Mahomed v Morris (2000)
A creditor who held disputed security from a debtor was not under a duty to give notice to the debtor's surety before the creditor entered into a compromise agreement with the debtor whereunder some of the alleged security was surrendered to the debtor, even where debtor and creditor were in liquidation. Section 168(5) Insolvency Act 1986 could not be used by outsiders to the liquidation to attack acts or decisions of the liquidator. * Leave to appeal to the House of Lords refused.
The Mahomed brothers (jointly 'MB') appealed from the order of Jacob J on 26 March 1999 striking out their application under s.168(5) Insolvency Act 1986 in the liquidation of Bank of Credit and Commerce International SA ('BCCI') against the first three respondents, the joint liquidators of BCCI. MB had secured the indebtedness of a company named Manlon Trading Ltd ('Manlon'), owned and controlled by their brother, against funds in BCCI accounts in their names. Manlon had delivered promissory notes to BCCI. When Manlon went into liquidation BCCI applied the monies in the accounts to discharge in part the indebtedness of Manlon to BCCI. MB challenged BCCI's ability to take the monies. BCCI then went into liquidation itself. The liquidators of BCCI and Manlon cooperated to sell the notes and then reached a settlement agreement, with the approval of their respective liquidation committees to divide the proceeds between them. The monies taken by BCCI were insufficient to discharge Manlon's indebtedness to BCCI whereas, had BCCI taken all the notes and their proceeds, there would have been a surplus which would have been more than sufficient to recoup the monies taken from MB's accounts by BCCI. MB were not consulted or informed about the intention of the BCCI liquidators to enter the agreement and nor did the BCCI liquidators obtain the sanction of the court. MB sought leave pursuant to s.130(2) of the 1986 Act to commence new proceedings against BCCI as well as Manlon, claiming a declaration that they were entitled to subrogation to BCCI's security rights. They then sought relief under s.168(5) of the 1986 Act, as persons aggrieved by the act or decision of both sets of liquidators, asking that the settlement agreement be set aside. The BCCI liquidators and the Manlon liquidator each applied to strike out the application on the ground that it disclosed no reasonable cause of action, was scandalous, frivolous or vexatious or was otherwise an abuse of process. The judge applied the test in Re Edennote (1996) 2 BCLC 389 that in the absence of fraud the court would only interfere with the act of a liquidator if he had done something so utterly unreasonable and absurd that no reasonable man would have done it and struck out the proceedings. At an oral hearing applying for leave to appeal Robert Walker LJ referred to the Court of Appeal decision in Mitchell v Buckingham (1998) 2 BCLC 369 and gave leave limited to the following issue in relation to the BCCI liquidators alone: "whether (if the evidence shows that (MB) were not sufficiently consulted) it was proper for the liquidators to proceed without such consultation and without the directions of the Companies Court in circumstances where a subrogation claim was put forward by (MB)". The BCCI liquidators contended, inter alia, that MB were not entitled by reason of their subrogation claim to avail themselves of s.168(5) of the 1986 Act.
(1) The notice of appeal did not reflect or acknowledge the limited ground of appeal allowed by Robert Walker J. Whilst the Court of Appeal retained a discretion to allow additional issues to be raised, notice of which had been clearly given, that discretion would be sparingly exercised. (2) It could not have been the intention of Parliament that any outsider to the liquidation, dissatisfied with some act or decision of the liquidator, could attack that act or decision by the special procedure of s.168(5) of the 1986 Act (Re Edennote (supra)). Someone who was directly affected by the exercise of a power given specifically to liquidators and who would not otherwise have any right to challenge the exercise of that power could utilise s.168(5) (eg the landlord in Re Hans Place Ltd (1993) BCLC 768). It was not enough that the person claiming to be aggrieved was a surety when his subrogation rights did not in any way depend on the company being in liquidation. Such a surety was not a creditor. (3) Realistically, MB were attempting to make the BCCI liquidators personally liable to pay compensation. Even if there were a sound basis in law for such a claim (which there was not), without the possibility of a reversal or modification of an act or decision of a liquidator, s.168(5) of the 1986 Act could not be used for that purpose. (4) The application was misconceived and the appeal should fail on this preliminary point alone. (5) The circumstances of this case were far removed from the Mitchell case, which concerned competing unsecured creditors. This was a case where it was for the liquidators, exercising their commercial judgment, to decide at their own discretion what compromise (if any) was acceptable. (6) The BCCI liquidators were under no duty to consult or notify MB or to obtain the approval of the Companies Court before entering the settlement agreement. To impose such an obligation on a secured creditor would impose a serious fetter on the freedom of the secured creditor to exercise his power of sale over the charged property at the time and in the manner he chose (see China & South Sea Bank Ltd v Tan (1990) 1 AC 536). (6) It was impossible to say that the BCCI liquidators in failing to obtain the sanction of the court breached some duty owed to MB.
* The house of Lords refused an application by Abdul Sattar Abdul Aziz Mahomed and Mohammed Iqbal Abdul Aziz Mahomed for leave to appeal in this case on 9 October 2000.
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17 Feb 2000
Court of Appeal
Peter Gibson LJ, Schiemann LJ, Wilson J
 2 BCLC 547
Catherine Newman QC