Case No: 1520/2014
6097/2014
CH/2015/0207
Neutral Citation Number: [2016] EWHC 444 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL

Date: 5 January 2016 

Before :

His Honour Judge Purle QC

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Between :

	(1) Mark Wilson 
(in his capacity as liquidator of 375 Live Limited)
(2) 375 LIVE LIMITED 
  (in compulsory liquidation)	Appellants	
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	(1) SMC Properties Ltd 
 (2) Unitguide Limited 	Respondents	

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Christopher Harrison (instructed by Wedlake Bell LLP) for the Appellants
Hugh Sims QC (instructed by Hausfield & Co LLP) for the Respondents

Hearing dates: 5 January 2016

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JUDGMENT
His Honour Judge Purle QC                     Tuesday, 5th January 2016

Ruling by HIS HONOUR JUDGE PURLE QC

1.	JUDGE PURLE:  This is an appeal from an order of Mr Registrar Briggs, which he made on 2 April of last year.  By that order, he validated, pursuant to section 127 of the Insolvency Act 1986, a contract dated 6 March 2014, made between 375 Live Ltd (“the company”) and SMC Properties Limited (“SMC”) as purchaser of land known as 58G Hatton Garden, London, and the subsequent transfer dated 4 April 2014.  
2.	6 March 2014 was after the presentation of a winding-up petition, which occurred on 26 February 2014, but before its advertisement.
3.	4 April was the day after the advertisement of the petition.  The winding-up order was made on 14 April 2014.
4.	Section 127 of the Insolvency Act 1986 reads as follows:
"In a winding up by the court, any disposition of the company's property, and any transfer of shares or alteration in the status of the company's members made after the commencement of the winding up is, unless the court otherwise orders, void."

5.	That section is, therefore, comprehensive and invalidates all transactions, save to the extent that the court subsequently validates them, entered into after the presentation of the petition.
6.	In this case, the Registrar validated the transaction because he regarded SMC, from whom he heard by its director and the person who negotiated this transaction, as a genuine, unconnected purchaser, purchasing at a price which it believed was a proper price.
7.	The property in question had, in fact, been purchased some while earlier, in August 2011, for over £1 million:  £1.2 million to be precise.  So the resale price was significantly down on that, despite the fact that property values had, on the evidence before the Registrar, increased in the intervening period.  The property had deteriorated somewhat in the meantime and had been subject to alterations, which were said to be unconventional.  This may well have had a depressive effect on the value of the property, and the Registrar himself found as a fact that £200,000 needed to be spent on renovations and repairs.
8.	The property was mortgaged to Unitguide Limited, which had security over the property.  It had lent £600,000 initially, and that was due to be repaid after an extension in April 2014.  There was evidence from Mr Kaye of Unitguide Limited, from whom the Registrar heard, that he would, in the absence of repayment or a prospect of early repayment, have appointed a receiver in the event of further default after April 6 2014.  Other evidence suggested that he was content with his margin of security, but it is clear, looking at his evidence as a whole, that he was not going to wait for payment indefinitely, and the Registrar proceeded on the basis that if the property had not been sold when it was sold, in March, then the probability was that the mortgagee would have intervened and there would have been, in the language of Mr Kaye, a “distress sale”.  A "distress sale" would, as is common knowledge, give rise to a real risk of a reduced value, which the experts put at between 10 and 20 per cent of the market value in a market where there was no pressure to sell.
9.	The sale on the company's side was conducted by a Mr Clegg, though he says he was merely acting under the instructions of a Mr Conway.  However, Mr Clegg was the de jure director of the company.  The property had been marketed, initially at a price of £1.5 million, since November 2013.  The company was under substantial pressure from its creditors, not only Unitguide Limited, which wanted repaying, but most particularly, the Revenue, who were owed a substantial amount in Value Added Tax, for which there was no apparent prospect of repayment, save possibly from a sale of this property, had the proceeds been applied appropriately, which it seems was not the case.  However, that has nothing to do with SMC, the purchaser who paid good money -- £850,000 -- to purchase this property, not knowing, in fact, of the existence of the winding-up petition.
10.	So far as the company's knowledge is concerned, it must, of course, have known of the existence of the winding-up petition, because it would have been served with it, and it was wound up on 14 April 2014.
11.	It may be that it might have been said that SMC should have known of the existence of the winding-up petition, at least before completion, because it had by then been gazetted and the Gazette can these days be accessed electronically.  In addition there is, as is noted in the Chancery Guide, a register of pending petitions which can be accessed by anyone wishing to know whether a particular company is facing a winding-up petition.
12.	However, this point does not appear to have been significantly considered in the court below, and does not form part of the appeal.  I therefore put it to one side.  It is sufficient to note that on the registrar's findings, SMC did not, in fact, know of the existence of the petition and paid what it thought was an appropriate price.  It had been asked initially to pay £1.1 million.  That is a significant figure, because in November 2013, a purchaser, or prospective purchaser, called Zea Solutions, had offered that price and solicitors had been instructed on both sides to sell at that price.  However, that was overtaken in mid-November 2013 by an offer of £1.3 million from Warren Properties, upon the basis that there would be an early exchange and completion.
13.	Mrs Munro-Peebles was behind Warren Properties, and she was found by the Registrar, before whom she gave evidence, to be an honest witness.  No one gave any evidence from the Zea Solutions' camp.
14.	When Warren Properties came on the scene, Zea Solutions dropped out, in the sense that the documents which had been sent to their solicitors were requested back; in other words, they were gazumped.
15.	Warren Properties did not proceed to an exchange, and therefore to an early completion.  This mattered very much to Mr Clegg.  Mr Clegg had previously signed, he said without realising it, a guarantee.  He gave a witness statement before the Registrar, but did not attend for cross-examination.  Therefore, the Registrar could place little actual weight on his evidence, which was not tested by cross-examination.
16.	Mr Green of SMC also gave evidence.  He was behind the transaction on SMC’s side, and he was found, despite passages in his evidence which were vague and sometimes incoherent, to be a reliable witness.  The Registrar found that there was a genuine negotiation between the two parties, the £1.1 million being knocked down, almost instinctively, on SMC's side, partly because of the state of repair, and because that is how property sales come to be negotiated.
17.	It was also known, according to Mr Clegg, that Mr Conway was in personal difficulties -- the details do not matter -- and that the community around Hatton Garden was well aware that this was a property which Mr Conway, through his company, needed to sell quite quickly.
18.	Warren Properties were unable to raise the finance.  They did, however, obtain a valuation at the time, of initially £1.1 million, but which Mrs Munro-Peebles persuaded the valuer, a responsible firm owned by Close Brothers, to increase to £1.2 million.
19.	When the Warren Properties purchase did not proceed as anticipated, the sale went off, due to their lack of funds.  Mr Clegg, therefore, went into the market again and had his negotiations with SMC.
20.	I have no doubt that the Registrar was entirely justified in finding that that was an arm's length negotiated sale, conducted at least by SMC in good faith.  It duly completed.
21.	Mr Clegg's evidence was revealing, and was described by the Registrar as "candid".  He was driven primarily, as he himself acknowledged, by the need to sell the property for enough money to clear the guarantee liability.  That was his dominant motive, on his own witness statement.  Indeed, he acknowledged that he would have sold it for less.  All he wanted was sufficient to cover the Unitguide loan.
22.	The Registrar noted that evidence, apart from the last part, which he did not mention expressly, but nonetheless, validated the transaction when he considered the evidence overall.
23.	He found, upon a consideration of the totality of the evidence, including expert evidence, that the value of the property, subject to one point, was, in round figures, £900,000 at the time, and that, taking into account a margin, as he thought the expert evidence justified, of 2.5 per cent either way, there was no significant undervalue.  In those circumstances, he exercised his discretion by validating the transactions.  I say that his finding of value was subject to one point.  The one point was this: there were two valuers who gave live evidence.  They both agreed that the court would have to decide whether the valuation should proceed on the basis that a quick sale was required; that is to say a sale where insufficient time was given to test the market to its full because of the need for speed.
24.	On that footing, which was described as the "special assumption", both valuers agreed that there was to be deducted from the open market value a figure of 10 to 15 per cent, or maybe, in the case of one of the valuers, as much as 20 per cent.  Accordingly, on an open market valuation of £900,000, if the special assumption applied, the actual sale price of £850,000 was in excess of the actual value.
25.	That is important for this reason: a number of grounds of appeal were advanced, ten in all, but they all have this in common.  If the registrar's finding, which he did in fact make, that the special assumption was appropriate, is justified and cannot be overturned, then there was no sale at an undervalue, the creditors have lost nothing, and the purchaser, as a genuine arm's length purchaser who has provided good value, should not be penalised, because the purpose of section 127 is to protect creditors.  Thus, if the company achieved a proper price in the circumstances for the property in question, then the creditors have not suffered and the court ought, in those circumstances, to validate the transaction.
26.	The circumstances in which the discretion should be exercised one way or the other have been considered in a number of cases, at least two of which are at Court of Appeal level.  They are adequately summarised in Denney v John Hudson & Company Limited [1992] BCLC 901, a case on a predecessor section, section 522 of the Companies Act 1985, which was in the same terms.
27.	Perhaps the most important part is in the first of eight principles set out in the judgment of Fox LJ, derived from the earlier decision of the Court of Appeal in Re Gray's Inn Construction Company Limited [1980] 1 WLR 711.  At page 904 of Denney, between the letter C, down to 905B, those eight principles are set out as follows:
		(1) The discretion vested in the court by s 522 is entirely at large, subject to the general principles which apply to any kind of discretion, and subject also to limitation that the discretion must be exercised in the context of the liquidation provisions of the statute.
(2) The basic principle of law governing the liquidation of insolvent estates, whether in bankruptcy or under the companies' legislation, is that the assets of the insolvent at the time of the commencement of the liquidation will be distributed pari passu among the insolvent's unsecured creditors as at the date of the bankruptcy.
In a company's compulsory liquidation this is achieved by s 227 of the 1948 Act (now s 127 of the Insolvency Act 1986 of the current legislation).
(3) There are occasions, however, when it may be beneficial not only for the company but also for the unsecured creditors, that the company should be able to dispose of some of its property during the period after the petition has been presented, but before the winding-up order has been made. Thus, it may sometimes be beneficial to the company and its creditors that the company should be able to continue the business in its ordinary course.
(4) In considering whether to make a validating order, the court must always do its best to ensure that the interests of the unsecured creditors will not be prejudiced.
(5) The desirability of the company being enabled to carry on its business was often speculative. In each case the court must carry out a balancing exercise.
(6) The court should not validate any transaction or series of transactions which might result in one or more pre-liquidation creditors being paid in full at the expense of other creditors, who will only receive a dividend, in the absence of special circumstances making such a course desirable in the interest of the creditors generally. If, for example, it were in the interests of the creditors generally that the company's business should be carried on, and this could only be achieved by paying for goods already supplied to the company when the petition is presented (but not yet paid for) the court might exercise its discretion to validate payments for those goods.
(7) A disposition carried out in good faith in the ordinary course of business at a time when the parties were unaware that a petition had been presented would usually be validated by the court unless there is ground for thinking that the transaction may involve an attempt to prefer the disponee – in which case the transaction would not be validated.
(8) Despite the strength of the principle of securing pari passu distribution, the principle has no application to post-liquidation creditors; for example, the sale of an asset at full market value after the presentation of the petition. That is because such a transaction involves no dissipation of the company's assets for it does not reduce the value of its assets.”

28.	As I have said, possibly the most important point is the first point, which reads, when applied to the current legislation, as follows:
"The discretion vested in the court by [section 127] is entirely at large, subject to the general principles which would apply to any kind of discretion and subject also to limitation that the discretion must be exercised in the context of the liquidation provisions of the statute."

29.	It is said on behalf of the appellants that the Registrar, who gave a very careful and detailed judgment, erred in his approach because when he came to analyse the policy of the section under which he was exercising a discretion, he placed too much emphasis on the need to avoid the preference of creditors, and insufficient emphasis on the need to avoid a dissipation of assets.  He recognised that the avoidance of dissipation of assets was one of the consequences of the operation of the section, but does not appear to have regarded this as part of the policy of the section.
30.	To my mind, it may well be that the Registrar, in placing the emphasis in that way, did err, but it does not necessarily follow from that that his actual decision is to be challenged on that ground.
31.	I notice also that when the Registrar himself formulated the principles which apply to the exercise of the discretion, which he took largely from Denney, in paragraph 36 of his judgment, he said this (in paragraph 36.4):
"In deciding whether to make a validation order in such a case, the court should endeavour to ensure that the interests of the unsecured creditors are not prejudiced."

32.	The words "in such a case" do not derive from Denney, and refer, in the registrar's judgment, to the example of a sale or disposition made to enable the company to continue the business in its ordinary course.  I do not consider the statements of principle in Denney, and prior to that, Gray's Inn Construction, to be limited to such a case.  The fourth principle set out from the judgment of Fox LJ in Denney is quite general. The policy of the section is to protect the interests of creditors.  Ordinarily the most important point is to ensure a pari passu distribution, but it is also there to prevent dissipation of assets or, put another way, transactions at an undervalue.
33.	Nonetheless, the Registrar, when he came to exercise his discretion, undoubtedly gave full consideration to the question of whether or not there was a sale at an undervalue, and he found that there was not.
34.	He said, in paragraph 78:
"Accordingly I find that the policy behind section 127 of the Insolvency Act 1986 is not undermined as the transaction did not favour a pre-liquidation creditor."

35.	Had the matter finished there, his approach might be subject to criticism, but he went on to say:
"In any event, my findings lead to a conclusion that there has been no, or no significant, loss to creditors.  In those circumstances, I exercise my discretion and validate the transaction."

36.	He went on also to say he would have reached the same conclusion if he had not taken into account what he referred to as "the margin discount", because on his finding, and leaving aside the special assumption, SMC had paid 5 to 6 per cent less than the open market value.  Of course, he had also found, as I have noted, that the special assumption did apply.  That was in paragraph 72 of his judgment.  This was on the following basis:
"If the sums due to the fixed charge holder had not been repaid by 6 April 2014, Unitguide would have entered into possession and sold the property. I also accept his evidence [that is to say Mr Kaye's evidence, the person behind Unitguide]  that such a sale would have been a distress sale and the best market price is hard to achieve in such circumstances.  As a result I find that the special assumption applies".

37.	On the basis of the special assumption, the figure that he advanced in his judgment, which he rounded to £900,000, would have been reduced by at least £90,000 to £810,000.
38.	As it happens, Mr Harrison, who appears for the liquidator appellant, argued that there was an arithmetical error in the approach of the Registrar, and that the £900,000 should have been rounded to £910,000.
39.	Mr Sims QC, for the respondent, defended the registrar's arithmetic.  I need not resolve the arithmetical issue as it is unnecessary to do so.  I merely note that if £910,000 is the right figure, then if the special assumption applies, the resultant valuation would still be less than the £850,000 that the property was actually sold for, and creditors would still not have suffered.  In those circumstances, therefore, it seems to me that the Registrar was, assuming his approach to valuation was correct, entitled to reach the conclusion which he did, and to validate this transaction upon the grounds that there had been, as he put it, no, or no significant, loss to creditors.  In fact, on the footing that the special assumption applied, there was no loss to creditors, not even an insignificant loss.
40.	I have already said that the Registrar was entitled to reach the conclusion he did that Unitgrade Limited would have intervened after 6 April 2014, although it is possible also that it might have given a week or two’s grace had there been a sale in the offing.
41.	It is said that where the Registrar went seriously wrong was in accepting the expert evidence over the evidence of contemporaneous transactions, which justified a much higher valuation of up to £1.3 million being the price that Warren Properties was prepared to, but unable, to pay.
42.	It was unable to pay that in March, when the transaction went off, though by the end of March Warren Properties was on the scene expressing interest again.  That was by a letter dated 31 March 2014.  However, by then, contracts had been exchanged, on 6 March, with SMC.
43.	It is perhaps worth considering the particular ground to which that evidence relates in full.  Ground 6 was failure to have proper regard to the contemporaneous evidence of value, and the examples which are given, are firstly, that the company purchased the property for £1.2 million in August 2011.  The short answer to that is, whilst true, that was 2.5 years earlier, and despite the fact that there was a generally rising market, there had been a deterioration in the condition of this property, and this was not necessarily a guide -- probably a poor guide at best -- to the value over two and a half years later in its changed condition.  Both experts appeared to be of that view.
44.	It is then said that Unitguide Limited, the lender to the company, had itself applied a loan to value ratio of 2:1, which indicated in the context of a loan of £600,000 a value of £1.2 million, or maybe as much as £1.4 million.  Given the extent of the margin, I cannot regard this as more than a rough and ready guide.  This was buttressed by reference to one of the company's own e-mails in January 2013, which was not, in any sense, a proper valuation, and which, it seems to me, the Registrar was entitled to ignore, as were the experts.
45.	Reliance is placed upon the Warren Properties offer, but that fell away, and the Registrar was entitled, in my judgment, to place greater reliance on the expert evidence than evidence of an uncompleted transaction.  Likewise, the Registrar was entitled to place little or no regard on the contemporaneous valuation by Warren Properties’ valuers, the Close Brothers subsidiary.  That, as I have said, started with a valuation of £1.1 million, which was increased to £1.2 million under pressure from Mrs Munro-Peebles.
46.	Whilst I have no doubt that it was, in the end, a genuine valuation, it was not an impressive one, as even the appellant's expert recognised in his oral evidence.
47.	More importantly, those valuers were not tendered as experts, and were not cross-examined.  Therefore, as expert evidence, the valuation in question has no value whatsoever.  It was, of course, open to the parties to get their own experts to consider this alternative valuation, which they did, but it made no difference to their evidence.  
48.	Likewise, reliance was placed upon the evidence of Mr Franks, who was marketing the property, which he thought would fetch as much as £1.3 million.  Again, this was not tendered as expert evidence.
49.	The relevance of his evidence was to show that the property had, in fact, been exposed to the market since November 2013, and to demonstrate what interest it generated.  
50.	Reliance was finally placed on the Zea Solutions' offer of £1.1 million.  They appeared to be a genuine purchaser, until they were gazumped. However, as the Registrar noted, no one was called from Zea Solutions, and there was no evidence as to whether or not they were in a position to complete the sale.  It is a not uncommon occurrence for people to put in offers in the property world which they are not always able to take forward to an exchange and completion.
51.	Most of these points were considered by the Registrar in paragraph 74 of his judgment.  That reads as follows:
"I find that the cluster referred to by Mr Harrison provides a useful background but does not assist in reaching a concluded view regarding the value of the property at the date of the transaction for the following reasons.  First, Ms Munro-Peebles accepts that her offer was based on hope value for change of use.  This falls outside of the RICS guidance and was ultimately discounted by Mr Hewetson [that was the appellant's expert].  

"Secondly, her desire to purchase involved a strong element of emotion, purchasing a building that was beautiful.  

"Thirdly, she was purchasing on the basis of a rising market and was prepared to offer a higher purchase price to obtain it in the belief that the market would catch it up.  

"Fourthly, her offer was made by reference to a headline market offer of £1.5 million and she negotiated £200,000 off the asking price, seemingly without too much difficulty.  

"Fifthly, the sale did not proceed.  

"Sixthly, there is no evidence that if the property was offered to Warren Properties on 31 March 2014 it would have exchanged and completed before enforcement action was taken by the fixed charge holder.

"Seventhly, the offer from Zea Solutions Limited did not proceed.  Even though the rug was pulled from underneath this purchaser there was no evidence before the court to demonstrate that it was in a position to complete the sale."

"I find it interesting that Mr Clegg offered the property for sale to SMC at the same price as that agreed with Zea Solutions which was at the time £400,000 below the marketing price.

"Eighthly, the condition of the property had deteriorated markedly from the date it had been purchased.  This gave rise to two issues: first, money would have to be spent on refurbishing the property to get it back to the standard it was in when the company purchased it, and; secondly, a purchaser would have an empty building not producing a yield while works were carried out.  This may have had a downward pressure on its market value as a purchaser would not be able to obtain an immediate return by letting it.  

"Ninthly, market expectation at the date of the transaction was that a purchaser would be an investor.  

"Lastly, the expert evidence has been given knowing about the offers made by the various different parties.  Accordingly, I give more weight to the expert evidence which takes the offers into account than the cluster of failed offers and the previous purchase price on a standalone basis."

52.	It seems to me that the Registrar was fully entitled to approach the matter in that way.  Accordingly, it seems to me that he was entitled to conclude that the value in the open market was as he found it to be, whether that is rounded to £900,000 or £910,000, and that, if the special assumption applied, it followed that the property was sold for no less than its true value.
53.	  The registrar dealt with the special assumption in paragraph 64, where he recorded that Mr Wolfenden and Mr Hewetson both considered that the market value of the property as at 6 March 2014, on the special assumption that the sale of the property was agreed following the constraint of a limited marketing period between 23 January 2014 and 6 April 2014, would result in a discount to the normalised market value of between 10 and 15 per cent, though Mr Hewetson also suggested the discount might be as high as 20 per cent.
54.	Given that the Registrar proceeded on the basis, as he was entitled to do on the evidence, that if the company had not sold when it did there would have been a sale by a mortgagee, which everyone was agreed would lead to a discounted price, which inferentially would be of the same order as that considered by Mr Wolfenden and Mr Hewetson, then he was entitled to reach his primary conclusion on the footing that the special assumption applied.  On that footing, there had been no loss to creditors.  In those circumstances, all the other grounds of appeal, it seems to me, fall aside.
55.	It is said that Warren Properties, having returned back to the scene at the end of March, would have been a much better prospect for even a receiver, if appointed, to deal with, or a liquidator if no receiver was appointed.  That is as it may be, but the matter did complete and it completed at what was a proper price.
56.	Moreover, although the Registrar did find that Mrs Munro-Peebles was an honest witness, he had no detailed evidence before him as to the timing of the availability of finance, or indeed, as to what the available finance was.  In those circumstances, it seems to me that he was still entitled to be somewhat sceptical of the prospects of Warren Properties proceeding rapidly to completion; and if in fact a Law of Property Act receiver had been appointed, one could reasonably expect any purchaser in the market to exploit that to their advantage, including, if Warren Properties did re-enter the market, Warren Properties.
57.	As it is, had a receiver been appointed at a time when SMC had exchanged contracts but had not by then completed, ie varying the facts as they actually occurred somewhat, one might reasonably have expected the receiver to complete with a purchaser who, having exchanged, was there with sufficient money to pay off the chargeholder’s debt.
58.	However, I need not consider that because, as with so much else in this area, that is speculation.  The Registrar proceeded on the basis of proper evidence, and although I accept that parts of his reasoning, as regards the policy of the law, may be open to question, he in fact took all relevant factors into account and, based upon the evidence, reached conclusions that he was entitled to reach as to the actual value of the property at the time of the transaction which, applying the special assumption, meant that there was no loss to creditors.  
59.	It is said that upon the footing that there was some, albeit no, as the Registrar put it, significant loss to creditors, that that was enough -- and so it is -- to trigger the section and to raise a bar to validation.  But it is not an absolute bar.  It is for the court to consider the exercise of the discretion in the light of all the circumstances, the discretion being at large.  It is in the nature of a discretion that one judge may exercise it in one way and another judge may exercise it in another way.
60.	As it happens, I need not consider in this case what the impact of a loss of, say, £50,000 to creditors might have been.  I would probably have regarded that as significant, speaking for myself, but given that I have concluded that the Registrar was justified in applying the special assumption, this is not a case where any loss to creditors has been demonstrated; indeed on the registrar’s findings it has been demonstrated that no loss at all occurred.
61.	The Registrar, as a final cross-check, tested his conclusion by reference to what the position would have been had a prospective application been made, and he said that the court would have made a validation order.  I regard that as an unhelpful way to consider cases of this nature.  It is inevitable that in the case of a prospective application, the evidence cannot possibly be as complete as it was in this case, and the court might well find itself in a state of uncertainty and follow the example of Mr Justice Hart in Re Rescupine Limited [2003] 1 BCLC 661, and refuse to validate the transaction simply because, in the time available, insufficient evidence had been marshalled to satisfy the court, as in Recupine itself, that the property had been properly marketed.
62.	It seems to me that that may well have been the result in the event of a prospective application in this case.  However, I am not concerned, nor was the Registrar concerned, with a prospective validation, and this particular comment was merely a cross-check, or test, as he put it in paragraph 79 of his judgment, and was not decisive in the result.  
63.	In all the circumstances, the validation was, in my view, justified, and the appeal is dismissed.