House of Lords considers what constitutes a transaction at an undervalue

The House of Lords considered what constitutes a transaction at an undervalue in a judgment handed down yesterday. CMS Cameron McKenna acted for the successful Liquidator who had sought to challenge a sale made prior to the liquidation as a transaction at an undervalue under section 238 Insolvency Act 1986.

The facts of the transaction were as follows. A J Bekhor & Co (the "Company") entered into agreements with Brewin Dolphin & Co Limited and also entered into agreements with Private Capital Group Limited ("PCG") (Brewin Dolphin's parent company) with the purpose of selling the Company's broking business to Brewin Dolphin. The various agreements were linked.

The overall intention was that Brewin Dolphin would purchase the Company's trade for the consideration of GBP 1.25 million payable over 4 years. This was to be implemented by the Company selling its business, excluding its computer and other fixed assets, to a subsidiary and then selling the shares in that subsidiary to Brewin Dolphin. The consideration would be GBP 1. Separately, PCG entered into a leasing agreement with the Company for the computer, the lease payments for which would be yearly in arrears for 4 years at a rate of GBP 312,500 (totalling GBP 1.5millon). The objective was that the purchase price would be tax deductible and that no value would be placed on goodwill. The transfer of the computer equipment required the consent of the head lessors. This was neither sought nor given. The Company defaulted on the head leases which were terminated. PCG treated the sub-lease as having been brought to an end and did not make any of the GBP 312,500 payments.

The Company subsequently went into administrative receivership and liquidation. The liquidator sought to challenge the sale as a transaction at an undervalue under Section 238 Insolvency Act 1986.

This appeal by Brewin Dolphin was heard by Lords Steyne, Hutton, Hobhouse, Millett and Scott. The judgment was written by Lord Scott, the main points of interest being as follows:

1. The Court should look at the overall consideration received by the Company for the relevant asset: "... if a Company agrees to sell an asset to A on terms that B agrees to enter into some collateral agreement with the company, the consideration for the asset will, in my opinion, be the combination of the consideration, if any, expressed in the agreement with A and the value of the agreement with B...".

2. Subsequent events may be taken into account when assessing the value of the consideration which the Company receives in return for its asset: "... Where the events, or some of them, on which the uncertainties [as to the value of the consideration received by the Company] depend have actually happened, it seems to me unsatisfactory and unnecessary for the Court to wear blinkers and pretend that it does not know what has happened ... For the purposes of Section 238(4) ... and the valuation of the consideration for which a company has entered into a transaction, reality should, in my opinion, be given precedence over speculation. I would hold, taking into account the events that took place in the early months of 1990, that the value of [the consideration given by] Private Capital Group [in the form of its] covenant in the sub-lease of 10th November 1989 was nil ...".

3. Finally, on a point which comes up every day of the week ... "The value of an asset that is being offered for sell is, prima facie, not less than the amount that a reasonably well informed purchaser is prepared, in arms' length negotiations, to pay for it".

Phillips (Liquidator of A J Bekhor & Company) and another (Respondents) -v- Brewin Dolphin Bell Lawrie (Formerly Brewin Dolphin & Company Limited) (Appellants) and another

For further information, please contact Duncan Aldred by e-mail at [email protected] or by telephone on +44 (0)20 7367 2709, or alternatively please contact Belinda Hackett by e-mail at [email protected] or by telephone on +44 (0)20 7367 2807.