IP Briefing: West Larkin Limited – Will the Court Second-Guess a Liquidator’s Decisions?

Background

This briefing concerns one of two judgments issued by Lady Wolffe in response to separate Notes lodged in the same liquidation, that of West Larkin Limited (“the Company”). In this briefing we are examining the judgment in relation to a Note lodged by Joseph Sweeney; a separate briefing will consider the other Note, lodged by Donalda Sweeney, Joseph’s mother.  Background This briefing concerns one of two judgments issued by Lady Wolffe in response to separate Notes lodged in the same liquidation, that of West Larkin Limited (“the Company”). In this briefing we are examining the judgment in relation to a Note lodged by Joseph Sweeney; a separate briefing will consider the other Note, lodged by Donalda Sweeney, Joseph’s mother.   

With this Note, Mr Sweeney sought to have himself recognised as a member of the Company and to have the liquidator of the Company directed to challenge a “notice of interest,” registered by the petitioning creditor under s25 Agricultural Holdings (Scotland) Act 2003, in respect of a parcel of land owned by the Company. The notice of interest has the effect of creating a statutory right of preemption in favour of the party who registered it, thereby preventing what the Noter contended would otherwise have been a bidding war. In her judgment, Lady Wolffe considered the extent to which the Court will be willing to step in and interfere with a liquidator’s decision made in the course of a winding-up.   

Decision

Ultimately, Lady Wolffe declined to interfere with the liquidator’s decision not to challenge the notice of interest. Her starting point was the test set out in In re Edennote that, “absent cases of fraud or bad faith, the court will only interfere with the act of the liquidator ‘if he has done something so utterly unreasonable and absurd that no reasonable person would have done it.’” This was tempered by the distinction drawn by the Court of Appeal in Re Buckingham International plc (No 2), between “practical decisions… as to valuation and disposal” and decisions “involving the exercise of judgment as between different creditors’ competing claims.” While the Court would generally defer to the liquidator in respect of the former, it might be persuaded to apply its own judgment regarding the latter.   

Considering these two tests, Lady Wolffe noted that the circumstances of the case fell into the first of the two categories set out in Buckingham. The decision not to challenge the notice of interest could not be equiparated with an adjudication or similar determination by the liquidator. It fell squarely within the exercise of the type of power – realisation of an asset of the insolvent company – in which the courts defer to the liquidator’s commercial judgment. As a result, applying the Edennote test above, the decision was far from being “so utterly unreasonable and absurd that no reasonable person would have done it.” Indeed, the decision not to challenge the notice of interest was “readily explicable.” Considering the value of the Company’s only asset and the costs already incurred, it was unlikely there would be any return to the Company’s creditors. Further, considering the context in which the Note was presented – the parties involved having a long and bitter history of disputes and litigation between them – it was probable that any challenge to the validity of the notice of interest would have been vigorously opposed. This would have drawn the liquidator into a lengthy and expensive litigation with dim prospects of generating even a minimal increase in the realisation of the Company’s only asset. In these circumstances, the Noter’s challenge was refused.   

Analysis

This decision will be comforting for insolvency practitioners, as it reinforces the autonomy of liquidators in determining how to dispose of assets in a liquidation. In applying the Edennote test, the court has affirmed that any party seeking to have the Court substitute its own judgment for that of a liquidator must meet an extremely high bar. If they cannot, the Court will not step in to second-guess a liquidator’s decision-making.