In Rubin v Coote [2011] EWCA Civ 106 (09 February 2011) the Court of Appeal has upheld the decision of a liquidator to settle litigation against a former director of a company notwithstanding the opposition of the company’s creditors.

The liquidator of Branchempire Limited (‘Branchempire’) had negotiated a settlement of its claims against its former director Brian Henton and Lookmaster Limited (‘Lookmaster’), a company controlled by him, whereby creditors stood to be repaid in full over a period of some two years. In order to complete the settlement the liquidator needed the sanction of the company’s creditors under section 165 of the Insolvency Act 1986 (the 1986 Act). The creditors however refused sanction to the liquidator to settle, seeking immediate payment from Mr Henton of the sum due under the proposed settlement. Consequently, the liquidator made a successful application to the High Court for an order sanctioning the settlement, under section 165(2)(b) of the 1986 Act.  

Michael Coote, a former long leasehold tenant of Branchempire and its major creditor, appealed, contending that the terms of the proposed compromise were not in the best interests of the creditors. This was against a ‘long history of dishonest evasion’ by Mr Henton divesting Branchempire of its assets in favour of himself and Lookmaster. Mr Coote also alleged that, in reaching the compromise with Mr Henton, the liquidator failed to make proper enquiries into the assets of Lookmaster and Mr Henton. In support of this allegation Mr Coote sought to introduce a substantial amount of new evidence relating to Mr Henton’s assets. In the event the Court of Appeal refused to admit this, mindful that this was relevant only to the question of timing of the proposed payment, not to the amount, and did not affect the overall prospects of the claims succeeding.

The Court of Appeal upheld the High Court’s decision, agreeing unanimously that the reasoning of the High Court was correct; the judge had been entitled to find that the £1 million settlement figure was acceptable given the chances of success in the litigation and the additional costs which further investigation and litigation would involve. The Court of Appeal noted that it had no impact on the fact that Mr Coote would have had a dividend of 100p in the £1 had he accepted the offer when it was made, even if he had to wait two years for it.

Regarding the discretion of the judge of first instance in approving the disputed compromise, the Court of Appeal took the view that the court must weigh the prospective benefit to creditors from the settlement against the possible benefits from the available alternative causes of action. Where, as in this case, there was a clear rationale for the settlement, the court was right to prefer the settlement instead of requiring the liquidator to continue to negotiate for an immediate payment that it was not clear was capable of being achieved. The other interesting point of note arising out of the Court of Appeal’s decision is that it clarified that the court can take into account the interests of creditors whose claims arise after liquidation has commenced, for example, the interests of the liquidator in relation to his unpaid fees (which were substantial by the time Mr Coote came to the High Court, standing at approximately £847,000). The Court appeared to agree with the liquidator that the potential fruits of investigating whether further assets were available to meet the creditors’ claims would be outstripped by the costs of such investigations.

Considering the history of the claim and the lengths Mr Coote had to go to for payment of the sums due to him it is perhaps understandable that he expected the liquidator, who had been appointed largely as a result of pressure from Mr Coote himself, to have gone the extra mile to try and achieve earlier payment. The Court of Appeal nevertheless adopted a commercial and pragmatic approach thus avoiding the inevitable outlay of substantial further costs for an uncertain improvement in the timing and amount of payment to creditors.