O'Connell & Ors (As Joint Administrators of London Oil & Gas Ltd) v London Group LLP & Ors

The court declared that two novation agreements dated 15 February 2019 were void for want of authority and alternatively would be set aside as transactions at an undervalue under section 238 of the Insolvency Act 1986. The judge held that the director who signed the deeds, Mr Simon Hume-Kendall, had neither actual nor ostensible authority to commit London Oil & Gas Limited to the novations and had acted in breach of fiduciary duties under sections 171 and 172 of the Companies Act 2006. The purported board ratification was ineffective because the board did not have full knowledge of the material facts and were misled; ratification would in any event have been a breach of duty in the financial circumstances. The court therefore granted the relief sought by the applicants (the administrators) to the extent of declaring the novation agreements void or, alternatively, ordering that they be set aside as transactions at an undervalue.

Background and nature of the application. The joint administrators of London Oil & Gas Limited (LOG) applied for declarations that two novation agreements of 15 February 2019 (each purporting to novate liabilities recorded as due from London Group LLP to LPE Enterprises Limited and London Power & Technology Limited respectively) were transactions at an undervalue under s.238 Insolvency Act 1986, alternatively void for lack of authority because they had been executed by a director in breach of fiduciary duties, or alternatively shams.

Parties and procedural posture. The Applicants were the joint administrators of LOG; the respondents included London Group LLP, LPE and LP&T. The case was tried in the High Court (Chancery) at first instance before Insolvency and Companies Court Judge Mullen. The respondents filed witness statements but did not attend trial; two of them later went into administration and their administrators adopted a neutral stance.

Principal factual findings. The judge found extensive and inconsistent documentary material, including backdated or multiple versions of facility agreements and other documents. LOG's trial balance showed a significant debt recorded as due from London Group LLP. Documents and bank statements indicated large payments routed through LG LLP and to its beneficial owners. Two facility agreements were subsequently prepared and backdated in January 2019 and the two novation agreements were executed on 15 February 2019, signed by Mr Hume-Kendall and witnessed by a former company secretary.

Issues for decision. (i) Whether Mr Hume-Kendall had actual or ostensible authority to enter into the novation agreements on behalf of LOG; (ii) whether the novation agreements were void because they were entered into in breach of directors' fiduciary duties; (iii) whether any purported ratification by the board was effective; (iv) whether, alternatively, the novation agreements were transactions at an undervalue under s.238 Insolvency Act 1986; and (v) whether the novation agreements were shams.

Court's reasoning and conclusions. The judge accepted the administrators' evidence and concluded that Mr Hume-Kendall had no authority, actual or ostensible, to enter into arrangements under which LOG would make the relevant loans or would release LG LLP from liabilities. The relevant board approvals required by LOG's articles (and by the companies' governance) were absent, and the arrangements were at odds with restructuring steps earlier approved by boards which required final board approval. The director had acted in breach of duties under ss.171 and 172 Companies Act 2006, at a time when LOG was insolvent or on the cusp of insolvency, and the respondents were deemed to have notice of the absence of authority. Any ratification by the board was ineffective because the board did not have full knowledge of material facts, had been misled as to the provenance and timing of documents (including backdating), and ratification would have been contrary to the directors' duties in the circumstances. The alternative statutory route was also established: the novations fell within the two-year relevant time, involved substitution of apparently unrecoverable debtors and provided no realistic consideration to LOG, and so would be set aside as transactions at an undervalue under s.238 IA 1986. The judge observed that it was unnecessary to decide finally the sham point given the conclusions on authority and undervalue.

Subsidiary findings. The judge accepted that certain facility agreements and sale agreements were backdated or inconsistent and that the evidence of the respondents' witnesses was insufficiently corroborated. The administrators' decision to rely on the respondents' written but untested statements was permitted but the judge gave those statements limited weight where unsupported by contemporaneous documents.

At first instance the court found in favour of the applicants. The novation agreements of 15 February 2019 are void for want of authority; alternatively they are to be set aside as transactions at an undervalue under section 238 Insolvency Act 1986. The rationale was that the director who executed the deeds lacked actual or ostensible authority, acted in breach of duties under sections 171 and 172 Companies Act 2006, the board could not validly ratify the transactions because it lacked material information and ratification would have been a breach of duty, and the novations substituted unrecoverable debtors within the relevant period and conferred no real consideration on the company.