Extra Division’s ruling over Liquidator’s request for standard security reversed by Supreme Court

Extra Division’s ruling over Liquidator’s request for standard security reversed by Supreme Court

A recent ruling made by Britain’s most powerful legal authority has reinforced the importance for litigants to win their case in the first instance, with it becoming increasingly apparent that succeeding in appeal cases is getting harder to achieve.

The Supreme Court opted to uphold the initial ruling made by the Outer House of the Court of Session in Scotland which gave Foxworth Investments Ltd a standard security over the Letham Grange Hotel and a connected golf range.

The ruling means that previous verdict decreed by appeal court the Extra Division- who had previously concluded that the Outer House was evidently incorrect to conclude that both the hotel and its golf course had been purchased for a substantially lower total that their market value- was thrown out.

Joanne Gillies, Partner and a Solicitor Advocate at Pinsent Masons, has argued that the ruling will deliver a heavy blow to the country’s liquidators, as a precedent may have been set in their appeal process to contest pre-liquidation transfers for the benefit of creditors.

“The Supreme Court’s decision will come as a particular blow to liquidators seeking to challenge pre-liquidation transfers for the benefit of creditors – especially where there is, as is often the case, a trail of inadequate or unsatisfactory documentation,” she said.

“For litigants more generally, the message could not be clearer – ensure you succeed at first instance as chances on appeal are getting markedly slimmer.”

The verdict of the case is thought to have been dependent on whether the acquisition of Letham Grange and the connected golf course by Development Company Ltd in the immediate weeks leading up to its company liquidation constituted a ‘gratuitous alienation’; in Scottish legal terminology this translates to a property sale which was completed with the buyer paying far under the properties market value.

Under the 1986 Insolvency Act, liquidators are allowed to contest any property sale by a business within two years of the company receiving a winding up order, and the sale will be scrutinised unless it arises that it was undertaken for “adequate consideration”. Nevertheless, any third party given rights over the property “in good faith and for value” will be allowed to retain their acquisition.

The assets in question were first bought out by corporate giants LGDC back in November for an estimated £2 million, and were then sold again to Nova Scotia Ltd for a significantly lower £248,100 seven years later in February 2001. After LGDC was forced to go into liquidation 22 months later in December 2002, the market value of both assets was set at £1.8 million.

A month later, Nova Scotia was given a standard security over both the hotel and the golf course by the Outer House, who ruled against Foxworth. However, the ruling essentially meant that in reality Foxworth would be given control of both assets if Nova Scotia begun to default on their debts thereafter.

Later in 2003, the presiding liquidator for LGDC, Mr Henderson, started the process of contesting the 2001 sale of the assets to Nova Scotia, arguing that they had breached Scottish law by being guilty of gratuitous alienation. Henderson managed to acquire a decree six years later in 2009 after Nova Scotia didn’t turn up to court on their assigned date and he subsequently begun contesting Foxworth’s attainment of standard security on the grounds that they were fully aware of LGDC’s financial difficulties and their liquidation at the point of being granted it. This, Henderson argued was a clear exhibition of gratuitous alienation and meant that LGDC had not obtained their standard security “in good faith and for value”. Henderson also identified that each of the three businesses had a mutual director and governing mind, one Mr Liu.

When the case was first heard in the Outer House, the presiding authority Lord Glennie acknowledged Nova Scotia’s defence that it had taken on LGDC’s debts to Liu totalling £1.85 million from their acquisition of the asset, which indicated that they were not guilty of gratuitous alienation. However, this decision was then reversed by the appeal court Extra Division on the grounds that the financial documents involved with the sale were unclear and insufficient to prove that Nova Scotia were innocent of committing gratuitous alienation. Extra Division argued that the decision made by Glennie “erred in law” as it was made on the basis of presumptions and inadequate supporting evidence; a reality that meant that the final verdict was both “unsatisfactory” and “inconclusive”.

Lord Reed, announcing the principal judgement in the Supreme Court, reinstated the ruling of the Outer House and accepted the appeal of Foxworth Investments Ltd. Elaborating on the decision, Mr Reed argued that whilst the Extra Division was right to identify that an appeal court does have the sovereign power to reverse a judge’s ruling if they were clearly incorrect; this touchstone was not sufficiently met in the current case.

Reed added that a judge cannot be deemed ‘clearly wrong’ in cases where the appeal court comes to a different conclusion; instead, the significant aspect of the decision being appealed was that “no reasonable judge could have reached”.

“It follows that, in the absence of some other identifiable error, such as … a material error of law, or the making of a critical finding of fact which has no basis in the evidence, or a demonstrable misunderstanding of relevant evidence, or a demonstrable failure to consider relevant evidence, an appellate court will interfere with the findings of fact made by a trial judge only if it is satisfied that his decision cannot reasonably be explained or justified,” Mr Reed said.

Ms Gillies highlighted the ruling as clear evidence that succeeding first time in court is now imperative to liquidators chances of achieving their endeavours, and described the ruling as a ‘blow’ to those involved in the litigation industry.

“Given the best evidence that something is not correct or that a transaction is not quite as it is portrayed is often the poor paperwork surrounding or evidencing it, this decision will be a blow for the liquidators,” said Joanne Gillies.