Phillips v Brewin Dolphin Bell Lawrie Ltd

For the purposes of identifying a transaction at an undervalue under section 238 of the Insolvency Act 1986, the court must identify the person with whom the company transacted and the consideration exchanged as the quid pro quo. Commercially linked contracts with different counterparties do not thereby form one statutory transaction.

The consideration supplied and received must be valued in money or money’s worth from the company’s perspective. An insolvent business is not necessarily valueless where an informed purchaser was willing to pay for a profitable part capable of preservation and sale.

A separate contract may be both part of a wider commercial arrangement and independently terminable. Failure to preserve a lessee’s right to uninterrupted possession may amount to a repudiatory breach where that right is fundamental to the lease.

A stockbroking company transferred its business to a subsidiary and sold the subsidiary’s shares to Brewin Dolphin for £1. The company separately leased computer equipment to Brewin Dolphin’s parent, PCG, for four years. The arrangements were commercially linked, but were embodied in separate agreements with different counterparties.

After the company failed to pay rent under the superior computer leases, the owners terminated those leases. PCG accepted the company’s breach of its own lease as repudiatory. The company was subsequently wound up.

Evans-Lombe J, in a decision reported at [1998] 1 BCLC 700, found that the share sale was at an undervalue of £725,000 and that PCG had been discharged from further performance of the computer lease. Brewin Dolphin appealed against the undervalue determination. The company cross-appealed on the lease issue. The principal questions concerned the statutory transaction’s scope, the value exchanged, and whether the lease had been validly terminated.

1. Appeal and cross-appeal dismissed. Morritt LJ delivered the judgment, with which Laws LJ and Lord Woolf MR agreed.

2. For section 238 of the Insolvency Act 1986, the relevant transaction was the share sale alone. Although the share sale and computer lease were linked commercially, they were deliberately structured as separate agreements. Brewin Dolphin alone was party to the share sale, while PCG alone was party to the lease. The statutory comparison concerned consideration provided by the counterparty as the quid pro quo for the company’s disposition. PCG’s rent covenant could not be recharacterised as consideration for Brewin Dolphin’s acquisition of the shares.

3. The doctrines concerning inconsistent rights did not prevent Brewin Dolphin from contending both that the lease was independently terminable and that the wider arrangements were relevant to the undervalue question. The two inquiries were legally distinct. Those doctrines apply only where the asserted rights or courses of action are truly alternative and inconsistent.

4. The shares and business transferred by the company had a value of £1.2 million. After deducting the agreed £150,000 value of retained computer equipment, the company’s consideration was worth £1.05 million. The informed price which Brewin Dolphin was prepared to pay provided permissible valuation evidence. The company’s insolvency did not make the profitable part of its business valueless because that part could have been preserved and sold.

5. The consideration received under the share sale was £325,001, comprising the £1 price and Brewin Dolphin’s £325,000 net redundancy liability. Neither PCG’s £1.25 million rent covenant nor its £312,500 loan formed part of that consideration. The statutory undervalue was therefore £725,000.

6. The lease was separately enforceable and terminable. The words “so far as he is able” did not exclude the condition implied by section 7(1) of the Supply of Goods and Services Act 1982. The company’s obligation to pay the superior lease rentals was essential to preserving PCG’s possession. Its breach went to the root of the lease and was validly accepted as repudiatory.

7. The court expressed no concluded view on whether section 238(3) could permit both restoration of the undervalue and enforcement of the full lease rentals. Morritt LJ was not convinced that allowing both would be a proper exercise of the statutory discretion, but the point did not arise.

1. Court of Appeal: Brewin Dolphin’s appeal and the company’s cross-appeal were dismissed with costs. Leave to appeal to the House of Lords was refused.

2. High Court, Chancery Division: Evans-Lombe J held that the shares had been sold at an undervalue of £725,000 and that PCG had been discharged from the computer lease by its acceptance of the company’s repudiation. The decision is reported at [1998] 1 BCLC 700.