Lord v Sinai Securities Ltd & Ors

On an application to dismiss a liquidator’s claim summarily, the court should not determine disputed valuation and commercial-benefit issues unless the claim has no real prospect of success. A covenant to pay money may have substantial value even where the company’s assets are charged and its liabilities exceed their apparent value. Relief for a transaction at an undervalue is discretionary. The court’s primary concern may be restoring the company’s position, and complete restoration of the counterparty is not always required. The statutory good-faith and business-purpose protection requires both the relevant subjective purpose and objectively reasonable grounds for believing that the transaction would benefit the company. For the shadow-director definition, control over one director is insufficient; it must be shown that the directors, or at least a consistent majority, were accustomed to act on the person’s directions.

The claimant, the liquidator of Rosshill Properties Limited, sought relief against Sinai Securities Limited under sections 238 and 239 of the Insolvency Act 1986. The challenge concerned a 2000 compromise under which Rosshill covenanted to pay Sinai £6 million and granted security over development land. Sinai applied for the liquidator’s claims to be dismissed as having no real prospect of success.

The issues were whether the covenant could have had substantial value, whether the compromise could attract relief despite difficulties in restoring the parties to their former positions, whether the statutory defence under section 238(5) was established, and whether Sinai or the relevant individual was connected with Rosshill as a shadow director. The court also considered whether the preference claim was outside the applicable statutory period.

1. Section 238 claim. The liquidator’s case could not be dismissed summarily. It was open to him to establish that Rosshill’s covenant to pay £6 million had substantial value when made. The existing evidence, including a later negotiated sale of the land for £7.5 million without planning permission, prevented the court from concluding that the covenant was valueless.
2. The benefits said to have been obtained by Rosshill under the compromise might not be measurable in money or money’s worth. That issue was suitable for determination at trial. The liquidator therefore had a real prospect of showing that the consideration received was significantly less than the consideration provided.
3. Relief under section 238(3) was discretionary. The fact that Mr Smith could not be restored in every respect to his pre-compromise position did not mean that no order could be made. The relevant transaction was the sale or transfer by Rosshill, and the court’s primary concern might be restoration of the company’s position. The counterparty’s position remained a matter for the court’s general discretion.
4. The section 238(5) defence was not established at this stage. Good faith alone was insufficient. The requirements that the transaction be entered into for the purpose of carrying on the company’s business and that there be objectively reasonable grounds for believing that it would benefit the company remained open for determination.
5. Section 239 claim. The preference claim was outside the six-month period unless the recipient was connected with Rosshill. Under sections 249(a) and 251, a person was not a shadow director merely because one director was his nominee. It had to be shown that the directors, or at least a consistent majority, were accustomed to act on that person’s directions. The argument that this custom existed solely during one board meeting was hopeless.
6. The section 238 claim was allowed to proceed. The section 239 claim was doomed to fail and was not permitted to proceed to trial. Further argument on the form of order and directions was adjourned.

First-instance decision. No prior appellate decision is stated in the judgment.