Edennote Ltd, Re

In a compulsory winding up, unsecured creditors whose interests are prejudiced by an undervalue sale are persons aggrieved and may ask the court to undo the transaction under the Insolvency Act 1986. The court’s intervention is exceptional. The question is whether the liquidator acted so unreasonably and absurdly that no reasonable liquidator would have acted in that way. The objective standard assumes that the liquidator obtained proper advice where advice was needed. Failure to investigate a potentially better realisation may satisfy that standard. Removal is distinct. Cause need not involve misconduct, but creditor loss of confidence must be reasonable. The court does not lightly remove its own officer and must consider the effect on professional standing. An honest mistake which can be corrected may justify setting aside a transaction without justifying removal.

Edennote Ltd was being wound up by the court. Its liquidator assigned a company cause of action to Mr Venables, who was also a creditor and contributory. Tottenham Hotspur plc, Amshold Ltd and Mr Sugar applied to set aside the assignment and remove the liquidator.

Sir John Vinelott in the Chancery Division set aside the assignment and removed the liquidator. His decision is reported at [1995] 2 BCLC 248. Mr Venables appealed both aspects of the order; the liquidator did not appeal. The issues were whether the applicants had standing under sections 167(3) and 168(5), what test governed interference with a liquidator’s sale of assets, and whether the circumstances justified removal under section 172.

1. Standing and statutory control. Sections 167(3) and 168(5) of the Insolvency Act 1986 were not confined to proposed or prospective acts. The court could control a past exercise of the liquidator’s powers and, where appropriate, undo the transaction resulting from it. The applicants were unsecured creditors whose interests would be prejudiced by an undervalue sale. They were therefore persons aggrieved and had standing under section 168(5). There was no need to restrict either provision because of their overlap.
2. Setting aside the assignment. It was unnecessary and potentially confusing to import the language of administrative-law review into the supervision of liquidators, who ordinarily act as prudent businesspeople. The governing standard remained whether the act was so utterly unreasonable and absurd that no reasonable person would have done it. A reasonable liquidator is taken to be properly advised where advice is needed. Here, proper advice would have revealed that the proposed assignee could obtain substantial negotiating leverage from the assigned cause of action. The liquidator should therefore have approached the applicants to test whether a better realisation was available. His failure to do so satisfied the applicable standard. The order setting aside the assignment was affirmed.
3. Removal from office. Although section 172 does not expressly require cause to be shown, the court agreed that removal without cause would be inappropriate. The principle in Re Kevpak Homecare Ltd. was broad enough to permit removal even without personal misconduct. However, creditor loss of confidence had to be reasonable. The court should not lightly remove its own officer and should consider the effect on professional standing and reputation. Mr Ryman had made a serious but honest mistake. The steps needed to obtain the best deal could still be taken and did not show that he was incapacitated from continuing. No adequate grounds for a reasonable loss of confidence were established.
4. Disposition. The order removing Mr Ryman was discharged. The order setting aside the assignment and the costs order below remained in force. The applicants received two-thirds of their costs of the appeal.

1. Court of Appeal (Civil Division) affirmed the setting aside of the assignment but allowed the appeal to the extent of discharging the order removing the liquidator.
2. High Court of Justice, Chancery Division set aside the assignment and removed the liquidator by order of Sir John Vinelott. The decision is reported at [1995] 2 BCLC 248.