Insolvency

Company transferring goodwill to subsidiary and selling subsidiary to purchaser for 1 parent company leasing computer equipment used in business parent company refusing to make...Company transferring goodwill to subsidiary and selling subsidiary to purchaser for 1 parent company leasing computer equipment used in business parent company refusing to make annual payments following repossession of equipment company sold at undervaluePhillips and another v Brewin Dolphin Bell Lawrie Ltd and another: HL (Lord Steyn, Lord Hutton, Lord Hobhouse of Woodborough and Lord Scott of Foscote): 18 January 2001The company negotiated to sell its stockbroking business to B Ltd for 1.5m.

For tax and regulatory reasons the transaction was carried out by the company transferring its business and assets for 1 to a wholly owned subsidiary whose shares were then transferred to B Ltd.

By two agreements in November 1989 the company received (1) from B Ltd an assumption of the companys redundancy and other obligations to its employees and (2) from P Ltd, the parent company of B Ltd, a covenant to make four annual payments of 312,500 as rent for a sublease of the companys computer equipment.

In early 1990 the head lessor terminated the companys head lease and repossessed the computer equipment.

P Ltd treated the sublease as thereby terminated and refused to make the annual payments.

The company was wound up in April 1990.

Its liquidator applied for an order under section 238 of the Insolvency Act 1986 for a declaration that the company had been sold at an undervalue.

The judge granted the application and the Court of Appeal upheld that decision.

B Ltd and P Ltd appealed.Gregory Mitchell QC, Ewan McQuater and Christopher Hare (instructed by Goodman Derrick) for the defendants; Michael Briggs QC and Richard Slade (instructed by CMS Cameron McKenna) for the claimants.Held, dismissing the appeal, that section 238(4)(b) of the Act did not stipulate by whom the consideration was to be provided but simply directed attention to the consideration for which the company had entered into the transaction; that the identification of that consideration was mainly a question of fact and the consideration could include a collateral agreement with a third party; that it was plain that the consideration for the companys shares was, apart from obligations assumed by B Ltd under the share sale agreement itself, the entry by P Ltd into the sublease agreement; that in valuing that agreement as at November 1989, the critical uncertainty was whether the sublease would survive for long enough to enable all or any of the payments to fall due; that where events on which the uncertainties depended had actually happened, it was unsatisfactory and unnecessary for the court to wear blinkers and pretend that it did not know what had happened; that taking into account the events which took place in early 1990, the value of P Ltds covenant in the sublease was nil and therefore, the value of the consideration for which the company entered into the share sale agreement was confined to the value of the consideration under that agreement; that it had not been demonstrated that the judge misdirected himself in valuing the companys assets at 1.5m; and that, accordingly, for the purposes of section 238 of the company had entered into a transaction at an undervalue.

(WLR)