owned subsidiary , for a consideration of £1. The
transfer of the business to Brewin Dolphin was to be brought
about by a transfer of the BSL shares.
Accordingly, under one of the agreements
of November 10, 1989 with Brewin Dolphin, AJB transferred
to Brewin Dolphin its shares in BSL.
Brewin Dolphin thus acquired AJB's business,
AJB received in return (i) from Brewin Dolphin, the assumption
by Brewin Dolphin of AJB's obligations to its employees, including,
in particular, the obligation to make redundancy payments;
and (ii) from PCG, under one of the November 10 agreements
between AJB and PCG, a covenant by PCG to pay AJB £312,500
per annum for four years, the first payment to be made on
November 10, 1990.
That agreement was expressed to be a
computer equipment leasing agreement and the payments were
expressed to be rent payable for the right to use the computer
equipment.
The total "rent" to be paid over the
four years was £1.25 million. It was by no means a coincidence
that £1.25 million was the sum that had been agreed would
be paid for the stockbrokring business.
The computer equipment in question was
not owned by AJB but had been leased from two lessors, Wirral
Equipment Ltd and Asterrose Ltd.
Each of the leases required the consent
of the lessors to any subletting by AJB. Consent to the subletting
of the equipment by AJB to PCG had been neither sought not
given.
On account of default by AJB in paying
rent due under those head leases, the head leases were terminated
in early 1990 and the computer equipment was recovered by
the lessors.
That took place before November 10, 1990
on which the first payment of £312,500 was due to be paid
to AJB under the sublease to PCG. So PCG treated the sublease
as having been brought to an end by the termination of the
head leases and consequently had made none of the £312,500
payments.
In the negotiations between AJB and Brewin
Dolphin that had led to the November 1989 agreements, the
value of AJB's stockbroking business and the sum to be paid
for it had been agreed at £2.5 million but later negotiated
down to £1.25 million.
There were two reasons why under the
form the transaction finally took, the £1.25 million was to
be paid to AJB not by Brewin Dolphin, the purchaser of the
business, but by PCG as rent for the computer equipment spread
over four years.
One reason was that PCG hoped to be able
to deduct the "rent" from its taxable profits. The other reason
was that the payment of £1.25 million for the goodwill of
the stockbroking business would have prompted requirements
by the regulatory authority for additional capital funding
for that business.
AJB was at the time of the agreements
in deep financial trouble. A winding-up order was made against
AJB on April 25, 1990 on the petition of Wirral Equipment
Ltd and Asterrose Ltd.
On May 4, 1990 an administrative receiver
was appointed by AJB's debenture holder. AJB was, and was
when the winding-up order was made, hopelessly insolvent.
On June 24, 1994 Mr Phillips, the liquidator
and administrator of AJB, commenced proceedings against Brewin
Dolphin and PCG contending that the transaction under which
AJB had transferred its shares in BSL to Brewin Dolphin, thereby,
in effect, transferring its stockbroking business to Brewin
Dolphin, was a sale at an undervalue. An order against Brewin
Dolphin under section 238 was sought.
As against PCG, payment of the four
annual sums of £312,500 was claimed as part of the value of
the share capital of BSL due to be paid to AJB.
His Lordship said that one had to start
with the share sale agreement under which AJB agreed to divest
itself of its allegedly valuable asset, namely the shares
in BSL.
Section 238(4)(b) of the 1986 Act did
not stipulate by what person or persons the consideration
was to be provided. It simply directed attention to the consideration
for which the company had entered onto the transaction.
The identification of that consideration
was, in his Lordship's opinion, a question of fact. It might
also involve an issue of law, for example, as to the construction
of some document.
But if a company agreed to sell an asset
to A on terms that B agreed to enter into some collateral
agreement with the company, the consideration for the asset
would, in his Lordship's opinion, be the combination of the
consideration, if any, expressed in the agreement with A and
the value of the agreement with B.
n short, the issue in the present case
was not to identify the section 238(4) transaction. The issue
was to identify the section 238(4) consideration.
On the facts, it was plain that the consideration
for the BSL shares was, apart from obligations assumed by
Brewin Dolphin under the share sale agreement itself, the
entry by PCG into the sublease agreement under which it covenanted
to pay £312,500 per annum for four years.
The purchase price of £1.25 million was
to be paid under the sublease in four annual payments of £312,500
each. No other conclusion was, in his Lordship's opinion,
possible but that on those facts the consideration for the
BSL shares included the benefit of the covenant given by PCG
under the sublease.
What was the value, in money or money's
worth, of PCG's covenant under the sublease?
Mr Mitchell contended that the value
of the covenant was its face value, and pointed out that there
was not, and never had been any question as to PCG's ability
to pay.
His Lordship agreed that there was no
doubt as to PCG's ability to pay but the value of the covenant
needed to be investigated a little more deeply.
According to the sublease, the covenant
was given in exchange for the right to use the computer equipment.
But it appeared that, by the end of September 1989, Brewin
Dolphin had decided not to use the equipment in order to run
the business it was negotiating to acquire but, instead, to
update its own existing computer system. That decision did
not, of course, affect PCG's willingness to pay the £312,500
per annum for four years.
The amount of those payments was attributable
to the purchase, via the BSL shares, of AJB's business and
was not attributable in the least to any value placed on the
right to use the computer equipment.
That equipment, as Brewin Dolphin and
PCG knew, was held by AJB under head leases which barred AJB
from assigning of subletting any of the equipment. The bar
was expressed as an absolute one.
The sublease under which the four annual
payments were to be made constituted ipso facto a breach by
AJB of a term of the head leases. So the head leases became
terminable at any time by the head lessors and the equipment
comprised in the sublease could at any time have been repossessed
by them.
The repossession of the equipment would,
and did, bring to an end the sublease and the payment obligations
of PCG.
So, what was the value in money or money's
worth, of a covenant by PCG that was so precarious?
PCG's covenant which had been precarious
at the outset had become worthless by February 1990 the latest.
AJB went into compulsory winding-up in April 1990 and an administrative
receiver was appointed in May 1990.
Those events would inevitably have led
the head lessors to terminate the head leases and recover
their equipment, if they had not done so previously, thereby
bringing the subleases to an end.
Mr Mitchell submitted that those ex post
facto events ought not to be taken into account in valuing
PCG's sublease covenant as at November 10, 1989. His Lordship
did not agree.
In valuing the covenant as at that date,
the critical uncertainty was whether the sublease would survive
for the four years necessary to enable all the four £312,500
payments to fall due, or to survive long enough to enable
some of them to fall due, or would come to an end before any
had fallen due.
Where the events, or some of them, on
which the uncertainties depended had actually happened, it
seemed unsatisfactory and unnecessary for the court to wear
blinkers and pretend that it did not know what had happened.
Problems of a comparable sort might arise
for judicial determination in many different areas of the
law. Answers might not be uniform but might depend upon the
particular context in which the problem arose.
For the purposes of section 238(4) however,
and the valuation of the consideration for which a company
had entered into a transaction, reality should be given precedence
over speculation.
His Lordship would hold, taking into
account the events which took place in the early months of
1990, that the value of PCG's covenant in the sublease was
nil.
After all, if following the signing of
the sublease, AJB had taken the sublease to a bank or finance
house and had tried to raise money on the security of the
covenant, it was unlikely that the bank or finance house,
with knowledge of the circumstances surrounding the sublease,
would have attributed any value at all to the sublease covenant.
Where the value of the consideration
for which a company entered into a section 238 transaction
was as speculative, as was the case here, it was for the party
who relied on that consideration to establish its value. PCG
and Brewin Dolphin were unable to do so.
Therefore, his Lordship would treat the
value of the consideration for which AJB entered into the
share sale agreement as being confined to the value of the
consideration under that agreement. The sublease covenant
added nothing.
Mr Mitchell submitted that AJB's business
as at November 10, 1989 was worthless and that the BSL shares
were therefore valueless.
That submission was based on the fact
that AJB appeared to have been hopelessly insolvent and by
November 1989 was trading at a substantial loss of around
£13,000 a day.
The judge's findings were that AJB's
business assets were an attractive package to buyers such
as Brewin Dolphin, that it could not be inferred that Brewin
Dolphin was the only potential purchaser, and that Brewin
Dolphin, a reasonably well informed potential purchaser from
the class of typical purchasers, had been prepared to pay
about £1,050,000 for the BSL shares.
His Lordship agreed with that approach.
The value of an asset that was being offered for sale was,
prima facie, not less than the amount that a reasonably well
informed purchaser was prepared, in arm's length negotiations,
to pay for it.
On that issue, the judge reached his
figure of £1,050,000 after hearing and assessing the evidence,
including expert evidence. It had not been demonstrated that
in doing so he misdirected himself. The Court of Appeal upheld
him.
Lord Steyn, Lord Hutton, Lord Hobhouse
and Lord Millett agreed.
Solicitors: Goodman Derrick; CMS Cameron
McKenna
Source or File Reference : Times Law
Report January 23rd 2001
Additional Pages in Library : 0
Copyright : Times Law Report January 23rd 2001
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