Phillips (Liquidator of A. J. Bekhor & Co.) and Another v. Brewin Dolphin Bell Lawrie

For section 238(4)(b) of the Insolvency Act 1986, consideration is identified as a matter of substance and fact. It may include the value of a linked collateral agreement made by a third party, even though that party did not enter into the challenged transaction.

When that consideration is speculative, later events resolving uncertainties present at the transaction date may inform its valuation. Reality should prevail over speculation, and the party relying on speculative consideration must establish its value. An asset's value is prima facie no less than the amount a reasonably well-informed purchaser is prepared to pay in arm's-length negotiations. The restorative discretion under section 238(3) should account for benefits received because of the transaction.

A. J. Bekhor & Co transferred its stockbroking business through the sale of shares in its subsidiary to Brewin Dolphin. The linked arrangements included Brewin Dolphin's assumption of employee liabilities and a covenant by its parent company, Private Capital Group, to pay £1.25 million under a computer-equipment sublease. The equipment was subsequently repossessed by the head lessors, and none of the sublease payments became payable.

Evans-Lombe J, at [1998] 1 BCLC 700, excluded the covenant from the consideration, valued the shares at £1.05 million and the relevant consideration at £325,000, and ordered Brewin Dolphin to pay £725,000 plus interest. The Court of Appeal, at [1999] 1 WLR 2052, upheld that result on the ground that the share sale and sublease were formally separate transactions.

The issues before the House were whether the third-party covenant formed part of the consideration, how that covenant and the shares should be valued, and whether a separate £312,500 loan should affect the restorative order.

1. Disposition. Lord Scott of Foscote delivered the leading speech. Lord Steyn, Lord Hutton, Lord Hobhouse of Woodborough and Lord Millett adopted his reasons. The House unanimously dismissed the appeal but varied the order to give credit for a £312,500 loan and corresponding interest.
2. Identification of consideration. Per Lord Scott, the Court of Appeal had focused incorrectly on identifying the boundaries of the section 238 transaction. Section 238(4)(b) instead required identification of the consideration for which the company entered into that transaction. That was a question of fact, potentially involving document construction. Where a company sells an asset to one person on terms that a third party enters into a collateral agreement, the consideration may comprise both arrangements. The six-part analysis in In re MC Bacon Ltd [1990] BCLC 324 was approved as a useful statement of the statutory requirements. The Private Capital Group covenant therefore formed part of the consideration for the shares.
3. Valuation of the covenant. Per Lord Scott, the covenant's inclusion did not establish that it possessed its face value. It depended upon a prohibited and terminable sublease, and the head lessors could repossess the equipment at any time. When valuing such precarious consideration under section 238(4), the court may use later events to resolve uncertainties already present at the transaction date. In this context, reality took precedence over speculation. The covenant was worth nil, and the parties relying upon that speculative consideration had failed to prove any positive value.
4. Value of the transferred asset. Per Lord Scott, insolvency and operating losses did not establish that the business or its shares were worthless. An asset offered for sale is prima facie worth no less than the amount a reasonably well-informed purchaser is prepared to pay in arm's-length negotiations. The trial judge was entitled to value the shares at £1.05 million after assessing the evidence, including expert evidence. Against consideration worth £325,000, the transaction was at an undervalue of £725,000.
5. Restorative order. Per Lord Scott, section 238(3) confers a broad discretion to restore the position that would have existed without the transaction. Private Capital Group's £312,500 loan was an advance payment of part of the contemplated consideration and a benefit which the company would not otherwise have received. Fairness required credit for that sum and interest at the same rate and from the same date as the interest payable by Brewin Dolphin. Private Capital Group was consequently required to withdraw its proof for the loan in the liquidation.

1. House of Lords — In [2001] UKHL 2, unanimously dismissed the appeal but varied the order to allow credit for the £312,500 loan and corresponding interest.
2. Court of Appeal — In [1999] 1 WLR 2052, dismissed the defendants' appeal and the company's cross-appeal. It upheld the £725,000 order, although it treated the share sale and sublease as separate transactions for section 238 purposes.
3. High Court — In [1998] 1 BCLC 700, Evans-Lombe J found a £725,000 undervalue, ordered Brewin Dolphin to pay that sum with interest, and dismissed the claim against Private Capital Group.