The Court of Appeal’s recent decision in Denaxe Limited v Cooper & Anor is an important one for insolvency office-holders and trustees seeking court approval for a significant transaction, typically a commercial decision to sell business assets as a going concern.
The Approval and Sale of Blackpool Football Club
In this case, receivers sought and obtained the court’s approval in June 2019 to sell Blackpool Football Club. The club’s majority shareholder did not object to the application for approval, it reserved its position.
After the receivers had sold the club in for £8.2 million and been discharged from office, the majority shareholder of the club commenced legal proceedings against the receivers claiming that they had undersold the club by £80 million. The majority shareholder maintained that the club should have been put into liquidation and the football stadium sold for redevelopment and therefore the receivers had failed to obtain the best price for these assets.
Majority Shareholder’s Silence and Subsequent Legal Action
Importantly, the majority shareholder had decided to remain silent at the earlier approval hearing when it could have at that time easily raised the criticism made in the subsequent proceedings it issued against the receivers for breach of duty. This was done to preserve the club and hold the receivers responsible for any financial losses if proven and both these points were made in the lead judgment in the case.
High Court’s Decision and Grounds for Striking Out
The receivers applied to strike out the claim on grounds that they had immunity against the claim because of the court’s prior approval of the club’s sale and additionally because the proceedings were abusive as the majority shareholder had decided not to challenge the receivers’ sale strategy at the approval hearing when the court was asked to consider and approve it.
At first instance the High Court struck out the majority shareholder’s claim on the basis that immunity flowed from the court’s approval of the proposed sale.
The High Court also determined that the majority shareholders claim was an abuse of process because the majority shareholder had had every opportunity to raise its concerns at the approval hearing, but chose not to do so. This was something that the judge had noted when sanctioning the proposed sale of the club. It followed that the subsequent proceedings against the receivers was an abuse of process and was struck out on that ground applying the well-known principle in Henderson v Henderson.
Court of Appeal’s Analysis and Clarifications
On appeal, the Court of Appeal held that the High Court had been right to strike out the claim against the receivers, but of much wider significance for receivers and insolvency practitioners was the Court of Appeal’s analysis of the measure of the protection given to the office-holder derived from the court’s approval.
Observing that office-holders make the decision using their expertise and experience, the Court of Appeal emphasised that office-holders are not surrendering to the court their discretion to make a decision but asking the court to approve a proposed course of action.
Issues Determined and Scope of Immunity
After analysing the case authorities, the Court of Appeal clarified that there was no legal doctrine of “immunity” and that this was simply another label for what was issue estoppel and the well-known principle in Henderson v Henderson.
In applying these principles to this case, the Court of Appeal said that it was necessary to focus on the issues that were in fact determined when the court first approved the proposed transaction and those issues that should and could have been raised before the court and compare those issues with the issues raised in the subsequent proceedings that the majority shareholder brought against the receivers. So in short were the issues in question raised and could or should they have been raised at the hearing to approve the sale.
What this means is that the extent of the “immunity” that follows from the approval decision depends upon the issues and this will vary in each case.
As many issues, for example whether a proposed sale of assets satisfied the office-holder’s duty of care to obtain the best price may require the court to carry out an extensive examination, the court may not be prepared to make a determination of such an issue since the approval process is intended to be quick and accessible.
Best Practices for Office-Holders
However, as a best practice measure to give themselves the best protection, when office-holders make approval applications, they should ask the court when making the order to include a statement of the issues that have been determined so as to limit the scope of any subsequent debate.
The Court of Appeal’s decision in this case gives welcome clarity and guidance for court appointed receivers, trustees and insolvency practitioners as to how to deal with issues raised on an approval application and the degree of protection approval gives to office-holders who are confronted with a subsequent claim.
If you would like to know more about the issues raised in this case or how it might apply to you please, contact us.