Henderson v Foxworth Investments Ltd

The appeal concerned the liquidator's challenge under section 242 of the Insolvency Act 1986 to the disposition of valuable heritable property made within two years of the commencement of winding up. The critical questions were whether the alienation was made for adequate consideration and whether the first appellant (Foxworth) acquired its standard security "in good faith and for value" within the proviso to section 242(4). The Lord Ordinary had found that NSL assumed Liu-family debts of £1.85m as part of the consideration and so the disposition was not at an undervalue; the Extra Division set that finding aside on the ground that an enforceable obligation had not been shown to exist at the time of the sale and granted reduction of the security.

The Supreme Court allowed the appeal, holding that the Extra Division had no proper basis for concluding that the Lord Ordinary had misdirected himself or had gone "plainly wrong" on the facts. The court emphasised (1) the unchallenged evidence of Liu-family loans to the company, (2) the commercial inevitability that those loans would be reflected when the assets were transferred between related family companies, and (3) that the Lord Ordinary's assessment of credibility and of when an obligation was undertaken was one that a reasonable judge could reach.

Background and parties. Letham Grange (the subjects) was sold by Letham Grange Development Company Ltd (LGDC) in 2001 to 3052775 Nova Scotia Ltd (NSL) for £248,100. NSL granted a standard security to Foxworth Investments Ltd (Foxworth) in 2003. LGDC went into liquidation in December 2002 and the respondent (the liquidator, Henderson) challenged the 2001 disposition and the subsequent security.

(i) Nature of the claim. The liquidator sought reduction of the standard security on the basis that the 2001 disposition was a gratuitous alienation susceptible to reduction under section 242 of the Insolvency Act 1986, and that Foxworth could not claim the protection of the proviso preserving rights acquired "in good faith and for value" because of knowledge and common control by Mr Liu.

(ii) Issues framed by the court.

• whether the disposition of 12 February 2001 was made for adequate consideration;
• whether the assumption by NSL of liabilities owed to the Liu family (£1.85m) formed part of the consideration and was enforceable at the time of the disposition;
• whether Foxworth acquired its security in good faith and for value; and
• the correct approach to appellate review of factual findings (when a trial judge can be said to have gone "plainly wrong").

(iii) Procedural posture and reasoning. At first instance the Lord Ordinary, after a lengthy proof, found the Liu-family loans had been made, accepted Mr Liu as credible on the essential points and concluded that NSL had assumed £1.85m of family debt as part of the consideration, so the disposition was not reducible. The Inner House (Extra Division) held that the Lord Ordinary had erred because there was no finding that any obligation was enforceable at the date of the disposition and because his reasons were inadequate; it granted reduction. The Supreme Court (Lord Reed, with the court) allowed the appeal. The court stressed that an appellate court will only interfere with trial findings if they cannot reasonably be explained or justified, or if the judge has made a legal error or a critical finding that has no basis in the evidence. Applying that standard, the Supreme Court concluded the Lord Ordinary had been entitled to accept the unchallenged evidence of Liu-family loans, to regard the assumption of liability by a related purchaser as commercially probable, and to accept Mr Liu's evidence on the essentials. The Extra Division had therefore no proper basis to disturb the Lord Ordinary's factual conclusions. The Supreme Court remitted the question of expenses in the Outer House to the Lord Ordinary for determination in light of the restored substantive judgment.

Wider context. The court reiterated the strict limits on appellate interference with findings of fact and clarified the application of the "plainly wrong" standard in the context of contested credibility and circumstantial evidence.

Appeal allowed. The Supreme Court held that the Lord Ordinary’s factual findings — including that NSL assumed £1.85m of Liu-family debt as part of the consideration and that Mr Liu was credible on the essential matters — were ones that could reasonably be reached and were not vitiated by error of law or lack of reasons. The Extra Division therefore had no proper basis to set those findings aside. The court restored the Lord Ordinary’s substantive conclusion and remitted the question of expenses in the Outer House for reconsideration.

Outer House (Lord Ordinary) [2011] CSOH 66; 2011 SLT 1152 — Lord Ordinary found sale made for adequate consideration. Inner House, Extra Division [2013] CSIH 13; 2013 SLT 445 — allowed liquidator's appeal and granted reduction. Appeal to Supreme Court [2014] UKSC 41 — appeal allowed, substantive first-instance decision restored; expenses remitted to Lord Ordinary.