UNIDARE PLC v (1) MALCOLM COHEN (2)DERMOT POWER [2005] EWHC 1410 (Ch)

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
[2005] EWHC 1410 (Ch)Case No Case No: 1217 of 2004Venue Royal Courts of Justice, Strand, London, WC2A 2LL
Between
UNIDARE PLCClaimant(1) MALCOLM COHEN (2)DERMOT POWERDefendants
Before
MR. JUSTICE LEWISONRaquel Agnello (instructed by Stephenson Harwood) for the ClaimantMarcia Shekerdemian (instructed by Olswang) for the DefendantHearing dates: 29th & 30th June 2005Date 1 July 2005
[1]Introduction 2 Background 3 The documentation 4 The share purchase agreement 4 The stock transfer form 4 The power of attorney and declaration of trust 4 The board meeting 4 The debenture 5 Effect of the transaction 6 The legislation 7 Trust 9 Unidare 9 Associates' associates 9 Control 10 Liquidation and disclaimer 17 Paragraph 83 17 The administrator's thinking 18 Did paragraph 83 apply? 19 Acting unfairly 19 Result 20 MR. JUSTICE LEWISON: Introduction The issue in this case is whether Unidare plc ("Unidare") is a secured creditor of Kilnoore Ltd ("the company"). The company went into administration on 7 January 2004. Unidare relies on a debenture dated 31 January 2002. The administrators rejected its claim to be a secure creditor on the ground that the debenture was invalid as a result of the operation of section 245 of the Insolvency Act 1986. They did so on the basis of the legal advice they had received, including advice from counsel. The administrators also rejected the value that Unidare placed on its claim to have suffered loss, as a result of the disclaimer by the company of its obligations as tenant under a lease, in relation to which Unidare was the guarantor. The administrators say that the debenture is invalid because: i) Unidare gave no relevant consideration for the debenture and ii) At the time when it was created Unidare was connected with the company. Having rejected the claim, the administrators decided to place the company into liquidation in reliance on paragraph 83 of Schedule B1 to the Insolvency Act 1986. Unidare says that they were not entitled to do that because: i) There was an issue whether the debenture was or was not valid, and the administrators should have obtained the court's ruling on that issue; and ii) There was also a dispute about the value of Unidare's claim, on which the administrators should (at least) have obtained professional valuation advice, rather than evaluating the claim themselves. Background Unidare is a public company listed on the Irish and London Stock Exchanges. Its business currently consists of the distribution of industrial products and the manufacture of domestic water heaters. Before the transactions that give rise to the current dispute it was the sole owner of a company called Unidare Holdings Ltd ("Holdings"). Holdings was the majority shareholder in the company, which carried on the business of the distribution of welding products and equipment. It held 80 per cent of the shares. The remaining 20 per cent were held by a Swiss company, which was part of the Air Liquide group. (I have simplified the corporate structure, but that does not matter for present purposes). The company's business was carried on from a sales office in London and a warehouse in Glossop. The warehouse was held under a lease originally granted in January 2000 (but surrendered and regranted in March 2000). The company was the tenant under the lease and the regranted lease; and Unidare was its guarantor under both. In addition to having guaranteed payment of the company's rent, and performance of its obligations under the lease, Unidare had also covenanted to take a new lease in the event of a disclaimer by the tenant. When the lease was granted the reversion belonged to a company within the Unidare group. But it was sold to an outsider in March 2000. In the middle of 2001 Unidare conducted a strategic review of its operations. It decided to sell its shareholding in the company. The prospective buyer was a consortium led by Mr John Garland, who had been the managing director of Unidare's welding division (which included the company) until 1997. He and the consortium formed a new company called Kozo Ltd as the vehicle for the acquisition. The agreed purchase price was the company's net asset value, less a discount of £400,000. Unidare tried to persuade Air Liquide to take on the liability under the guarantee of the lease in place of Unidare; but without success. The purchasers were either unwilling to act as guarantors, or were unacceptable to the landlord. So Unidare decided that it had no choice but to sell the company and remain liable under the guarantee. However, Kozo did not have the money to pay for the shares. So the plan was for the company to borrow the money itself, secured on its own assets under a debenture in favour of Lloyds TSB; and then to lend the money to Kozo so that Kozo could pay Unidare. This required going through the procedure (known as the "whitewash" procedure) described in sections 155 to 158 of the Companies Act 1985. The sum ultimately payable to Unidare was of the order of £2.3 million, of which £1.5 million was payable on completion of the transaction; and the remainder in deferred payments. Because Unidare was to remain liable under the guarantee, it also stipulated for a debenture to secure its right to an indemnity from the company in respect of any payment that it was actually called upon to make under the guarantee; and also to secure the deferred consideration for the sale of the shares. The documentation The share purchase agreement The share purchase agreement was dated 31 January 2002. It was in fact signed the day before, and held in escrow until the following day. The relevant provisions were: i) Clause 2.1 which contained the agreement by Unidare to procure the sale of and by Kozo to purchase Holdings'shares in the company; ii) Clause3.1 which provided for completion of the agreement to take place immediately after execution of the agreement; iii) Clause3.2 which described the documents that Unidare was to deliver to Kozo on completion. These included an irrevocable power to attorney appointing Kozo to be Unidare's attorney in respect of the shares, pending stamping and registration of the transfers; iv) Clause 3.4 which required Kozo to procure the execution of certain documents by the company immediately after a meeting of the board of directors of the company. These documents included the debenture; v) Clause 3.5 which required Unidare to procure a meeting of the board of directors of the company at which the share transfers would be approved, and Kozo's nominees were appointed to the board in place of the existing board. The stock transfer form This was also signed on behalf of Unidare on 30 January but also dated 31 January 2002. It was delivered to the board meeting contemplated by clause 3.5 of the sale agreement. However, it was not stamped until August 2002. The power of attorney and declaration of trust The power of attorney was also dated 31 January 2002. Although the share purchase agreement contemplated a power of attorney given by Unidare, in fact is was given by Holdings (which was the registered shareholder). It was granted to secure Kozo's interest in the shares. Clause 1 appointed Kozo as Holdings' attorney to exercise all rights powers and privileges attaching to the shares, including power to direct the exercise of any voting rights. It was entitled to exercise its powers as attorney in its absolute discretion. By clause 2 Holdings undertook not to exercise any right, power or privilege attaching to the shares without Kozo's consent. By clause 6 Holdings declared that it held the shares on trust for Kozo. The trust thus declared was, in my judgment, a bare trust. The board meeting The minutes of the board meeting are dated 30 January 2002. However, Mr Egan, the solicitor handling the transaction, says that this was a mistake; and that the board meeting in fact took place on the following day, 31 January 2002. At the meeting: i) The directors of the company resigned and Kozo's nominees were appointed as directors. The meeting then continued with the new directors; ii) The funding documents (including the debenture in favour of Unidare) were produced; iii) The board considered the requirements of the "whitewash" procedure. At this point the meeting adjourned for the necessary statutory declarations to be made as required by the whitewash procedure. When the meeting reconvened, it adjourned again to allow the members of the company to approve special resolutions for the entry into the various funding documents. The special resolution was signed by Kozo on behalf of Holdings, in reliance on the power of attorney. The meeting then reconvened yet again and approved the funding documents, which included the debenture. Having resolved to enter into these documents, the share transfers were then produced to the meeting and approved, subject to stamping. The debenture The debenture is also dated 31 January 2002. Recital 3 states:
"The execution and delivery of this Deed is a condition precedent to Completion of the Share Purchase Agreement"
The operative part of the debenture states that it is made:
"in consideration of the premises and of Unidare proceeding to Completion of the Share Sale Agreement."
Clause 1 of the debenture expresses the consideration in the same way. Clause 1 continues with covenants by the company that Kozo would pay the consideration due under the share sale agreement. Clause 2 recites that:
"In consideration of Unidare having entered into the Lease" the company would perform and observe the tenant's covenants; and would indemnify Unidare against any failure to do so. Mr Egan says that the debenture was one of the last two documents to be executed; and that it was not executed until after the "whitewash" procedure had been completed. Mr Egan's evidence was not challenged. Nevertheless, there was some debate about the precise order of events on 31 January 2002; and the precise order in which documents were signed. Ms Shekerdemien, who appeared for the liquidators, relied on linguistic clues within the documents themselves. However, the minutes of the meeting are themselves evidence that the documents were signed in the order in which they were intended to be signed. Moreover, it seems to me that where parties to a transaction involving the execution of multiple documents intend them to be executed in a particular order which is necessary to give effect to the intended transaction, the court should be ready to presume that they were executed in the correct order to give effect to the transaction: compare Gartside v. Silkstone and Dodworth Iron and Coal Co (1882) 21 Ch D 762 ; Eaglehill Ltd v. J Needham Builders Ltd [1973] AC 992, 1011. I find, therefore, that the power of attorney (containing the declaration of trust) was executed before the debenture. There was also a faint suggestion (based on the company's annual return) that Kozo was registered as the shareholder on 31 January 2002. However, it is plain that the stock transfer was not stamped until August 2002; that the board's resolution to approve the share transfer was conditional on stamping; and that if Kozo had been registered on 31 January 2002 it would have conflicted with the resolution. Mr Egan's evidence was that the share transfer was not registered until after the special resolutions were signed; and it is unlikely that it was registered between the signing of the resolutions and the execution of the debenture. Moreover, the share certificate recording Holdings' shareholding was still in Holdings' possession s few days later. I find, despite the company's annual return, that Holdings remained the registered shareholder until after execution of the debenture. Effect of the transaction Thus although Holdings remained the registered shareholder as regards 80 per cent of the shares in the company, in my judgment it held them on a bare trust for Kozo; and Kozo was entitled to act in Holding's name in its absolute discretion. Holdings had also agreed not to exercise any powers in relation to the shares without Kozo's consent. Before the transactions the corporate structure looked like this: After the transactions the corporate structure looked like this: The legislation Section 245 (2) of the Insolvency Act 1986 provides: "
Subject as follows, a floating charge on the company's undertaking or property created at a relevant time is invalid except to the extent of the aggregate of— (a) the value of so much of the consideration for the creation of the charge as consists of money paid, or goods or services supplied, to the company at the same time as, or after, the creation of the charge, (b) the value of so much of that consideration as consists of the discharge or reduction, at the same time as, or after the creation of the charge, of any debt of the company, and …" Section 245 (3) provides:
"Subject to the next subsection, the time at which a floating charge is created by a company is a relevant time for the purposes of this section if the charge is created— (a) in the case of a charge which is created in favour of a person who is connected with the company, at a time in the period of 2 years ending with the onset of insolvency, (b) in the case of a charge which is created in favour of any other person, at a time in the period of 12 months ending with the onset of insolvency, . . ."
It is common ground that the debenture in this case was created more than 12 months before the onset of insolvency. Thus the definitions of "a person who is connected with the company" are critical. Section 249 says:
"For the purposes of any provision in this Group of Parts, a person is connected with a company if— (a) he is a director or shadow director of the company or an associate of such a director or shadow director, or (b) he is an associate of the company; and "associate" has the meaning given by section 435 in Part XVIII of this Act."
Who is an associate is governed by section 435. The particular sub-sections on which argument has concentrated are subsections (5), (6), (7) and (10). Sub-section (5) provides:
"A person in his capacity as trustee of a trust other than-- (a) a trust arising under any of the second Group of Parts or the Bankruptcy (Scotland) Act 1985, or (b) a pension scheme or an employees' share scheme (within the meaning of the Companies Act), is an associate of another person if the beneficiaries of the trust include, or the terms of the trust confer a power that may be exercised for the benefit of, that other person or an associate of that other person."
Sub-section (6) provides:
"A company is an associate of another company— (a) if the same person has control of both, or a person has control of one and persons who are his associates, or he and persons who are his associates, have control of the other, or (b) if a group of two or more persons has control of each company, and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person of whom he is an associate."
Sub-section (7) provides:
"A company is an associate of another person if that person has control of it or if that person and persons who are his associates together have control of it."
Subsection (10) provides:
"For the purposes of this section a person is to be taken as having control of a company if— (a) the directors of the company or of another company which has control of it (or any of them) are accustomed to act in accordance with his directions or instructions, or (b) he is entitled to exercise, or control the exercise of, one third or more of the voting power at any general meeting of the company or of another company which has control of it; and where two or more persons together satisfy either of the above conditions, they are to be taken as having control of the company. "
It follows from these definitions that the debenture will be invalid (except to the extent provided for in section 245 (2)) if Unidare was "connected with" the company at the time when the debenture was created. This, in turn, depends on whether Unidare had "control" of the company at that time. That, therefore, is the critical issue. Trust Following the execution of the power of attorney, Holdings held its shares in the company on trust for Kozo. Consequently, applying section 435 (5), Holdings was associated with Kozo. Unidare Unidare, as owner of the whole of the share capital in Holdings, was entitled to exercise all the voting rights at a general meeting of Holdings. It is not a question whether Unidare could direct Holdings how to exercise its own voting rights in relation to the company. In my judgment the general meeting of which the sub-section speaks is a hypothetical general meeting, and is simply part of a formula for determining who has control of a company. Since Unidare controlled Holdings, it was associated with Holdings. Associates' associates What has been established thus far is that Unidare was an associate of Holdings; and Holdings was an associate of Kozo. But section 435 does not contain any general provision enabling the aggregation of different associates. Thus if A is associated with B, and B is associated with C, it does not follow that A is also associated with C. This can only be achieved by applying the somewhat convoluted provisions of sub-section (6). It is common ground that they do not apply to this case; so that, mercifully, I do not need to attempt to expound them Control The first argument that the administrators advance is that the directors of the company were "accustomed to act" on the directions of Unidare. In so far as the allegation is directed at the action of the new board in approving the debenture and resolving that the company should enter into it, I do not see how the completion of a single transaction on a single day (which was itself the very day on which the board were appointed) can amount to being "accustomed" to act. Inherent in the notion of being accustomed to act on someone's instruction is conduct over a period of time. In so far as the allegations directed at the old board, there is no evidence that they acted on anyone's instructions or at anyone's direction. The mere fact that the old board shared directors with other companies of which Unidare was the ultimate parent does not lead to the conclusion that they failed to exercise their powers as directors of the company in good faith, in the company's interests and as the result of independent decisions made by them. The real focus of the attack, however, concentrated on the position of Holdings as shareholder. The rival arguments, in a nutshell, are these. Unidare submits that as a result of the agreement for sale and purchase of the shares, and the declaration of trust, Holdings was no more than a bare trustee of the shares for Kozo. Moreover, it had agreed not to exercise any of the powers attached to the shares (including voting rights) without Kozo's consent. If and in so far as voting was in issue, Holdings had to act in accordance with Kozo's wishes. It cannot, therefore, be said that, in any meaningful sense, Holdings was entitled to exercise or control the exercise of any voting power in the company. The liquidators submit that the share sale agreement and the power of attorney are irrelevant. Holdings remained the registered shareholder. So far as the company was concerned, it was entitled to cast the votes attached to the shares. The company's register of shareholders cannot record the existence of any trust of the shares; so that legal title to the shares is what counts. If this means that two (or more) people satisfy the definition of control in relation to the same block of shares (the legal owner and the beneficial owner or owners) that serves the policy of the Act. If Parliament wished to exclude nominee and fiduciary shareholders from the definition of those having "control" of a company, a means was readily to hand, as is shown by the analogous provisions of section 736A (5) and (6) of the Companies Act 1985. Ms Agnello, who appeared for Unidare, submitted that the mischief against which section 435 (10) was directed was that a person could so arrange a company's affairs as to benefit himself in preference to the other creditors of the company. Thus section 435 (10) should be construed as applying to the person who "pulled the company's strings". She pointed to the words of section 435 (10) (a) with its clear reference to the concept of "shadow directorship"; and also to the reference in section 435 (10) (b) to a person entitled to "control" the exercise of voting power. She pointed out that section 435 (10) eschews reference to the legal ownership or title to shares; and said that it did so deliberately. The aim of the sub-section was to look through the legal niceties and get at the reality of power and control. Ms Agnello took me to the decision of the Court of Appeal in Michaels v. Harley House (Marylebone) Ltd [2000] Ch 104 . That was a case in which the issue was whether a company which was a vendor of shares under an uncompleted contract for the sale of shares was a member of the same group of companies as the company whose shares were being sold. I did not find that decision of assistance for two reasons. First, the court was concerned with the detailed construction of the provisions of section 736A of the Companies Act 1985. Unlike section 435 of the Insolvency Act 1986, section 736A makes express provision for how to treat shares held in a fiduciary capacity and shares held by A as nominee for B. Second, the court's analysis was directed at the position of a vendor under an uncompleted contract for sale. In the present case, not only is there a contract; there is also an express declaration of trust. Ms Agnello also relied on the decision of Evans-Lombe J in Philip Morris Inc v. Rothmans International Ltd (unreported 19 July 2000). The issue in that case was whether there was "a change in control" of one of two corporate partners within the meaning of the partnership agreement. There was an elaborate definition of "change of control" which incorporated parts of the City Code of Take-overs and Mergers.

The judge said:

"It seems to me that these three cases in the Court of Appeal point to the conclusion that a party ("
A" ) may exercise control over the voting rights appurtenant to shares not only in the circumstances where the party ("B") on the register can be demonstrated to be a trustee or bare nominee of the entire interest in the shares for A. Such control can exist in a situation where B is not shown to be such nominee or trustee but it is demonstrated that he has been shorn of any economic interest in the shares which has passed to A. In those circumstances a Court would intervene to prevent B from exercising any powers, such as voting, which spring from his bare legal ownership of the shares, which exercise was inconsistent with or injured the owner of the economic interests in the shares. A will, in fact, be in a position to control B's voting rights in respect of the shares. Each case, however, will turn on its own facts. It will be a question of assessing the extent of the interest retained by the registered holder of the shares." Again, I did not find this case of assistance. I do not doubt that if B holds shares on a bare trust for A, A can be regarded as being entitled to "control" the exercise of voting rights. Similarly, if B has passed all his economic interest to A, A can also be regarded as being able to control the voting rights. So, in this example A would fall within the definition in section 435 (10) (b). But that is not the question. The question is not whether A is included in the definition. Plainly he is. The question is whether B (the registered shareholder) is excluded from it. The answer to that question is not dependent on who is entitled to control the exercise of voting rights. It depends on who is entitled to exercise voting rights. Ms Shekerdemian submitted that whether a person was entitled to exercise voting rights depended on the terms of the company's articles of association and the register of members. The company was not affected by any contractual restrictions affecting a member's right to vote; and was not affected by any trust of the shares. As far as the company was concerned, the register (in some cases modified by the company's articles of association) determined who was entitled to exercise voting rights; and the company was not entitled to look behind the register. Ms Shekerdemian drew my attention to a number of cases in which the court considered different forms of statutory definition. In many of these cases (including Michaels ) the legislation dealt expressly with the position of one who held shares in a fiduciary capacity. She submitted, therefore, that where Parliament intended to make an exception for registered shareholders who held shares in a fiduciary capacity, it knew how to do so; and often did just that. However, section 435 of the Insolvency Act 1986 did not contain any such provision. Parliament must therefore be taken to have intended to apply the law as applicable to statutes without any such special provision; and in accordance with the ordinary principles of company law. In this connection, Ms Shekerdemian relied in particular on IRC v. J Bibby & Sons Ltd [1945] 1 All ER 667 . The issue in that case was whether shares in a company held by directors as trustees could be aggregated with shares held by them beneficially for the purpose of determining whether the directors had "a controlling interest" in the company. Lord Russell of Killowen said at 669:
"When the section speaks of directors having a controlling interest in a company, what it is immediately concerned with in using the words "controlling interest" is not the extent to which the individuals are beneficially interested in the profits of the company as a going concern or in the surplus assets in a winding up, but the extent to which they have vested in them the power of controlling by votes the decisions which will bind the company in the shape of resolutions passed by the shareholders in general meeting. In other words, the test which is to exclude a company's business from subsection (9)( a ) and include it in (9)( b ), is the voting power of its directors, not their beneficial interest in the company. For the purpose of such a test the fact that a vote-carrying share is vested in a director as trustee seems immaterial. The power is there, and though it be exercised in breach of trust or even in breach of an injunction, the vote would be validly cast vis-a-vis the company, and the resolution until rescinded would be binding on it."
Lords Porter and Simonds agreed with Lord Russell. Lord Macmillan said at 670:
"The question whether the directors of the respondent company have the control of it by their voting power as shareholders must in my view be determined by the memorandum and articles of the company and by the register of shareholders. By the constitution of the company, as I have already mentioned, the voting power is vested in the ordinary shareholders and the register shows that the directors hold a majority of these shares. … So far as the company is concerned the relation between such of its shareholders as happen to be trustees and their beneficiaries is res inter alios . It may be that a trustee shareholder may, as between himself and his cestuis que trust , be under a duty to exercise his vote in a particular manner, or a shareholder may be bound under contract to vote in a particular way ( cf Puddephatt v Leith ). But with such restrictions the company has nothing to do. It must accept and act upon the shareholder's vote notwithstanding that it may be given contrary to some duty which he owes to outsiders. The remedy for such breach lies elsewhere."
Lord Porter said at 672:
"The phrase is a composite one and the combination means no more than that the directors must have an interest such as enables them to control the activities of the company: it does not require some personal financial interest on their part which control enables them to exploit. It may be that trustees can ultimately be brought to book for activities which would not lay a beneficial owner open to attack or complaint. Nevertheless for good or ill the trustee like the beneficial owner controls, though if his powers be wrongly exercised they may in some way or other be capable of being challenged."
Lord Simonds said at 672:
"What, my Lords, constitutes a controlling interest in a company? It is the power by the exercise of voting rights to carry a resolution at a general meeting of the company. Can the directors of the respondent company by the exercise of their voting rights carry such a resolution? Yes: for they are the registered holders of more than half the ordinary shares of the company. Therefore they have a controlling interest in the company. … Those who by their votes can control the company do not the less control it because they may themselves be amenable to some external control. Theirs is the control, though in the exercise of it they may be guilty of some breach of obligation whether of conscience or of law. It is impossible (an impossibility long recognised in company law) to enter into an investigation whether the registered holder of a share is to any and what extent the beneficial owner. A clean cut there must be."
When the same case was in the Court of Appeal [1944] 1 All ER 548 Lord Greene MR had delivered the judgment of the court. He also held that a registered shareholder who held shares as a trustee was entitled to vote the shares. But he made an (obiter) exception in the case of a bare trustee. As regards a bare trustee he said (at 550):
"The case of a bare trustee is not, of course, before us. But it seems to us that, in such a case, the control would naturally be said to be in the beneficial owner and not in the trustee; so that, if the shares carried more than half the voting power and the beneficial owner was director, he would properly be described as having a controlling interest in the company."
However, in the House of Lords, Lords Russell, Wright and Porter reserved their opinion on the question of a bare trustee; and Lord Simonds was openly sceptical about the correctness of the observations of the Court of Appeal on that point. In IRC v. Silverts Ltd [1951] Ch. 521 shares in a company were held by a bank as custodian trustee of a trust. Two of the directors of the company were the managing trustees of the trust. The Court of Appeal held that there was a difference (although a fine one) between a bare trustee and a custodian trustee, because the latter (unlike the former) was not obliged to act on the directions of another if to do so would amount to a breach of trust. Lord Evershed MR, who gave the judgment of the court, said:
"… where the registered shareholder is a bare trustee in the sense of being a mere name or "dummy" for the true owner, we should feel strongly inclined to answer the question reserved by House in the Bibby case in the same way as Lord Greene, M.R. In the present case, however - perhaps fortunately - the answer would not, on an appeal to common sense, appear so clearly. … In our judgment, the ratio decidendi in Bibby's case is that, in accordance with well-established principles relating to limited companies, a question of the rights of members vis-à-vis the corporation (such as that of voting control under its regulations) is to be determined by reference, and by reference only, to the share register beyond which it is not (save possibly in the case of mere "nominee" shareholders) permissible to look; and not that, in the case of a trust, the powers and discretions of exercising votes in regard to shares must be treated as reposing in the trustees without regard to the terms of the trust or the right of beneficiaries to direct such exercise. Thus, if (because the shares were registered in the names of "nominees" or "bare trustees" or otherwise) it were in any circumstances permissible to look beyond the share register, we do not think the speeches in the Bibby case would prevent inquiry being made whether those individuals to whom the nominee shareholders were answerable were themselves obliged by contract or otherwise to give directions in accordance with instructions received from some third party."
Clearly the Court of Appeal in Silverts did not regard themselves as bound by the decision of the House of Lords in Bibby to hold that a bare trustee should be treated in the same way as other trustees. In S Berendsen Ltd v. IRC [1958] Ch 1, the registered shareholder was itself a company. The Court of Appeal held that in such circumstances, it was permissible to "ask, since the company cannot speak, whose is the voice that you hear". In the course of his judgment Lord Evershed MR considered the earlier case of FA Clark & Sons Ltd v. IRC [1941] 2 KB 270. In that case three trustees held shares in company A. They agreed to sell their shares to company B. The directors of company A held all the shares in company B. The question was whether company A was controlled by its directors. The Court of Appeal held that since the registered shareholders in company A held their shares on a bare trust for company B, the trustees' shares in company A must be treated as being under the control of the shareholders of company B, i.e. the directors of company A. The explanation of that case gives some force, in my judgment, to the argument that a bare trust is not subject to the general rule laid down in Bibby in the House of Lords. What I derive from these cases is that: i) In the vast majority of cases, whether a person is entitled to exercise voting rights is to be determined simply by looking at the register of shareholders and the company's articles of association; ii) In such cases, it is not permissible to look outside those materials and to inquire whether there are contractual or fiduciary restraints, as between the registered shareholder and others, which inhibit him in exercising those rights; iii) In general there is no warrant for distinguishing between different degrees of trusteeship; iv) The Court of Appeal has expressed the view that where the question is whether a person has a controlling interest in a company an exception may be made in the case of a bare trustee (or nominee or "dummy"). In such a case control resides in the beneficial owner to the exclusion of the trustee; v) In the case of a shareholder which is itself a corporation, in determining how its voting rights as shareholders are exercised it is permissible to look outside the register of shareholders and inquire whose voice is heard when its votes are cast. Since I have held that, following execution of the power of attorney, Holdings held its shares in the company on a bare trust for Kozo, the question left open by the House of Lords must be decided. There is very little guidance to be gained from the words of the section itself. It can be said that Parliament did consider the question of trusts; because it expressly legislated for trustees in section 435 (5). Yet it did not carry that through into section 435 (10). That is some indication that section 435 (10) is intended to refer to the legal right, as against the company, to exercise voting powers. Ms Agnello naturally concentrated on the reference to "control" in section 435 (10) (b). The question of control (as opposed to exercise) of voting rights must stem from a relationship between the registered shareholder and someone who is not the company. In order to determine whether such a person has control over voting rights, it is necessary to look outside the register of members and the articles of association of the company. Likewise, if the question is whether someone is accustomed to act on the instructions or directions of another, it is necessary to examine facts which go beyond those materials, and which may, indeed have left no paper trail. So the "clean cut" to which Lord Simonds referred in Bibby is not present. To my mind this greatly weakens the force of the argument based on Bibby in the House of Lords. Ms Shekerdemian also referred to the policy underlying the enactment of section 435 and stressed its importance in the scheme of the insolvency regime. She showed me extracts from the Cork Report on Insolvency Law and Practice (Cmnd. 8558) which underlined the importance of making special provision for connected persons. However, the members of the Cork Committee took the view (in relation to companies) that ownership of more than half the equity share capital would be required before a person should be regarded as connected with a company. This proportion was not translated into section 435 as enacted. Ms Shekerdemian also postulated hypothetical circumstances (related to the provisions in the Insolvency Act about preferences) in which she said that it would be absurd if a shareholder in a company were not regarded as connected with the company even though he held his shares on a bare trust. My impression was that it must have taken a good deal of ingenuity to work out Ms Shekerdemian's hypothetical example, and that it was not one that is likely to be encountered in anything but an exceptional case. In most cases, the conclusion that a person is connected with a company has the effect of extending (retrospectively from the onset of insolvency) the period during which transactions are liable to be set aside or avoided. This element of retrospective operation does not point to a need to construe the definition as widely as possible. Moreover, although I see the force of the argument that whereas section 736A of the Companies Act deals expressly with shares held by nominees, and section 435 does not, I cannot discern any cogent policy reason for concluding that Parliament must have intended that bare trustees would be treated as connected with companies in which they are registered shareholders. Ms Shekerdemian accepts that if the share transfer had been registered in the company's statutory books before execution of the debenture then her argument that Unidare was connected with the company would have been unsustainable. It is clear to me that, by the time that the debenture was executed, Unidare and Holdings had done everything in their power to divest Holdings of its ownership of the shares in the company. The share transfer had been approved by the board of the company. The formal process of registration of Kozo as the new shareholder was not within the power of Unidare or Holdings. If the happenstance that registration did not take place before the grant of the debenture was to lead to the conclusion that, for that reason alone, Unidare was connected with the company when the debenture was granted, that would seem to me to be a triumph of formalism. The phrase I have to construe in section 435 (10) (b) is a typically compressed piece of draftsmanship. The verb "entitled" governs both the exercise of voting power and the control of voting power. In looking at control of voting power, the word "entitled" must, in my judgment, mean "entitled as between the registered shareholder and the controller of the voting power". Why, then, should the word "entitled" in its application to the exercise of voting power be construed as meaning "as between the registered shareholder and the company"? There is a further slight clue to the meaning of section 435. Unlike section 736 and section 736A of the Companies Act 1985, which refer to "voting rights ", section 435 refers to "voting power ". The word "rights" naturally directs attention to legal rights, especially since section 736A (2) goes on to explain that voting rights means "rights conferred on shareholders in respect of their shares". The word "power", by contrast, gives me some encouragement to look to the economic reality of the case. A registered shareholder who holds his shares on a bare trust under which he is required to cast his vote in accordance with the directions of the beneficial owner might be said to have voting rights, but I do not consider that in any real sense he can be said to have voting power. The Court of Appeal, in two cases I have mentioned ( Bibby and Silverts ), were clearly impressed by the appeal to the common sense and economic reality of the case of a bare trustee. I do not consider that the wording of section 435 compels me to take a different view. In addition Holdings was a corporate shareholder. If I ask whose voice would be heard if, after the declaration of trust, Holdings were to cast the votes attached to the shares registered in its name at a general meeting of the company, the only answer, in my judgment, is Kozo's. I hold, therefore, that following the execution of the declaration of trust Holdings is not to be regarded, for the purposes of section 435 (10) (b) of the Insolvency Act 1986, as being entitled to exercise the voting power of those shares. Since such a person is bound to act in accordance with the directions of the beneficial owner, he does not control their voting power either. Thus Holdings was not associated with the company when the debenture was executed. It follows, therefore, that at the time the debenture was executed, Unidare was not connected with the company either; and that, consequently, the debenture is valid. Unidare is, therefore, a secured creditor. Liquidation and disclaimer As I have said, on 9 February 2005 the administrators rejected Unidare's claim that its debenture was valid. In the light of my decision they were wrong to have done so. On 10 February Unidare notified the administrators that Unidare had a claim (said to have been calculated in accordance with the methodology expounded in Re Park Air Services Ltd [2000] 2 AC 172 ) "in excess of £2 million". Unidare's proof of debt claims a contingent debt of £2,111,250. The administrators rejected this debt. Mr Cohen, one of the joint administrators, says that he has been advised that, based on certain assumptions, Unidare's claim cannot exceed £1.48 million (which was the minimum amount available for distribution to creditors). On 11 February 2005 the administrators gave notice under paragraph 83 of Schedule B1 to the Insolvency Act 1986. This had the effect, once the notice was registered by the Registrar of Companies, of converting the administration into a creditors' voluntary winding up. On 23 February 2005 the liquidators disclaimed the lease. In consequence the landlord called upon Unidare to take up a new lease, in accordance with its covenant to do so. The new lease was granted to Unidare on 5 May 2005. Paragraph 83 Paragraph 83 of Schedule B1 to the Insolvency Act 1986 applies where:
"the administrator of a company thinks— (a) that the total amount which each secured creditor of the company is likely to receive has been paid to him or set aside for him, and (b) that a distribution will be made to unsecured creditors of the company (if there are any)."
Ms Agnello accepts that the only way in which the administrators' decision can be challenged is under paragraph 74 of Schedule B1, which provides:
"A creditor or member of a company in administration may apply to the court claiming that— (a) the administrator is acting or has acted so as unfairly to harm the interests of the applicant (whether alone or in common with some or all other members or creditors), or (b) the administrator proposes to act in a way which would unfairly harm the interests of the applicant (whether alone or in common with some or all other members or creditors). "
The court has wide powers on the hearing of such an application. It is, in my judgment, clear that there must be a causative link between the action that is alleged to be unfair and the harm to the creditor's interests that is alleged. In addition an administrator may be liable for misfeasance on an application under paragraph 75 of Schedule B1. The administrator's thinking Mr Cohen explained that when he decided to invoke the procedure under paragraph 83, he had rejected Unidare's claim to have a valid security. He therefore thought that Unidare's claim was an unsecured claim. Unsecured claims topped £5 million; and he had £1.48 million in hand. He therefore thought that a distribution would be made to unsecured creditors. The only other potentially secured creditor (the bank) had been repaid in full. However, he thought that any final adjudication of Unidare's claim to a valid security would be made by the liquidators, once the company had gone into liquidation. He also thought that Unidare's claim was greatly exaggerated. On the basis of his own experience he thought that the property could be relet within two years. He had advice from his retained agents that the rent payable was the market rent; and he used his own experience to assess a reasonable discount rate for early payment. On that basis, he concluded that Unidare's claim was likely to be in the region of £250,000. Although the various reports to creditors consistently said that he was unable to quantify the dividend "if any" that would be paid to unsecured creditors, this merely reflected his caution as a prudent and experienced licensed insolvency practitioner, who did not want to raise false hopes among the creditors. I accept Mr Cohen's evidence about his thought process. Did paragraph 83 apply? Reading paragraph 83 literally, Mr Cohen did think that the only secured creditor (the bank) had been repaid; and that there would be a dividend payable to creditors. Thus, on the face of it, paragraph 83 applied. Ms Agnello submitted that the administrator's conclusion must be based on reasonable grounds; or at least not be one which no reasonable administrator could have reached. I do not consider that paragraph 83 should be interpreted in this way. I accept that the process of thinking involves a rational thought process, and in that sense must be reasonable; but I do not accept that what the administrator thinks is subject to any form of test by reference to an objective standard. Assuming that my conclusion on the validity of the debenture is right, Mr Cohen was wrong to reject Unidare's claim to be secured. However, in rejecting the validity of the debenture, Mr Cohen relied on the legal advice he was given. Ms Shekerdemian's excellent argument demonstrates that the legal advice that Mr Cohen received (even though I disagree with it) was not unreasonable. So in my judgment it can fairly be concluded that Mr Cohen formed his opinion on that point on reasonable grounds. Ms Agnello submitted that in his assessment of the quantum of Unidare's claim, Mr Cohen ought not to have relied on his own experience in concluding that Unidare's claim was exaggerated. He ought to have consulted an expert valuer in forming a view on how long it would take to relet the property, and whether the rent was a market rent. I accept Mr Cohen's evidence that his own assessment (with the aid of his retained agents) of Unidare's claim was that it was worth in the region of £250,000; and that he had £1.48 million in hand. In those circumstances I do not consider that I can castigate as unreasonable the thought process which said that even if he was wrong in his assessment of the quantum of Unidare's claim there was still a very comfortable margin of error before the prospect of a dividend to unsecured creditors was jeopardised. It is also worth noting that Unidare does not appear to have quantified its own claim with the aid of any expert valuer. Accordingly, even if (as Ms Agnello submitted) the administrator's thinking must be based on reasonable grounds, I hold that it was. Accordingly paragraph 83 applied, and the company was validly put into liquidation. Acting unfairly Unidare's complaint is that the administrator rejected its claim to be a secured creditor, without submitting the dispute to the adjudication of the court. Thus Unidare was deprived of an opportunity to vote at creditors' meetings. There is no doubt that the administrator had power to apply to the court for directions. But a power is not a duty; and a failure to exercise a power is not necessarily unfair. Mr Cohen's view was that the validity of the debenture would be determined in the winding up; and that even if it was valid, there was enough money in hand to satisfy whatever was the proper amount of Unidare's claim. Moreover, if an administrator rejects a claim, the aggrieved creditor is entitled to appeal to the court either under rule 2.39 (2) or rule 2.78 (1) of the Insolvency Rules 1986. So an aggrieved creditor is not without a remedy. I am not persuaded that this decision was unfair, or that it has adversely harmed Unidare's interests. Unidare retains its security, and is entitled to recoup itself out of the monies held by the liquidators. The issue of the validity of the debenture would have to be decided one way or another, and I cannot see that it has been any more expensive or more difficult to decide it in the context of a liquidation than it would have been if it had been decided in the context of an administration. The question whether any conduct of the administrators has harmed Unidare can, I think be tested as follows. Assume first that Unidare was a secured creditor (as I have held it is). Mr Cohen was therefore wrong in rejecting Unidare's claim to be a secure creditor. Accordingly, Unidare was not entitled to vote at any meeting, except in respect of such part of the claim as was unsecured. So no harm to Unidare's interests has been caused, because as things have turned out, it was not entitled to vote anyway. Now assume the alternative situation: that Unidare was an unsecured creditor. On this hypothesis, Mr Cohen was right in rejecting Unidare's claim to be a secured creditor. So Unidare was entitled to vote at the meeting. Why did it not vote? The reason it did not was because it wished to maintain its claim to security. So the cause of Unidare's failure to vote was not anything that Mr Cohen did, but Unidare's disagreement with his decision. Ms Shekerdemian also argued that if it was doubtful whether Unidare was secured or unsecured, then the administrator could have counted its vote under rule 2.39 (3) of the Insolvency Rules 1986. This rule allows the chairman of a creditors' meeting to mark a vote as "objected to" if he is unsure whether to admit or reject a claim, but nevertheless allow it to be cast. I need not express a view about this. Result I will declare that the debenture is not avoided by section 245; and I will dismiss the application under paragraph 73. The issue in this case is whether Unidare plc ("Unidare") is a secured creditor of Kilnoore Ltd ("the company"). The company went into administration on 7 January 2004. Unidare relies on a debenture dated 31 January 2002. The administrators rejected its claim to be a secure creditor on the ground that the debenture was invalid as a result of the operation of section 245 of the Insolvency Act 1986. They did so on the basis of the legal advice they had received, including advice from counsel. The administrators also rejected the value that Unidare placed on its claim to have suffered loss, as a result of the disclaimer by the company of its obligations as tenant under a lease, in relation to which Unidare was the guarantor.[2]The administrators say that the debenture is invalid because: i) Unidare gave no relevant consideration for the debenture and ii) At the time when it was created Unidare was connected with the company.[3]Having rejected the claim, the administrators decided to place the company into liquidation in reliance on paragraph 83 of Schedule B1 to the Insolvency Act 1986. Unidare says that they were not entitled to do that because: i) There was an issue whether the debenture was or was not valid, and the administrators should have obtained the court's ruling on that issue; and ii) There was also a dispute about the value of Unidare's claim, on which the administrators should (at least) have obtained professional valuation advice, rather than evaluating the claim themselves. Background[4]Unidare is a public company listed on the Irish and London Stock Exchanges. Its business currently consists of the distribution of industrial products and the manufacture of domestic water heaters. Before the transactions that give rise to the current dispute it was the sole owner of a company called Unidare Holdings Ltd ("Holdings"). Holdings was the majority shareholder in the company, which carried on the business of the distribution of welding products and equipment. It held 80 per cent of the shares. The remaining 20 per cent were held by a Swiss company, which was part of the Air Liquide group. (I have simplified the corporate structure, but that does not matter for present purposes).[5]The company's business was carried on from a sales office in London and a warehouse in Glossop. The warehouse was held under a lease originally granted in January 2000 (but surrendered and regranted in March 2000). The company was the tenant under the lease and the regranted lease; and Unidare was its guarantor under both. In addition to having guaranteed payment of the company's rent, and performance of its obligations under the lease, Unidare had also covenanted to take a new lease in the event of a disclaimer by the tenant. When the lease was granted the reversion belonged to a company within the Unidare group. But it was sold to an outsider in March 2000.[6]In the middle of 2001 Unidare conducted a strategic review of its operations. It decided to sell its shareholding in the company. The prospective buyer was a consortium led by Mr John Garland, who had been the managing director of Unidare's welding division (which included the company) until 1997. He and the consortium formed a new company called Kozo Ltd as the vehicle for the acquisition. The agreed purchase price was the company's net asset value, less a discount of £400,000. Unidare tried to persuade Air Liquide to take on the liability under the guarantee of the lease in place of Unidare; but without success. The purchasers were either unwilling to act as guarantors, or were unacceptable to the landlord. So Unidare decided that it had no choice but to sell the company and remain liable under the guarantee.[7]However, Kozo did not have the money to pay for the shares. So the plan was for the company to borrow the money itself, secured on its own assets under a debenture in favour of Lloyds TSB; and then to lend the money to Kozo so that Kozo could pay Unidare. This required going through the procedure (known as the "whitewash" procedure) described in sections 155 to 158 of the Companies Act 1985. The sum ultimately payable to Unidare was of the order of £2.3 million, of which £1.5 million was payable on completion of the transaction; and the remainder in deferred payments. Because Unidare was to remain liable under the guarantee, it also stipulated for a debenture to secure its right to an indemnity from the company in respect of any payment that it was actually called upon to make under the guarantee; and also to secure the deferred consideration for the sale of the shares. The documentation The share purchase agreement[8]The share purchase agreement was dated 31 January 2002. It was in fact signed the day before, and held in escrow until the following day. The relevant provisions were: i) Clause 2.1 which contained the agreement by Unidare to procure the sale of and by Kozo to purchase Holdings'shares in the company; ii) Clause3.1 which provided for completion of the agreement to take place immediately after execution of the agreement; iii) Clause3.2 which described the documents that Unidare was to deliver to Kozo on completion. These included an irrevocable power to attorney appointing Kozo to be Unidare's attorney in respect of the shares, pending stamping and registration of the transfers; iv) Clause 3.4 which required Kozo to procure the execution of certain documents by the company immediately after a meeting of the board of directors of the company. These documents included the debenture; v) Clause 3.5 which required Unidare to procure a meeting of the board of directors of the company at which the share transfers would be approved, and Kozo's nominees were appointed to the board in place of the existing board. The stock transfer form[9]This was also signed on behalf of Unidare on 30 January but also dated 31 January 2002. It was delivered to the board meeting contemplated by clause 3.5 of the sale agreement. However, it was not stamped until August 2002. The power of attorney and declaration of trust[10]The power of attorney was also dated 31 January 2002. Although the share purchase agreement contemplated a power of attorney given by Unidare, in fact is was given by Holdings (which was the registered shareholder). It was granted to secure Kozo's interest in the shares. Clause 1 appointed Kozo as Holdings' attorney to exercise all rights powers and privileges attaching to the shares, including power to direct the exercise of any voting rights. It was entitled to exercise its powers as attorney in its absolute discretion. By clause 2 Holdings undertook not to exercise any right, power or privilege attaching to the shares without Kozo's consent. By clause 6 Holdings declared that it held the shares on trust for Kozo. The trust thus declared was, in my judgment, a bare trust. The board meeting[11]The minutes of the board meeting are dated 30 January 2002. However, Mr Egan, the solicitor handling the transaction, says that this was a mistake; and that the board meeting in fact took place on the following day, 31 January 2002. At the meeting: i) The directors of the company resigned and Kozo's nominees were appointed as directors. The meeting then continued with the new directors; ii) The funding documents (including the debenture in favour of Unidare) were produced; iii) The board considered the requirements of the "whitewash" procedure.[12]At this point the meeting adjourned for the necessary statutory declarations to be made as required by the whitewash procedure.[13]When the meeting reconvened, it adjourned again to allow the members of the company to approve special resolutions for the entry into the various funding documents. The special resolution was signed by Kozo on behalf of Holdings, in reliance on the power of attorney. The meeting then reconvened yet again and approved the funding documents, which included the debenture. Having resolved to enter into these documents, the share transfers were then produced to the meeting and approved, subject to stamping. The debenture[14]The debenture is also dated 31 January 2002. Recital 3 states:
"The execution and delivery of this Deed is a condition precedent to Completion of the Share Purchase Agreement"
[15]The operative part of the debenture states that it is made:
"in consideration of the premises and of Unidare proceeding to Completion of the Share Sale Agreement."
[16]Clause 1 of the debenture expresses the consideration in the same way. Clause 1 continues with covenants by the company that Kozo would pay the consideration due under the share sale agreement.[17]Clause 2 recites that: "In consideration of Unidare having entered into the Lease" the company would perform and observe the tenant's covenants; and would indemnify Unidare against any failure to do so.[18]Mr Egan says that the debenture was one of the last two documents to be executed; and that it was not executed until after the "whitewash" procedure had been completed. Mr Egan's evidence was not challenged.[19]Nevertheless, there was some debate about the precise order of events on 31 January 2002; and the precise order in which documents were signed. Ms Shekerdemien, who appeared for the liquidators, relied on linguistic clues within the documents themselves. However, the minutes of the meeting are themselves evidence that the documents were signed in the order in which they were intended to be signed. Moreover, it seems to me that where parties to a transaction involving the execution of multiple documents intend them to be executed in a particular order which is necessary to give effect to the intended transaction, the court should be ready to presume that they were executed in the correct order to give effect to the transaction: compare Gartside v. Silkstone and Dodworth Iron and Coal Co (1882) 21 Ch D 762 ; Eaglehill Ltd v. J Needham Builders Ltd [1973] AC 992, 1011.[20]I find, therefore, that the power of attorney (containing the declaration of trust) was executed before the debenture. There was also a faint suggestion (based on the company's annual return) that Kozo was registered as the shareholder on 31 January 2002. However, it is plain that the stock transfer was not stamped until August 2002; that the board's resolution to approve the share transfer was conditional on stamping; and that if Kozo had been registered on 31 January 2002 it would have conflicted with the resolution. Mr Egan's evidence was that the share transfer was not registered until after the special resolutions were signed; and it is unlikely that it was registered between the signing of the resolutions and the execution of the debenture. Moreover, the share certificate recording Holdings' shareholding was still in Holdings' possession s few days later. I find, despite the company's annual return, that Holdings remained the registered shareholder until after execution of the debenture. Effect of the transaction[21]Thus although Holdings remained the registered shareholder as regards 80 per cent of the shares in the company, in my judgment it held them on a bare trust for Kozo; and Kozo was entitled to act in Holding's name in its absolute discretion. Holdings had also agreed not to exercise any powers in relation to the shares without Kozo's consent.[22]Before the transactions the corporate structure looked like this:[23]After the transactions the corporate structure looked like this: The legislation[24]Section 245 (2) of the Insolvency Act 1986 provides:
"Subject as follows, a floating charge on the company's undertaking or property created at a relevant time is invalid except to the extent of the aggregate of— (a) the value of so much of the consideration for the creation of the charge as consists of money paid, or goods or services supplied, to the company at the same time as, or after, the creation of the charge, (b) the value of so much of that consideration as consists of the discharge or reduction, at the same time as, or after the creation of the charge, of any debt of the company, and …"
[25]Section 245 (3) provides:
"Subject to the next subsection, the time at which a floating charge is created by a company is a relevant time for the purposes of this section if the charge is created— (a) in the case of a charge which is created in favour of a person who is connected with the company, at a time in the period of 2 years ending with the onset of insolvency, (b) in the case of a charge which is created in favour of any other person, at a time in the period of 12 months ending with the onset of insolvency, . . ."
[26]It is common ground that the debenture in this case was created more than 12 months before the onset of insolvency. Thus the definitions of "a person who is connected with the company" are critical.[27]Section 249 says:
"For the purposes of any provision in this Group of Parts, a person is connected with a company if— (a) he is a director or shadow director of the company or an associate of such a director or shadow director, or (b) he is an associate of the company; and "associate" has the meaning given by section 435 in Part XVIII of this Act."
[28]Who is an associate is governed by section 435. The particular sub-sections on which argument has concentrated are subsections (5), (6), (7) and (10). Sub-section (5) provides:
"A person in his capacity as trustee of a trust other than-- (a) a trust arising under any of the second Group of Parts or the Bankruptcy (Scotland) Act 1985, or (b) a pension scheme or an employees' share scheme (within the meaning of the Companies Act), is an associate of another person if the beneficiaries of the trust include, or the terms of the trust confer a power that may be exercised for the benefit of, that other person or an associate of that other person."
[29]Sub-section (6) provides:
"A company is an associate of another company— (a) if the same person has control of both, or a person has control of one and persons who are his associates, or he and persons who are his associates, have control of the other, or (b) if a group of two or more persons has control of each company, and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person of whom he is an associate."
[30]Sub-section (7) provides:
"A company is an associate of another person if that person has control of it or if that person and persons who are his associates together have control of it."
[31]Subsection (10) provides:
"For the purposes of this section a person is to be taken as having control of a company if— (a) the directors of the company or of another company which has control of it (or any of them) are accustomed to act in accordance with his directions or instructions, or (b) he is entitled to exercise, or control the exercise of, one third or more of the voting power at any general meeting of the company or of another company which has control of it; and where two or more persons together satisfy either of the above conditions, they are to be taken as having control of the company. "
[32]It follows from these definitions that the debenture will be invalid (except to the extent provided for in section 245 (2)) if Unidare was "connected with" the company at the time when the debenture was created. This, in turn, depends on whether Unidare had "control" of the company at that time. That, therefore, is the critical issue. Trust[33]Following the execution of the power of attorney, Holdings held its shares in the company on trust for Kozo. Consequently, applying section 435 (5), Holdings was associated with Kozo. Unidare[34]Unidare, as owner of the whole of the share capital in Holdings, was entitled to exercise all the voting rights at a general meeting of Holdings. It is not a question whether Unidare could direct Holdings how to exercise its own voting rights in relation to the company. In my judgment the general meeting of which the sub-section speaks is a hypothetical general meeting, and is simply part of a formula for determining who has control of a company. Since Unidare controlled Holdings, it was associated with Holdings. Associates' associates[35]What has been established thus far is that Unidare was an associate of Holdings; and Holdings was an associate of Kozo. But section 435 does not contain any general provision enabling the aggregation of different associates. Thus if A is associated with B, and B is associated with C, it does not follow that A is also associated with C. This can only be achieved by applying the somewhat convoluted provisions of sub-section (6). It is common ground that they do not apply to this case; so that, mercifully, I do not need to attempt to expound them Control[36]The first argument that the administrators advance is that the directors of the company were "accustomed to act" on the directions of Unidare. In so far as the allegation is directed at the action of the new board in approving the debenture and resolving that the company should enter into it, I do not see how the completion of a single transaction on a single day (which was itself the very day on which the board were appointed) can amount to being "accustomed" to act. Inherent in the notion of being accustomed to act on someone's instruction is conduct over a period of time. In so far as the allegations directed at the old board, there is no evidence that they acted on anyone's instructions or at anyone's direction. The mere fact that the old board shared directors with other companies of which Unidare was the ultimate parent does not lead to the conclusion that they failed to exercise their powers as directors of the company in good faith, in the company's interests and as the result of independent decisions made by them.[37]The real focus of the attack, however, concentrated on the position of Holdings as shareholder. The rival arguments, in a nutshell, are these. Unidare submits that as a result of the agreement for sale and purchase of the shares, and the declaration of trust, Holdings was no more than a bare trustee of the shares for Kozo. Moreover, it had agreed not to exercise any of the powers attached to the shares (including voting rights) without Kozo's consent. If and in so far as voting was in issue, Holdings had to act in accordance with Kozo's wishes. It cannot, therefore, be said that, in any meaningful sense, Holdings was entitled to exercise or control the exercise of any voting power in the company. The liquidators submit that the share sale agreement and the power of attorney are irrelevant. Holdings remained the registered shareholder. So far as the company was concerned, it was entitled to cast the votes attached to the shares. The company's register of shareholders cannot record the existence of any trust of the shares; so that legal title to the shares is what counts. If this means that two (or more) people satisfy the definition of control in relation to the same block of shares (the legal owner and the beneficial owner or owners) that serves the policy of the Act. If Parliament wished to exclude nominee and fiduciary shareholders from the definition of those having "control" of a company, a means was readily to hand, as is shown by the analogous provisions of section 736A (5) and (6) of the Companies Act 1985.[38]Ms Agnello, who appeared for Unidare, submitted that the mischief against which section 435 (10) was directed was that a person could so arrange a company's affairs as to benefit himself in preference to the other creditors of the company. Thus section 435 (10) should be construed as applying to the person who "pulled the company's strings". She pointed to the words of section 435 (10)(a) with its clear reference to the concept of "shadow directorship"; and also to the reference in section 435 (10)(b) to a person entitled to "control" the exercise of voting power. She pointed out that section 435 (10) eschews reference to the legal ownership or title to shares; and said that it did so deliberately. The aim of the sub-section was to look through the legal niceties and get at the reality of power and control.[39]Ms Agnello took me to the decision of the Court of Appeal in Michaels v. Harley House (Marylebone) Ltd [2000] Ch 104 . That was a case in which the issue was whether a company which was a vendor of shares under an uncompleted contract for the sale of shares was a member of the same group of companies as the company whose shares were being sold. I did not find that decision of assistance for two reasons. First, the court was concerned with the detailed construction of the provisions of section 736A of the Companies Act 1985. Unlike section 435 of the Insolvency Act 1986, section 736A makes express provision for how to treat shares held in a fiduciary capacity and shares held by A as nominee for B. Second, the court's analysis was directed at the position of a vendor under an uncompleted contract for sale. In the present case, not only is there a contract; there is also an express declaration of trust.[40]Ms Agnello also relied on the decision of Evans-Lombe J in Philip Morris Inc v. Rothmans International Ltd (unreported 19 July 2000). The issue in that case was whether there was "a change in control" of one of two corporate partners within the meaning of the partnership agreement. There was an elaborate definition of "change of control" which incorporated parts of the City Code of Take-overs and Mergers.

The judge said:

"It seems to me that these three cases in the Court of Appeal point to the conclusion that a party ("
A" ) may exercise control over the voting rights appurtenant to shares not only in the circumstances where the party ("B") on the register can be demonstrated to be a trustee or bare nominee of the entire interest in the shares for A. Such control can exist in a situation where B is not shown to be such nominee or trustee but it is demonstrated that he has been shorn of any economic interest in the shares which has passed to A. In those circumstances a Court would intervene to prevent B from exercising any powers, such as voting, which spring from his bare legal ownership of the shares, which exercise was inconsistent with or injured the owner of the economic interests in the shares. A will, in fact, be in a position to control B's voting rights in respect of the shares. Each case, however, will turn on its own facts. It will be a question of assessing the extent of the interest retained by the registered holder of the shares."[41]Again, I did not find this case of assistance. I do not doubt that if B holds shares on a bare trust for A, A can be regarded as being entitled to "control" the exercise of voting rights. Similarly, if B has passed all his economic interest to A, A can also be regarded as being able to control the voting rights. So, in this example A would fall within the definition in section 435 (10) (b). But that is not the question. The question is not whether A is included in the definition. Plainly he is. The question is whether B (the registered shareholder) is excluded from it. The answer to that question is not dependent on who is entitled to control the exercise of voting rights. It depends on who is entitled to exercise voting rights.[42]Ms Shekerdemian submitted that whether a person was entitled to exercise voting rights depended on the terms of the company's articles of association and the register of members. The company was not affected by any contractual restrictions affecting a member's right to vote; and was not affected by any trust of the shares. As far as the company was concerned, the register (in some cases modified by the company's articles of association) determined who was entitled to exercise voting rights; and the company was not entitled to look behind the register.[43]Ms Shekerdemian drew my attention to a number of cases in which the court considered different forms of statutory definition. In many of these cases (including Michaels ) the legislation dealt expressly with the position of one who held shares in a fiduciary capacity. She submitted, therefore, that where Parliament intended to make an exception for registered shareholders who held shares in a fiduciary capacity, it knew how to do so; and often did just that. However, section 435 of the Insolvency Act 1986 did not contain any such provision. Parliament must therefore be taken to have intended to apply the law as applicable to statutes without any such special provision; and in accordance with the ordinary principles of company law.[44]In this connection, Ms Shekerdemian relied in particular on IRC v. J Bibby & Sons Ltd [1945] 1 All ER 667 . The issue in that case was whether shares in a company held by directors as trustees could be aggregated with shares held by them beneficially for the purpose of determining whether the directors had "a controlling interest" in the company. Lord Russell of Killowen said at 669:
"When the section speaks of directors having a controlling interest in a company, what it is immediately concerned with in using the words "controlling interest" is not the extent to which the individuals are beneficially interested in the profits of the company as a going concern or in the surplus assets in a winding up, but the extent to which they have vested in them the power of controlling by votes the decisions which will bind the company in the shape of resolutions passed by the shareholders in general meeting. In other words, the test which is to exclude a company's business from subsection (9)( a ) and include it in (9)( b ), is the voting power of its directors, not their beneficial interest in the company. For the purpose of such a test the fact that a vote-carrying share is vested in a director as trustee seems immaterial. The power is there, and though it be exercised in breach of trust or even in breach of an injunction, the vote would be validly cast vis-a-vis the company, and the resolution until rescinded would be binding on it."
[45]Lords Porter and Simonds agreed with Lord Russell.[46]Lord Macmillan said at 670:
"The question whether the directors of the respondent company have the control of it by their voting power as shareholders must in my view be determined by the memorandum and articles of the company and by the register of shareholders. By the constitution of the company, as I have already mentioned, the voting power is vested in the ordinary shareholders and the register shows that the directors hold a majority of these shares. … So far as the company is concerned the relation between such of its shareholders as happen to be trustees and their beneficiaries is res inter alios . It may be that a trustee shareholder may, as between himself and his cestuis que trust , be under a duty to exercise his vote in a particular manner, or a shareholder may be bound under contract to vote in a particular way ( cf Puddephatt v Leith ). But with such restrictions the company has nothing to do. It must accept and act upon the shareholder's vote notwithstanding that it may be given contrary to some duty which he owes to outsiders. The remedy for such breach lies elsewhere."
[47]Lord Porter said at 672:
"The phrase is a composite one and the combination means no more than that the directors must have an interest such as enables them to control the activities of the company: it does not require some personal financial interest on their part which control enables them to exploit. It may be that trustees can ultimately be brought to book for activities which would not lay a beneficial owner open to attack or complaint. Nevertheless for good or ill the trustee like the beneficial owner controls, though if his powers be wrongly exercised they may in some way or other be capable of being challenged."
[48]Lord Simonds said at 672:
"What, my Lords, constitutes a controlling interest in a company? It is the power by the exercise of voting rights to carry a resolution at a general meeting of the company. Can the directors of the respondent company by the exercise of their voting rights carry such a resolution? Yes: for they are the registered holders of more than half the ordinary shares of the company. Therefore they have a controlling interest in the company. … Those who by their votes can control the company do not the less control it because they may themselves be amenable to some external control. Theirs is the control, though in the exercise of it they may be guilty of some breach of obligation whether of conscience or of law. It is impossible (an impossibility long recognised in company law) to enter into an investigation whether the registered holder of a share is to any and what extent the beneficial owner. A clean cut there must be."
[49]When the same case was in the Court of Appeal [1944] 1 All ER 548 Lord Greene MR had delivered the judgment of the court. He also held that a registered shareholder who held shares as a trustee was entitled to vote the shares. But he made an (obiter) exception in the case of a bare trustee. As regards a bare trustee he said (at 550):
"The case of a bare trustee is not, of course, before us. But it seems to us that, in such a case, the control would naturally be said to be in the beneficial owner and not in the trustee; so that, if the shares carried more than half the voting power and the beneficial owner was director, he would properly be described as having a controlling interest in the company."
[50]However, in the House of Lords, Lords Russell, Wright and Porter reserved their opinion on the question of a bare trustee; and Lord Simonds was openly sceptical about the correctness of the observations of the Court of Appeal on that point.[51]In IRC v. Silverts Ltd [1951] Ch. 521 shares in a company were held by a bank as custodian trustee of a trust. Two of the directors of the company were the managing trustees of the trust. The Court of Appeal held that there was a difference (although a fine one) between a bare trustee and a custodian trustee, because the latter (unlike the former) was not obliged to act on the directions of another if to do so would amount to a breach of trust. Lord Evershed MR, who gave the judgment of the court, said:
"… where the registered shareholder is a bare trustee in the sense of being a mere name or "dummy" for the true owner, we should feel strongly inclined to answer the question reserved by House in the Bibby case in the same way as Lord Greene, M.R. In the present case, however - perhaps fortunately - the answer would not, on an appeal to common sense, appear so clearly. … In our judgment, the ratio decidendi in Bibby's case is that, in accordance with well-established principles relating to limited companies, a question of the rights of members vis-à-vis the corporation (such as that of voting control under its regulations) is to be determined by reference, and by reference only, to the share register beyond which it is not (save possibly in the case of mere "nominee" shareholders) permissible to look; and not that, in the case of a trust, the powers and discretions of exercising votes in regard to shares must be treated as reposing in the trustees without regard to the terms of the trust or the right of beneficiaries to direct such exercise. Thus, if (because the shares were registered in the names of "nominees" or "bare trustees" or otherwise) it were in any circumstances permissible to look beyond the share register, we do not think the speeches in the Bibby case would prevent inquiry being made whether those individuals to whom the nominee shareholders were answerable were themselves obliged by contract or otherwise to give directions in accordance with instructions received from some third party."
[52]Clearly the Court of Appeal in Silverts did not regard themselves as bound by the decision of the House of Lords in Bibby to hold that a bare trustee should be treated in the same way as other trustees.[53]In S Berendsen Ltd v. IRC [1958] Ch 1, the registered shareholder was itself a company. The Court of Appeal held that in such circumstances, it was permissible to "ask, since the company cannot speak, whose is the voice that you hear". In the course of his judgment Lord Evershed MR considered the earlier case of FA Clark & Sons Ltd v. IRC [1941] 2 KB 270. In that case three trustees held shares in companya. A. They agreed to sell their shares to companyb. B. The directors of company A held all the shares in company B. The question was whether company A was controlled by its directors. The Court of Appeal held that since the registered shareholders in company A held their shares on a bare trust for company B, the trustees' shares in company A must be treated as being under the control of the shareholders of company B, i.e. the directors of company A. The explanation of that case gives some force, in my judgment, to the argument that a bare trust is not subject to the general rule laid down in Bibby in the House of Lords.[54]What I derive from these cases is that: i) In the vast majority of cases, whether a person is entitled to exercise voting rights is to be determined simply by looking at the register of shareholders and the company's articles of association; ii) In such cases, it is not permissible to look outside those materials and to inquire whether there are contractual or fiduciary restraints, as between the registered shareholder and others, which inhibit him in exercising those rights; iii) In general there is no warrant for distinguishing between different degrees of trusteeship; iv) The Court of Appeal has expressed the view that where the question is whether a person has a controlling interest in a company an exception may be made in the case of a bare trustee (or nominee or "dummy"). In such a case control resides in the beneficial owner to the exclusion of the trustee; v) In the case of a shareholder which is itself a corporation, in determining how its voting rights as shareholders are exercised it is permissible to look outside the register of shareholders and inquire whose voice is heard when its votes are cast.[55]Since I have held that, following execution of the power of attorney, Holdings held its shares in the company on a bare trust for Kozo, the question left open by the House of Lords must be decided.[56]There is very little guidance to be gained from the words of the section itself. It can be said that Parliament did consider the question of trusts; because it expressly legislated for trustees in section 435 (5). Yet it did not carry that through into section 435 (10). That is some indication that section 435 (10) is intended to refer to the legal right, as against the company, to exercise voting powers. Ms Agnello naturally concentrated on the reference to "control" in section 435 (10) (b). The question of control (as opposed to exercise) of voting rights must stem from a relationship between the registered shareholder and someone who is not the company. In order to determine whether such a person has control over voting rights, it is necessary to look outside the register of members and the articles of association of the company. Likewise, if the question is whether someone is accustomed to act on the instructions or directions of another, it is necessary to examine facts which go beyond those materials, and which may, indeed have left no paper trail. So the "clean cut" to which Lord Simonds referred in Bibby is not present. To my mind this greatly weakens the force of the argument based on Bibby in the House of Lords.[57]Ms Shekerdemian also referred to the policy underlying the enactment of section 435 and stressed its importance in the scheme of the insolvency regime. She showed me extracts from the Cork Report on Insolvency Law and Practice (Cmnd. 8558) which underlined the importance of making special provision for connected persons. However, the members of the Cork Committee took the view (in relation to companies) that ownership of more than half the equity share capital would be required before a person should be regarded as connected with a company. This proportion was not translated into section 435 as enacted. Ms Shekerdemian also postulated hypothetical circumstances (related to the provisions in the Insolvency Act about preferences) in which she said that it would be absurd if a shareholder in a company were not regarded as connected with the company even though he held his shares on a bare trust. My impression was that it must have taken a good deal of ingenuity to work out Ms Shekerdemian's hypothetical example, and that it was not one that is likely to be encountered in anything but an exceptional case. In most cases, the conclusion that a person is connected with a company has the effect of extending (retrospectively from the onset of insolvency) the period during which transactions are liable to be set aside or avoided. This element of retrospective operation does not point to a need to construe the definition as widely as possible. Moreover, although I see the force of the argument that whereas section 736A of the Companies Act deals expressly with shares held by nominees, and section 435 does not, I cannot discern any cogent policy reason for concluding that Parliament must have intended that bare trustees would be treated as connected with companies in which they are registered shareholders. Ms Shekerdemian accepts that if the share transfer had been registered in the company's statutory books before execution of the debenture then her argument that Unidare was connected with the company would have been unsustainable. It is clear to me that, by the time that the debenture was executed, Unidare and Holdings had done everything in their power to divest Holdings of its ownership of the shares in the company. The share transfer had been approved by the board of the company. The formal process of registration of Kozo as the new shareholder was not within the power of Unidare or Holdings. If the happenstance that registration did not take place before the grant of the debenture was to lead to the conclusion that, for that reason alone, Unidare was connected with the company when the debenture was granted, that would seem to me to be a triumph of formalism.[58]The phrase I have to construe in section 435 (10) (b) is a typically compressed piece of draftsmanship. The verb "entitled" governs both the exercise of voting power and the control of voting power. In looking at control of voting power, the word "entitled" must, in my judgment, mean "entitled as between the registered shareholder and the controller of the voting power". Why, then, should the word "entitled" in its application to the exercise of voting power be construed as meaning "as between the registered shareholder and the company"? There is a further slight clue to the meaning of section 435. Unlike section 736 and section 736A of the Companies Act 1985, which refer to "voting rights ", section 435 refers to "voting power ". The word "rights" naturally directs attention to legal rights, especially since section 736A (2) goes on to explain that voting rights means "rights conferred on shareholders in respect of their shares". The word "power", by contrast, gives me some encouragement to look to the economic reality of the case. A registered shareholder who holds his shares on a bare trust under which he is required to cast his vote in accordance with the directions of the beneficial owner might be said to have voting rights, but I do not consider that in any real sense he can be said to have voting power. The Court of Appeal, in two cases I have mentioned ( Bibby and Silverts ), were clearly impressed by the appeal to the common sense and economic reality of the case of a bare trustee. I do not consider that the wording of section 435 compels me to take a different view. In addition Holdings was a corporate shareholder. If I ask whose voice would be heard if, after the declaration of trust, Holdings were to cast the votes attached to the shares registered in its name at a general meeting of the company, the only answer, in my judgment, is Kozo's.[59]I hold, therefore, that following the execution of the declaration of trust Holdings is not to be regarded, for the purposes of section 435 (10) (b) of the Insolvency Act 1986, as being entitled to exercise the voting power of those shares. Since such a person is bound to act in accordance with the directions of the beneficial owner, he does not control their voting power either. Thus Holdings was not associated with the company when the debenture was executed.[60]It follows, therefore, that at the time the debenture was executed, Unidare was not connected with the company either; and that, consequently, the debenture is valid. Unidare is, therefore, a secured creditor. Liquidation and disclaimer[61]As I have said, on 9 February 2005 the administrators rejected Unidare's claim that its debenture was valid. In the light of my decision they were wrong to have done so. On 10 February Unidare notified the administrators that Unidare had a claim (said to have been calculated in accordance with the methodology expounded in Re Park Air Services Ltd [2000] 2 AC 172 ) "in excess of £2 million". Unidare's proof of debt claims a contingent debt of £2,111,250. The administrators rejected this debt. Mr Cohen, one of the joint administrators, says that he has been advised that, based on certain assumptions, Unidare's claim cannot exceed £1.48 million (which was the minimum amount available for distribution to creditors).[62]On 11 February 2005 the administrators gave notice under paragraph 83 of Schedule B1 to the Insolvency Act 1986. This had the effect, once the notice was registered by the Registrar of Companies, of converting the administration into a creditors' voluntary winding up.[63]On 23 February 2005 the liquidators disclaimed the lease. In consequence the landlord called upon Unidare to take up a new lease, in accordance with its covenant to do so. The new lease was granted to Unidare on 5 May 2005. Paragraph 83[64]Paragraph 83 of Schedule B1 to the Insolvency Act 1986 applies where:
"the administrator of a company thinks— (a) that the total amount which each secured creditor of the company is likely to receive has been paid to him or set aside for him, and (b) that a distribution will be made to unsecured creditors of the company (if there are any)."
[65]Ms Agnello accepts that the only way in which the administrators' decision can be challenged is under paragraph 74 of Schedule B1, which provides:
"A creditor or member of a company in administration may apply to the court claiming that— (a) the administrator is acting or has acted so as unfairly to harm the interests of the applicant (whether alone or in common with some or all other members or creditors), or (b) the administrator proposes to act in a way which would unfairly harm the interests of the applicant (whether alone or in common with some or all other members or creditors). "
[66]The court has wide powers on the hearing of such an application. It is, in my judgment, clear that there must be a causative link between the action that is alleged to be unfair and the harm to the creditor's interests that is alleged.[67]In addition an administrator may be liable for misfeasance on an application under paragraph 75 of Schedule B1. The administrator's thinking[68]Mr Cohen explained that when he decided to invoke the procedure under paragraph 83, he had rejected Unidare's claim to have a valid security. He therefore thought that Unidare's claim was an unsecured claim. Unsecured claims topped £5 million; and he had £1.48 million in hand. He therefore thought that a distribution would be made to unsecured creditors. The only other potentially secured creditor (the bank) had been repaid in full. However, he thought that any final adjudication of Unidare's claim to a valid security would be made by the liquidators, once the company had gone into liquidation. He also thought that Unidare's claim was greatly exaggerated. On the basis of his own experience he thought that the property could be relet within two years. He had advice from his retained agents that the rent payable was the market rent; and he used his own experience to assess a reasonable discount rate for early payment. On that basis, he concluded that Unidare's claim was likely to be in the region of £250,000.[69]Although the various reports to creditors consistently said that he was unable to quantify the dividend "if any" that would be paid to unsecured creditors, this merely reflected his caution as a prudent and experienced licensed insolvency practitioner, who did not want to raise false hopes among the creditors.[70]I accept Mr Cohen's evidence about his thought process. Did paragraph 83 apply?[71]Reading paragraph 83 literally, Mr Cohen did think that the only secured creditor (the bank) had been repaid; and that there would be a dividend payable to creditors. Thus, on the face of it, paragraph 83 applied. Ms Agnello submitted that the administrator's conclusion must be based on reasonable grounds; or at least not be one which no reasonable administrator could have reached. I do not consider that paragraph 83 should be interpreted in this way. I accept that the process of thinking involves a rational thought process, and in that sense must be reasonable; but I do not accept that what the administrator thinks is subject to any form of test by reference to an objective standard.[72]Assuming that my conclusion on the validity of the debenture is right, Mr Cohen was wrong to reject Unidare's claim to be secured. However, in rejecting the validity of the debenture, Mr Cohen relied on the legal advice he was given. Ms Shekerdemian's excellent argument demonstrates that the legal advice that Mr Cohen received (even though I disagree with it) was not unreasonable. So in my judgment it can fairly be concluded that Mr Cohen formed his opinion on that point on reasonable grounds.[73]Ms Agnello submitted that in his assessment of the quantum of Unidare's claim, Mr Cohen ought not to have relied on his own experience in concluding that Unidare's claim was exaggerated. He ought to have consulted an expert valuer in forming a view on how long it would take to relet the property, and whether the rent was a market rent. I accept Mr Cohen's evidence that his own assessment (with the aid of his retained agents) of Unidare's claim was that it was worth in the region of £250,000; and that he had £1.48 million in hand. In those circumstances I do not consider that I can castigate as unreasonable the thought process which said that even if he was wrong in his assessment of the quantum of Unidare's claim there was still a very comfortable margin of error before the prospect of a dividend to unsecured creditors was jeopardised. It is also worth noting that Unidare does not appear to have quantified its own claim with the aid of any expert valuer.[74]Accordingly, even if (as Ms Agnello submitted) the administrator's thinking must be based on reasonable grounds, I hold that it was.[75]Accordingly paragraph 83 applied, and the company was validly put into liquidation. Acting unfairly[76]Unidare's complaint is that the administrator rejected its claim to be a secured creditor, without submitting the dispute to the adjudication of the court. Thus Unidare was deprived of an opportunity to vote at creditors' meetings. There is no doubt that the administrator had power to apply to the court for directions. But a power is not a duty; and a failure to exercise a power is not necessarily unfair. Mr Cohen's view was that the validity of the debenture would be determined in the winding up; and that even if it was valid, there was enough money in hand to satisfy whatever was the proper amount of Unidare's claim. Moreover, if an administrator rejects a claim, the aggrieved creditor is entitled to appeal to the court either under rule 2.39 (2) or rule 2.78 (1) of the Insolvency Rules 1986. So an aggrieved creditor is not without a remedy.[77]I am not persuaded that this decision was unfair, or that it has adversely harmed Unidare's interests. Unidare retains its security, and is entitled to recoup itself out of the monies held by the liquidators. The issue of the validity of the debenture would have to be decided one way or another, and I cannot see that it has been any more expensive or more difficult to decide it in the context of a liquidation than it would have been if it had been decided in the context of an administration.[78]The question whether any conduct of the administrators has harmed Unidare can, I think be tested as follows. Assume first that Unidare was a secured creditor (as I have held it is). Mr Cohen was therefore wrong in rejecting Unidare's claim to be a secure creditor. Accordingly, Unidare was not entitled to vote at any meeting, except in respect of such part of the claim as was unsecured. So no harm to Unidare's interests has been caused, because as things have turned out, it was not entitled to vote anyway. Now assume the alternative situation: that Unidare was an unsecured creditor. On this hypothesis, Mr Cohen was right in rejecting Unidare's claim to be a secured creditor. So Unidare was entitled to vote at the meeting. Why did it not vote? The reason it did not was because it wished to maintain its claim to security. So the cause of Unidare's failure to vote was not anything that Mr Cohen did, but Unidare's disagreement with his decision.[79]Ms Shekerdemian also argued that if it was doubtful whether Unidare was secured or unsecured, then the administrator could have counted its vote under rule 2.39 (3) of the Insolvency Rules 1986. This rule allows the chairman of a creditors' meeting to mark a vote as "objected to" if he is unsure whether to admit or reject a claim, but nevertheless allow it to be cast. I need not express a view about this. Result[80]I will declare that the debenture is not avoided by section 245; and I will dismiss the application under paragraph 73.

Cited in 5 later judgments