Landlord and tenant – Repairing obligations – Compromise – Appellant major creditor obtaining damages for breach of landlord’s repairing obligations – Respondent being appointed as liquidator of landlord – Appellant refusing to approve compromise in respect of landlord’s debts — Judge sanctioning compromise — Whether compromise in best interests of creditors – Whether appellant entitled to adduce new evidence – Appeal dismissed – Application refused
The appellant was the tenant of a top-floor flat, His lease included a landlord covenant to keep the exterior, roofs and main walls of the building in good repair. In 1987, part of the decorative parapet above the appellant’s flat collapsed, but the landlord failed to carry out the necessary repairs.
In 1996, the appellant commenced proceedings against the landlord for breach of its repairing obligations and was awarded substantial damages. Later that year, the landlord went into voluntary liquidation and the respondent was appointed as liquidator. The appellant was the most significant creditor, with a claim in respect of his judgment and costs of around £486,000.
The respondent initiated proceedings against one of the landlord’s former directors (H) to recover moneys and property allegedly transferred at an undervalue or with an intention to defraud creditors. H proposed a compromise, offering £1m to be paid in two equal instalments, in full and final satisfaction of all claims. The appellant objected on the ground that the second payment might not be made because the respondent would use the initial payment to fund the expenses of the liquidation.
The respondent maintained that the settlement figure would have sufficed to pay the appellant in full. However, after an order sanctioning the compromise was issued under section 165 of the Insolvency Act 1986, his costs increased substantially and he was not prepared to reduce them to accommodate the appellant. The judge accepted that the respondent had properly assessed the value of the claims and the assets available to meet them, and he approved the settlement: see [2009] EWHC 2266 (Ch); [2010] BPIR 262.
The appellant appealed. He contended that the compromise was not in the best interests of the landlord’s creditors. The respondent had failed to press H to make an improved offer and had not properly assessed and made enquiries in respect of H’s actual asset position. The appellant also applied for permission to adduce new evidence to show that H had understated his available assets.
Held: The appeal was dismissed; the application was refused.
Liquidators often dealt with defaulting directors with a view to securing a reasonable return for the company’s creditors. The apparent keenness of the respondent to justify the settlement did not mean that the deal he had negotiated was inadequate or favoured H. The offer of £1m would have discharged the company’s liabilities to the appellant in full; the only disadvantage to him was the delayed payment. His asset position was relevant only in so far as the existence of further assets might have enabled the respondent to press successfully for an earlier payment in full.
In deciding whether to sanction a proposed compromise, the court had to consider whether the interests of creditors or contributories were likely to be best served by allowing the company to enter into that compromise. It was not for the court to speculate whether its terms were the best that could have been obtained. Unless the court could be satisfied that should the company not be permitted to enter into the negotiated compromise better terms or another compromise might be offered, the choice would be between the proposed compromise and no compromise: Re Greenhaven Motors Ltd [1999] BCC 463 considered.
In reaching its decision, the court might have to weigh the different interests of creditors and contributories and possibly those of preferential and non-preferential creditors. It would not consider to the wishes of parties that would not be affected by the decision. Subject to that, the court would give weight to the wishes of creditors and contributories whose interests it had to consider and which, if uninfluenced by extraneous considerations, were likely to be good judges of where their best interests lay. Similarly, it would give weight to the views of the liquidator, who would normally be best placed to take an informed and objective view. However, it was for the court to decide whether to sanction the compromise.
In looking at the alternatives, the court had to have regard to the apparent merits of the claim and to the risk and cost of pursuing it, whether by litigation or negotiation or both, and to the resources available to do so and the assets available to meet a successful claim. In considering the merits of the claim, the court could not conduct a mini-trial of the issues because only the material that had been produced at that stage would be available to it. However, the liquidator’s views were not binding on the court.
In the instant case, the judge’s conclusion had been unassailable. The appellant had not demonstrated that the judge had misdirected himself as to the relevant factors to be taken into account in deciding whether to approve the compromise. Nor did his decision lie outside the boundaries of his discretion. Faced with a compromise that, when made, met the appellant’s claim, the judge’s conclusion was all but inevitable given the chances of success in the litigation and the additional costs that further investigation and litigation would incur.
Furthermore, the court would not admit the new evidence because, at most, it would have led the judge to conclude only that there was an arguable but contested case for saying that H might have understated his net asset position. Neither did it affect the fact that the appellant would have had a dividend of 100p in £1 had he accepted the offer when it was made.
Duncan Kynoch (instructed under the public access scheme) appeared for the appellant; Tiran Nersessian (instructed by Edwin Coe LLP) appeared for the respondent.
Eileen O’Grady, barrister
