Rubin v Coote

Sanction of a liquidator’s compromise is a matter for the court’s own discretion. The court must decide whether the compromise is in the best commercial interests of the company and creditors whose interests are genuinely affected. It should give substantial weight to a liquidator’s properly formed, impartial and informed assessment, but is not bound by it. The court must compare the proposed compromise with the realistic alternative of pursuing or abandoning the claims, taking account of apparent merits, litigation and negotiation risks, costs, available resources, recoverable assets and the interests of different creditor classes. It must avoid conducting a mini-trial. The compromise was sanctioned where the liquidator’s assessment was properly made and the alternative outcome remained uncertain.

Branchempire Limited was in voluntary liquidation. The claimant liquidator sought sanction for a compromise of claims against Brian Henton, Lookmaster Limited and others concerning alleged breaches of fiduciary duty, transactions at an undervalue, preferences and transactions intended to defraud creditors. The proposed compromise required payments totalling £1 million, supported by Mr Henton’s personal guarantee.

The defendant, Michael Coote, the principal unsecured creditor, opposed the application. He considered the claims substantially more valuable and wished them to be pursued, potentially by a replacement liquidator on a contingency basis. The central issue was whether accepting the negotiated compromise, rather than pursuing the claims, was in the best commercial interests of the company and its creditors.

1. Discretion and relevant interests. The court itself had to decide whether to sanction the compromise. The relevant question was whether those with a real interest in the assets were likely to be best served by accepting the compromise or by refusing it. The court could take account of the views of creditors, the liquidator and post-liquidation creditors, but was not bound by any of them.
2. Weight given to the liquidator. Substantial weight would normally be given to the liquidator’s view where he had made a proper, careful and impartial assessment of the claims and the commercial merits of the compromise. That weight did not make the liquidator’s view binding. The court could depart from it where the assessment was flawed or substantial reasons existed.
3. Assessment of the alternative. The court was not required to speculate that better settlement terms could be obtained. Unless a rival offer was available, the practical comparison was between the proposed compromise and no compromise. The court nevertheless had to consider what pursuing the claims might realistically produce, including the apparent merits, risks and costs of litigation or negotiation, available resources, and the assets available to satisfy any judgment.
4. Limits of the inquiry. The court should not conduct a mini-trial. It had to assess whether the liquidator had properly evaluated the claims and whether that evaluation was obviously flawed, inadequate or negated by evidence before the court.
5. Application. The liquidator had properly assessed the claims, their potential value and the assets available to meet them. Counsel’s cautious advice was justified by evidential and legal uncertainties, including questions concerning intention, limitation and the value of assets. The possibility of a better recovery, or of cost-free pursuit by a replacement liquidator, was too uncertain to outweigh the negotiated compromise. The compromise was sanctioned.