Henderson v Foxworth Investments Limited & Anor [2014] UKSC 41

A liquidator sought to reduce a standard security granted over a hotel, arguing the underlying sale was a gratuitous alienation. The Supreme Court restored the Lord Ordinary's decision, clarifying that appellate courts may only overturn factual findings where the trial judge's decision cannot reasonably be explained or justified.

Facts

Letham Grange, a mansion hotel with golf courses, was acquired in 1994 by Letham Grange Development Company Ltd (LGDC), a company controlled by Mr Liu, for approximately £2m, financed by loans from Mr Liu and members of his family. In February 2001, LGDC sold the subjects to 3052775 Nova Scotia Ltd (NSL), another Liu-controlled company, for a recorded price of £248,100, at a time when the property was valued at around £1.8m. In December 2002, LGDC went into liquidation, and Mr Henderson was appointed liquidator. In January 2003, NSL granted a standard security over the subjects in favour of Foxworth Investments Ltd (Foxworth), a further Liu-controlled Canadian company.

The liquidator sought reduction of the standard security under section 242 of the Insolvency Act 1986, contending that the sale to NSL was a gratuitous alienation. Foxworth and NSL argued that the consideration for the sale was not confined to the £248,100 recorded, but also included NSL’s assumption of £1.85m of debt owed by LGDC to the Liu family.

After a nine-day proof, the Lord Ordinary (Lord Glennie) held that the sale was made for adequate consideration and that Foxworth had acquired its rights in good faith and for value. The Extra Division of the Inner House reversed, granting decree of reduction. Foxworth and NSL appealed to the Supreme Court.

Issues

The Supreme Court had to determine:

• Whether the Lord Ordinary erred in law in concluding that the assumption of debt formed part of the consideration for the sale, particularly whether an enforceable obligation to assume the debt existed at the time of the disposition.
• Whether the Lord Ordinary failed to give satisfactory reasons for his factual conclusions or otherwise failed to deal adequately with the evidence, thereby entitling the Extra Division to review the facts at large.
• The correct approach of an appellate court when reviewing findings of fact made by a trial judge.
• Whether the Lord Ordinary’s decision on expenses (with a proviso preventing immediate enforcement) should stand.

Arguments

Appellants (Foxworth and NSL)

They contended that the consideration for the 2001 disposition included NSL’s assumption of £1.85m of Liu family debt, meaning the sale was for adequate consideration and not susceptible to reduction under section 242. Foxworth had accordingly obtained the standard security in good faith and for value within the proviso to section 242(4).

Respondent (the liquidator)

The liquidator argued that the documentation supporting the alleged debt assumption was created after the event to bolster a false case, that no enforceable obligation to assume the debt existed at the time of the disposition, and that Mr Liu’s common directorship meant Foxworth had knowledge of the challengeable nature of the transaction. Before the Inner House it was newly argued that any debt assumption occurred too late to qualify as consideration.

Judgment

Lord Reed, with whom the other Justices agreed, allowed the appeal and restored the Lord Ordinary’s decision.

No error of law

The Lord Ordinary had understood that an obligation could only constitute consideration if undertaken as the counterpart of LGDC’s obligations. His finding at paragraph 90 that “the decision had in fact been made to assume part of the loan as part of the consideration” was properly read as referring to the specific £1.85m figure. Lord Reed declined to attribute an elementary error to an experienced judge where his words could reasonably be understood in a different sense. Mr Liu’s evidence supported the conclusion that an enforceable obligation, not a mere statement of intent, had been undertaken.

Adequacy of reasons and treatment of evidence

Lord Reed examined each of the five examples given by Lady Paton in the Extra Division of the Lord Ordinary’s alleged failure to deal with evidence: the reason for the sale, the initial claims in the liquidation, changes in Mr Liu’s account of what he told his solicitor Mr Gardner, the discrepancy between the 1994 letters and the 1995 fax, and the brevity of the treatment of Mr Gardner’s evidence. In each instance, Lord Reed concluded that the Lord Ordinary had considered the relevant matters, had acknowledged the criticisms of Mr Liu’s credibility as “formidable obstacles”, but had nevertheless found Mr Liu credible on the essentials after seeing him under lengthy cross-examination.

Crucially, the Extra Division had failed to appreciate the significance of the unchallenged evidence that the 1994 purchase was financed by Liu family loans. Given that indebtedness, it would have made little commercial sense for LGDC’s assets to be transferred to NSL without a corresponding transfer of debt, particularly as Mr Liu had been warned by Mr Gardner about the risk of challenge to an undervalue transfer.

The appellate function

Lord Reed developed the principles set out in McGraddie v McGraddie [2013] UKSC 58. He explained that the phrase “plainly wrong”, derived from Lord Macmillan in Thomas v Thomas, does not refer to the degree of confidence of the appellate court in a different view. Rather, it signifies that the decision under appeal is one that no reasonable judge could have reached, or that it cannot reasonably be explained or justified. In the absence of some other identifiable error – such as a material error of law, a critical finding of fact with no basis in the evidence, a demonstrable misunderstanding of relevant evidence, or a demonstrable failure to consider relevant evidence – an appellate court will only interfere where the trial judge’s decision cannot reasonably be explained or justified.

Applying this test, the Extra Division had no proper basis for interfering with the Lord Ordinary’s findings.

Expenses

The Court accepted that questions relating to expenses in the Court of Session are best determined by that court, and that the non-payment by NSL of an earlier award could be taken into account at the stage of making a fresh award. The expenses issue in the Outer House was to be remitted to the Lord Ordinary.

Implications

The decision reaffirms and clarifies the highly deferential approach appellate courts must take when reviewing findings of fact made by a trial judge who has heard oral evidence. The key principle is that intervention is warranted only where the trial judge’s decision cannot reasonably be explained or justified, not merely because the appellate court would have reached a different conclusion.

The judgment provides an authoritative gloss on the phrase “plainly wrong” from Thomas v Thomas, aligning Scottish practice with recent Supreme Court authority (In re B (A Child)) and comparable jurisprudence in Canada and the United States. It emphasises that an appellate court is bound to assume, absent compelling reason, that the trial judge has considered the whole of the evidence, and that a judgment need not present a balanced narrative account of all the evidence to be valid.

The case is significant for practitioners in insolvency, where section 242 challenges to gratuitous alienations frequently turn on disputed factual questions about the nature and timing of consideration, and demonstrates that questions such as whether debt assumption forms part of consideration are ultimately factual matters for the trial judge. More broadly, the decision has become a leading authority on the standard of appellate review of factual findings across UK jurisdictions.

Verdict: The Supreme Court allowed the appeal, set aside the decision of the Extra Division of the Inner House, and restored the Lord Ordinary’s decision that the sale by LGDC to NSL was made for adequate consideration and that Foxworth’s standard security was not liable to reduction. The question of expenses in the Outer House was remitted to the Lord Ordinary.

Source: Henderson v Foxworth Investments Limited & Anor [2014] UKSC 41