Greenhaven Motors Ltd, Re

On an application under section 167(1)(a) of the Insolvency Act 1986, the court itself must decide whether to sanction a liquidator’s proposed compromise. The court must assess whether the interests of creditors and contributories with a real interest in the assets are better served by the compromise, on its actual terms, or by refusing sanction. It should not speculate about better terms unless an alternative compromise is available. Considerable weight is ordinarily given to the liquidator’s informed and objective view, but that view does not determine the application. The more deferential Leon v York-o-Matic approach applies to section 167(3) supervision of a power which the liquidator may exercise without sanction. A compromise conferring no discernible benefit, while potentially harming the company’s claims, should not be sanctioned.

Greenhaven Motors Ltd was in liquidation. Its liquidator sought approval under section 167 of the Insolvency Act 1986 for a settlement with BG Funding Ltd and others concerning possession proceedings and competing claims relating to development land.

The Registrar approved the settlement on 19 November 1996 and dismissed Mr Mayers’s inter partes challenge on 22 November 1996. Harman J dismissed his appeal on 13 December 1996. The Court of Appeal considered both the appeal against approval of the compromise and an application for leave to appeal against a related costs order. The central issue was the proper approach to an application for sanction under section 167(1)(a), and whether the proposed settlement benefited those interested in the liquidation.

1. The appeal against approval was allowed unanimously. Chadwick LJ held, with Potter and Aldous LJJ agreeing, that the settlement required the liquidator to obtain the court’s sanction under section 167(1)(a) because it fell within paragraphs 2 and 3 of Part I of Schedule 4 to the Insolvency Act 1986. The application was not one under section 167(3).

2. The court must decide whether the interests of creditors and contributories having a real interest in the assets are better served by permitting the compromise on its actual terms or by refusing it. The court should give appropriate weight to the views of interested creditors, contributories and the liquidator, but the ultimate decision is the court’s. A person claiming to be a creditor or contributory should ordinarily be heard if the claim is bona fide and not plainly misconceived.

3. The court should not ask whether the liquidator negotiated the best possible terms, or speculate about a better compromise, unless better terms or another compromise are actually available. The comparison is ordinarily between the proposed compromise and no compromise.

4. The approach in Leon v York-o-Matic Ltd remains appropriate for applications under section 167(3), where the liquidator is exercising a power which does not require court sanction. It was wrong to apply that deferential test to a sanction application under section 167(1)(a).

5. Applying the correct approach, the proposed settlement gave no discernible benefit to any creditor or contributory. The £10,000 contribution principally benefited the liquidator personally or Mr Mayers, while the release of BG Funding’s debt claim was valueless because there were no distributable assets. The release of Greenhaven’s claims might cause loss. The court therefore refused sanction and set aside the Registrar’s order.

6. Leave to appeal against the County Court costs order was granted. On reconsideration, the costs order against Mr Mayers was upheld and that appeal was dismissed.

• England and Wales Court of Appeal (Civil Division): allowed the appeal against the Registrar’s approval of the compromise, set aside the Registrar’s order, and dismissed the appeal against the related County Court costs order.
• Chancery Division (Companies Court): Harman J dismissed the appeal from the Registrar’s order on 13 December 1996.
• Companies Court Registrar: approved the compromise and dismissed the inter partes challenge on 22 November 1996.