Lomax Leisure Ltd v Miller & Anor

A dividend declared by liquidators does not create a personal debt owed by the liquidators to creditors. The creditor’s remedy for non-payment is an order requiring payment from the liquidation assets, with any personal claim ordinarily arising only through misfeasance. An application appealing rejection of a proof is “pending” once it is on foot; service on the liquidator is not required. A dividend may therefore be postponed or cancelled where a properly constituted and meritorious appeal exists. A cheque issued by liquidators is unsupported by consideration where they have no personal liability for the dividend. Even if the cheque were enforceable, payment made under a mistake as to the outstanding appeal could be recoverable.

The claimant, an assignee of creditors’ claims, sued former liquidators of a members’ voluntary winding-up. The liquidators had declared a first and final dividend and sent cheques, but stopped payment after learning that another creditor had issued an application challenging rejection of its proof. The challenge was later successful, leaving insufficient funds for payment in full.

The claimant sought payment or compensation for the dividends and sued on the cheques. The central issues were whether the dividend declaration created a personal obligation, whether the appeal was “pending” before service, whether the cheques were supported by consideration, and whether the liquidators could rely on mistake and circuity of action.

1. The claim for payment or compensation failed. Under Rules 11.5 and 4.180(1) of the Insolvency Rules 1986, declaration of a dividend did not make the liquidators personally liable or create a debtor-creditor relationship between them and the creditors. The analogous remedy under Rule 4.182(3) was an order directing payment from the liquidation assets. A personal claim might arise from subsequent misfeasance, ordinarily under section 212 of the Insolvency Act 1986, but that was not the claim advanced.

2. “Pending” in Rule 11.5(2) meant that an appeal against rejection of a proof was on foot. Service on the liquidator was not an additional requirement. The rules balanced finality in distributions against protection of creditors who had appealed in time. Where the appeal was properly constituted and had some merit, there was good reason to postpone finality. The liquidators therefore had cause to postpone or cancel the dividend under Rule 11.4, and the dividend ought not to have been declared.

3. The cheques were not supported by consideration under section 27 of the Bills of Exchange Act 1882. The liquidators had no antecedent debt or personal liability to the creditors, and the commercial-benefit reasoning in Autobiography Ltd v Byrne was distinguishable. The cheques were consequently revocable instructions to the bank.

4. Alternatively, if the cheques had been supported by consideration, payment would have been made under a mistake of fact and law. The creditors had no right to receive the money, and the liquidators would have had a restitutionary claim subject to any change of position defence. The rule against circuity of action meant that the creditors could not obtain a better position through an action on unpaid cheques.

5. The claim failed on both pleaded bases. Lomax was provisionally ordered to pay the defendants’ costs on the standard basis, subject to further submissions.

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