Mahomed & Anor v Morris & Ors

A surety claiming subrogation rights outside a compulsory liquidation is not, without more, a person aggrieved entitled to invoke section 168(5) of the Insolvency Act 1986. That summary procedure primarily permits confirmation, reversal or modification of a liquidator’s act or decision. Its ancillary power cannot sustain a bare claim for personal compensation where the relevant transaction can no longer be reversed or modified.

A liquidator may make a commercial compromise concerning disputed company assets, subject to intervention where the decision is so unreasonable that no reasonable liquidator could have made it. A secured creditor owes the debtor’s surety no duty to give notice or consult before compromising disputed security. Liquidation does not create such a duty, nor does it ordinarily require court approval where the liquidation committee has sanctioned the compromise.

The appellants had provided liens over their bank accounts as security for the indebtedness of a company to BCCI. They claimed that, upon the use of their funds, they became entitled by subrogation to any surplus from promissory notes held as security by BCCI. BCCI’s liquidators compromised a dispute with the company’s liquidator over ownership of those notes without consulting the appellants or obtaining the court’s sanction.

Jacob J struck out the appellants’ application under section 168(5) of the Insolvency Act 1986. Permission to appeal was confined to whether the liquidators could proceed without consulting the appellants or seeking directions from the Companies Court when aware of the possible subrogation claim. The respondents additionally contended that the appellants could not invoke section 168(5) and that the relief claimed was unavailable under it.

1. Disposition. The Court of Appeal unanimously dismissed the appeal. Peter Gibson LJ delivered the leading judgment. Schiemann LJ agreed and gave additional reasons; Wilson J agreed with both judgments.
2. Section 168(5) of the Insolvency Act 1986 provides a summary procedure in a compulsory liquidation. Although “any person aggrieved” is broad language, Parliament did not intend every outsider dissatisfied with a liquidator’s conduct to have standing. A person directly affected by a power conferred specifically on liquidators, who otherwise lacks a means of challenge, may qualify. A surety asserting subrogation rights independent of the liquidation does not qualify merely because the liquidator’s decision concerns company assets.
3. The relief primarily authorised by section 168(5) is confirmation, reversal or modification of the liquidator’s act or decision. The power to make a just order is ancillary. Because the compromise remained binding upon the other contracting party, neither the agreement nor the liquidators’ act of entering it could be reversed or modified. The claim was therefore, in substance, a bare claim for personal compensation and fell outside the subsection.
4. Liquidators act as agents of the company and do not ordinarily incur personal liability for their acts as liquidators. They are not fiduciaries for the company’s creditors, still less for non-creditor sureties asserting subrogation rights. No sustainable assumption of responsibility by the liquidators was pleaded. Any viable complaint by the sureties lay against the company.
5. The compromise of rival claims to company assets called for a commercial decision by the liquidators. The Re Edennote Ltd perversity test governed such a decision: intervention required conduct so unreasonable that no reasonable liquidator could have adopted it. The exception concerning competing creditors in Mitchell v Buckingham was distinguishable. The compromise involved neither competing unsecured creditors nor purely legal questions requiring determination by the Companies Court.
6. A secured creditor holding disputed security owes the debtor’s surety no duty to give notice or consult before compromising the dispute. Such a duty would seriously fetter the secured creditor’s freedom to deal with its security. The creditor’s liquidation did not alter that position. The liquidators reported the compromise to the liquidation committee and obtained its approval under the statutory scheme; they owed the appellants no additional duty to obtain court sanction.
7. The appellants’ case was therefore plainly unsustainable even under the stringent standard governing strike-out. The appeal was dismissed with costs, and leave to appeal to the House of Lords was refused.

1. Court of Appeal (Civil Division): The appeal was unanimously dismissed by [2000] EWCA Civ 46. The court upheld the striking out of the section 168(5) application and refused leave to appeal to the House of Lords.
2. High Court, Chancery Division, Companies Court: Jacob J struck out the application against the liquidators on 26 March 1999. He held that the compromise was not arguably perverse and that there was no duty to inform the appellants. He also refused leave under section 130(2) of the Insolvency Act 1986; that refusal was not appealed.