Scotland—challenging a liquidator’s decision—the proper approach of the court (Re West Larkin Limited (in liquidation) (No 2))

What was the background?

The case concerned a note presented in the liquidation by a Mr Sweeney, seeking the making of an order under IA 1986, s 167(3) to have the liquidator directed to challenge the registration of a notice of interest registered by the tenants (the Urquharts) of an agricultural tenancy of the company’s only asset, a parcel of agricultural property.

If effective, the notice of interest would create certain statutory rights of pre-emption in favour of the Urquharts, entitling them to buy the property. On the other hand, if the notice was invalid, the liquidator would be free to sell the property on the open market.

This property had been the subject of a large number of disputes and litigations between the Sweeney and Urquhart families over a number of years, and there remained a fundamental dispute between the families as to whether the agricultural tenancy of the property still subsisted.

The liquidator had however refused to challenge the notice for reason that such a challenge would not be in the interests of the general body of creditors of the company, having regard to the uncertainty of outcome—the significant cost and expense that would be incurred, the company having no assets beyond the property, and the property having been valued at only £27,000.

The order sought in the note was opposed by Mrs Urquhart, one of the tenants, and the case came before Lady Wolffe to decide whether the liquidator should be directed to challenge the notice under IA 1986, s 167(3).

What did the court decide?

Lady Wolffe ultimately refused to grant IA 1986, s 167(3) order sought by the noter, determining that the liquidator’s refusal to challenge the notice was, in her view, eminently explicable and could not be said to be unreasonable.

In reaching that decision, she confirmed that the proper approach of the court to an application under IA 1986, s 167(3) is that, absent cases of fraud or bad faith, the court will only interfere with the act of a liquidator if he has done something so utterly unreasonable and absurd that no reasonable person would have done it (confirming the test set out in Re Edennote [1996] BCC 718).

Applying that test, and having regard to the principal objectives of a liquidation, the judge’s view was that the liquidator’s decision was readily explicable having regard to the valuation of the property, and the costs already incurred in the liquidation, noting that it was unlikely there would be any, or any significant, return to the company’s creditors.

The judge also considered that if the liquidator were to challenge the notice, the liquidator would be faced with a probable complex litigation of indeterminate (but not short) duration fought between the families, the outcome of which would be unknown, and with no certainty as to how it would be funded. Perhaps most importantly, the judge noted that even if a challenge was successful, it was entirely speculative as to whether this would generate even a minimal increase in the value which would be realised upon a disposal of the property.

What are the practical implications of this case?

IA 1986, s 167(3) provides that the exercise by a liquidator of his powers in a winding up by the court is subject to the control of the court, and that any creditor or contributory may apply to the court with respect to any exercise or proposed exercise of any of those powers.

While each application under IA 1986, s 167(3) will be determined on its own facts and circumstances, this case is helpful in restating and reaffirming that the proper approach of the court to such an application remains as articulated in the Edennote test. Liquidators will also welcome confirmation of the continued deference by the courts to their commercial judgment on certain decisions.

The case is also very useful in its analysis of the considerations to be taken into account by a liquidator, and those advising him, in decisions relating to the bringing of challenges or the raising of litigation. In particular, the costs already incurred in the liquidation, the costs of the challenge and litigation, how such costs would be funded, the prospects of success, and the likely benefits and return to creditors which would result from a successful challenge.

In reaching a decision as to whether to bring a challenge or raise litigation, liquidators should ensure that all of these considerations are taken into account (and properly documented in the event of a future challenge of their decision) so as to be able to justify the decision as being in the interests of the general body of creditors of the company.

Case details

• Court: Outer House, Court of Session  

• Judge: Lady Wolffe  

• Date of judgment: 14/01/2020

Stuart Clubb is a partner and a solicitor advocate at Shoosmiths. If you have any questions about membership of LexisPSL’s Case Analysis Expert Panels, please contact caseanalysis@lexisnexis.co.uk.

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