11 Jul 2014
Leonie Donald, Partner, comments on the recent court case 'Henderson v Foxworth Investments Limited and Another’.
Leonie Donald, Partner, comments on the recent court case Henderson v Foxworth Investments Limited and Another.
On the 2nd July 2014 the Supreme Court allowed an appeal from Foxworth Investments Limited (‘FIL’) and Nova Scotia Limited (‘NSL’), the defenders in the ongoing legal saga between both parties and Matthew Henderson, the liquidator of Letham Grange Development Company (‘LGDC’). The liquidator sought reduction of a disposition granted by LGDC in favour of NSL, arguing that the sale of Letham Grange (‘the Subjects) by LGDC to NSL constituted a ‘gratuitous alienation’ as defined in section 242 of the Insolvency Act 1986. LGDC had purchased the Subjects in 1994 for just over £2 million, and sold the Subjects in 2001 for only £248,100. Mr Henderson won the first round of this legal battle and was granted decree by default in 2009.
In 2011 Mr Henderson then sought reduction of a standard security granted by NSL in favour of FIL in 2003 over the Subjects. He argued that as a result of the gratuitous alienation, FIL knew when they obtained the security that LGDC were in liquidation and the disposition itself was open to challenge. The defenders argued that the sale of the Subjects was in fact for ‘adequate consideration’; in addition to the sale price of £248,100, NSL claimed it had also assumed the debts owed by LGDC to the company’s director Mr Liu and his family members totalling £1.85 million. FIL could then argue that they fell within the scope of the proviso to section 242(4) as they had obtained the standard security from NSL in good faith and for value. The Lord Ordinary held that the sale of the Subjects had indeed been made for adequate consideration and the standard security was therefore not liable to reduction.
In March 2013 the Inner House reversed the decision of the Lord Ordinary on the grounds that the judge had erred in law. The Inner House found that the Lord Ordinary had not given satisfactory reasons that NSL had assumed the debts at the time of sale. He was therefore not entitled to find that adequate consideration had been given or that FIL had obtained their rights under the standard security in good faith or for value.
FIL and NSL appealed to the Supreme Court, with all 5 Supreme Court judges allowing the appeal. They held an appellate court which is indeed able to interfere with the decision of the trial judge, where that judge has gone “plainly wrong” in their decision; however it must have been shown that the Lord Ordinary, Lord Glennie, had made a decision that no other reasonable judge could have made, without any explanation or justification. This was not the case here. Lord Glennie had clearly identified the main issue in this case; had the alienation been made for adequate consideration, and was there an obligation taken to assume LGDC’s debts? Mr Liu gave evidence that a decision to assume the indebtedness had been taken on behalf of NSL before the sale was completed, and Lord Glennie was entitled to accept this evidence.
The Supreme Court clearly outlined that Lord Glennie had not erred in law as was claimed in the Inner House, and he was well within his powers to reject the arguments of the Liquidator and find in favour of the defenders. Lord Glennie heard evidence from both parties, weighed each side’s arguments up and made a reasoned decision. This case therefore acts as a reminder to appellate courts that even if a trial judge has made a decision they do not necessarily agree with, this is not a competent ground to overturn the decision at first instance when that trial judge has justified their decision sufficiently.
This case additionally acts as a general reminder of the importance of not only transferring assets for value, but then keeping meticulous records; fraud allegations were a feature of this case, with the liquidator contending that the documentation relating to NSL assuming LGDC’s debts had been produced after the sale to support a false case. Ultimately Lord Glennie made his decision based on the evidence of Mr Liu; he was reported to have an “acute business intelligence", and had received advice from his solicitor with regards to the transferring of assets at an undervalue. With this in mind Lord Glennie accepted the evidence of Mr Liu. The issue of gratuitous alienations should therefore be kept in mind for company directors when transferring assets who wish to avoid a legal battle as long as that of Henderson v Foxworth Investments and Another.