Whitehouse v Wilson & Anor

When a liquidator seeks court sanction for compromising company claims, the court must assess the transaction against the company’s best commercial interests and the alternatives available. The liquidator’s commercial judgment ordinarily receives full weight, provided the relevant offers and creditor interests have been properly understood and evaluated.

Certainty, finality and prompt payment may make an unconditional cash offer preferable to a deferred or contingent offer, even where the latter may benefit pre-liquidation creditors. The fact that a compromise would stifle a claim against a director is relevant, but is not an automatic bar. Public interest in investigating misconduct may in an appropriate case outweigh immediate commercial advantage; on the facts, it did not prevent sanction.

Vol-Mec Limited was in creditors’ voluntary liquidation. Its liquidator sought sanction under section 165(2)(b) of the Insolvency Act 1986 for accepting a £160,000 cash offer from Andrew Munro, the majority shareholder and director, for assignment of the company’s potential claims, including misfeasance claims.

Christopher Whitehouse, a minority shareholder and alleged creditor, opposed the compromise and advanced an alternative offer through a Dominican company. That offer involved £110,000 immediately and further sums subject to qualifications and delay. The High Court sanctioned the Munro compromise on 2 December 2005 after adjourning the matter to allow final offers. The appeal concerned the comparative commercial benefit of the offers, the weight to be given to the liquidator’s view, and whether public interest in pursuing alleged director misconduct should preclude sanction.

Appeal dismissed. All three judges agreed that the High Court’s sanction of the liquidator’s acceptance of Mr Munro’s offer should stand.

1. The transaction was, in substance, a compromise of company claims. Although the application was framed under section 112 of the Insolvency Act 1986, it was properly treated as an application for sanction under section 165(2)(b) and Part I of Schedule 4. The court had to consider the alternatives available to the liquidator and whether the compromise served the company’s best commercial interests. The commercial judgment of the liquidator was prima facie evidence of those interests and was entitled to full weight in the circumstances. This approach was applied from In re Edennote Ltd (No 2) [1997] 2 BCLC 89.
2. In an insolvent winding up, creditor interests may diverge. The immediate and certain £160,000 offered by Mr Munro was more advantageous to post-liquidation expense creditors than the £110,000 immediate payment and uncertain deferred element offered by CF Whitehouse Ltd. The latter offer involved potential disputes over expenses, delayed or contingent payment, a foreign assignee without known United Kingdom assets, and an unsecured personal guarantee. It could also expose expense creditors to the risk of litigation pursued primarily for a pre-liquidation creditor’s benefit.
3. The fact that a compromise would stifle a claim against a director was a relevant consideration, but did not of itself prevent sanction. Faryab v Smith [2001] BPIR 246 was distinguishable: that decision turned on inadequate evaluation of a potentially valuable claim and the absence of meaningful creditor benefit from the proposed assignment. The public-interest considerations associated with investigating and sanctioning misconduct, emphasised in In re Pantmaenog Timber Co Ltd [2003] UKHL 49, [2004] 1 AC 158, did not require refusal of sanction here.
4. Wilson LJ and Lindsay J considered that the public-interest element deserved more searching evaluation. Lindsay J stressed the need for accurate understanding of competing offers and, where appropriate, consideration of the seriousness of the alleged misconduct, statutory reporting, the parties’ means, security and further legal advice. Those observations did not alter the conclusion that the decision fell within the range of reasonable determinations and that the appeal should be dismissed.

• Court of Appeal (Civil Division) — [2006] EWCA Civ 1688, 7 December 2006: appeal dismissed and the High Court’s sanction upheld.
• High Court, Chancery Division, Leeds District Registry — on 2 December 2005, sanctioned the liquidator’s acceptance of Mr Munro’s £160,000 offer. An earlier order of 18 November 2005 had adjourned the application and provided for sanction of the best cash offer.