Out-Law / Your Daily Need-To-Know

Scottish court declines to challenge the liquidator's decision

Out-Law Legal Update | 03 Feb 2020 | 1:44 pm | 2 min. read

The Court of Session refused to grant an order under Section 167(3) Insolvency Act 1986 (IA86) directing the liquidator to bring a challenge to the registration of a notice of interest by the agricultural tenants of the company's only asset. It ruled that, absent cases of fraud or bad faith, the court will only interfere if the actions of the liquidator are "utterly unreasonable and absurd".

 

  • Court of Session declined to direct the liquidator's actions
  • Liquidators will welcome the courts' continued position of deference to their commercial decisions
  • Re West Larkin Limited (in liquidation) (No 2) [2020] CSOH 6

 

In 2018, the court directed that West Larkin Limited be wound up. The company's only asset in liquidation was a parcel of agricultural property valued at £27,000, which had long been the object of dispute between the Sweeney and the Urquhart families.

The Urquhart family, being the agricultural tenants of the property, submitted for registration a notice of interest in the property. If successful, the notice would create a statutory right of pre-emption in favour of the Urquhart family entitling them to buy the property. Alternatively, if the notice of interest was not effective, the liquidator could sell the property on the open market. 

The Sweeney family wanted the liquidator to challenge the notice but the liquidator refused to do so on the basis that it would not be in the best interest of the general body of creditors of the company. The Sweeney family then made an application under s167(3) IA86 seeking that the court make an order directing the liquidator to challenge the registration of the notice.

In cases of winding up by the court, s167(3) IA86 submits the liquidator's exercise of powers to the control of the court. The same provision also allows any creditor or contributory to make an application to the court in respect of the liquidator's exercise or proposed exercise of any of his/her powers.

In considering the issue, the court restated and reaffirmed the test set out in the English case of Re Edennote [1996] EWCA Civ 1349. The Edennote test establishes a position of deference by the court to the liquidator's commercial judgement in certain matters, in particular any concerning realisation of assets. The courts will not interfere with the liquidator's decisions except in cases of bad faith or fraud, or if the actions of the liquidator are so unreasonable that no reasonable person would have acted in the same way.

The judge called the Edennote test "the proper approach". It said: "Applying the Edennote test and having regard to the principal objectives of a liquidation, the liquidator's decision to decline to challenge the notice was readily explicable having regard to the valuation of the company's only asset ... and the costs already incurred in the liquidation".

The liquidator did not participate in the debate himself but did provide further information by email, including the fact that the expenses of liquidation alone already amount to £27-£28,000. This prompted a helpful discussion of the factors to be taken into account by the liquidator in deciding not to challenge the notice.

In the present case, the judge noted that due to the long standing dispute between the families, it was likely that a challenge to the notice would result in complex and lengthy litigation of uncertain outcome. Importantly, the judge also expressed her doubts as to the likely benefits to the creditors of such a challenge being successful.

It is clear that every application under s167(3) IA86 will be determined on its own merits depending on the facts and circumstances of the case. However, this case sets a precedent for the Edennote test in Scotland and is a welcome confirmation that the courts are unwilling to interfere with the commercial decisions of the liquidators.