Phillips and Another v. Brewin Dolphin Bell Lawrie and Another

The House of Lords considered the proper identification and valuation of the "consideration" for the purposes of section 238 of the Insolvency Act 1986 where a company sold its business via a share sale and a related covenant to pay was contained in a separate agreement with a third party. The court held that the statutory task is to identify the consideration for which the company entered into the relevant transaction and that collateral or linked agreements may form part of that consideration. However, the value attributed to such collateral covenants must reflect their real worth as at the relevant date and may be nil if, in light of the true circumstances and subsequent events, they were precarious. The court applied section 238(3) broadly to restore the position and exercised its discretion to allow the purchaser a credit for an advance payment (a loan) received by the company.

This case arises from the sale by A. J. Bekhor & Co (AJB) of its stockbroking business to Brewin Dolphin and connected arrangements involving Private Capital Group Ltd (PCG). AJB transferred the business to a wholly owned subsidiary, Bekhor Securities Ltd (BSL), and sold the BSL shares to Brewin Dolphin on 10 November 1989. Contemporaneously PCG covenanted, by a document described as a sublease, to pay £312,500 per annum for four years (a total of £1.25m) which corresponded to the agreed purchase price for the business. AJB was insolvent and the head lessors of the computer equipment had not consented to subletting. In early 1990 the head leases were terminated and the equipment was repossessed; PCG therefore made no payments.

The liquidator sought relief under section 238 of the Insolvency Act 1986, contending that AJB had entered into a transaction at an undervalue. The trial judge found the share sale and the sublease linked but excluded PCG's covenant when valuing the consideration; he treated the only effective consideration as Brewin Dolphin's assumption of redundancy liabilities (net £325,000) and valued the shares at £1,050,000, ordering Brewin Dolphin to pay £725,000 with interest. The Court of Appeal affirmed on different reasoning, treating the share sale as the transaction and declining to treat the sublease covenant as consideration.

The House of Lords, allowing the liquidator's claim in substance, held:

• The proper statutory inquiry under section 238(4)(b) is to identify the "consideration" for which the company entered into the transaction; collateral agreements entered into by third parties may form part of that consideration where they were intended as part of the deal.
• On the facts the sublease covenant was part of the agreed consideration but, taking account of the circumstances and subsequent events (including the clear contractual bar on subletting and early termination and repossession of the equipment), the realistic value of PCG's covenant as at 10 November 1989 was nil.
• Events occurring after the transaction that bear directly on uncertain contingencies relevant to valuation are proper to take into account; reality should prevail over speculation.
• An advance payment (a £312,500 loan by PCG to AJB shortly before completion) was an advantage received by AJB and ought to be credited when framing the restitutionary order under section 238(3); the court therefore varied the remedy to give Brewin Dolphin credit for that sum and interest.

Relief sought: an order under section 238(3) to restore the position as if AJB had not entered the transaction; issues framed: identification of the section 238 "transaction" and "consideration", valuation of the collateral covenant, valuation of AJB's assets, and the proper remedial order.

Appeal dismissed. The House of Lords held that the statutory inquiry under section 238 is to identify the consideration for which the company entered into the transaction and that collateral agreements may form part of that consideration. On the facts the covenant by PCG was part of the agreed consideration but its realistic value as at 10 November 1989 was nil because the covenant was precarious and was brought to an end before any payment fell due. The court upheld the finding that AJB entered into a transaction at an undervalue but varied the remedy under section 238(3) to allow a credit for a £312,500 loan advanced to AJB and interest thereon.

Trial: Evans-Lombe J, reported at [1998] 1 BCLC 700. Court of Appeal: Morritt LJ (Laws LJ and Lord Woolf MR concurring), reported at [1999] 1 WLR 2052. House of Lords: [2001] UKHL 2 (this judgment).