Case No: CHANI/99/1003/B3

 
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
Chancery Division Companies Court
Mr. Justice Jacob
Royal Courts of Justice
Strand, London, WC2A 2LL

Thursday, 17 February 2000

B e f o r e :

LORD JUSTICE PETER GIBSON
LORD JUSTICE SCHIEMANN
and 
MR. JUSTICE WILSON

	MAHOMED & ANR.		Appellant	
	- and -		
	MORRIS & ORS.	Respondent	

(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040,  Fax No:  0171 831 8838
Official Shorthand Writers to the Court)

Miss Catherine Newman Q.C. and Mr. Matthew Collings (instructed by  Messrs. SPR Avery Midgen of London for the Appellants)
Mr. Richard Snowden (instructed by  Messrs. White and Case of London for the Respondents)

Judgment
As Approved by the Court

Crown Copyright ©

LORD JUSTICE Peter Gibson:

	1.  By s. 168 (5) Insolvency Act 1986 any person aggrieved by any decision of the liquidator of a company being wound up by the court may apply to the court and the court may confirm, reverse or modify the act or decision complained of and make such order as it thinks just.

	2.  By this appeal Abdul Mahomed and his brother Mohammed Mahomed (“the Mahomeds”) appeal from the order of Jacob J. on 26 March 1999, striking out their application brought under s. 168 (5) in the liquidation of the Bank of Credit and Commerce International S.A. (“BCCI”) against the first three Respondents, Mr. Morris, Mr. Richards and Mr. Akers, the joint liquidators of BCCI.  Robert Walker L.J. gave the Mahomeds leave to appeal, but that leave was limited to a single issue, as I shall explain later.

	3.  The facts, in summary, are these.  Manlon Trading Ltd. (“Manlon”) was a company owned and controlled by Harun Aziz, a brother of the Mahomeds.  It had a banking relationship with BCCI.  Much of its business involved trade with Nigeria.  In 1983 the Central Bank of Nigeria froze payments of money owed by Nigerians to foreign creditors like Manlon.  The debts were converted into interest-bearing promissory notes issued by the Central Bank.  The notes were registered notes transferable only by registration and their realisation required the cooperation of the registered holder to whom the notes were issued.  In 1985 Manlon obtained 19 notes (“the Notes”) issued by the Central Bank and delivered them to BCCI.  They fell into three categories.  9 were in the name of BCCI (“the BCCI Notes”) and their face value totalled $6,540,501.  5 were in the name of “Manlon c/o BCCI” (“the Manlon Notes”) with a face value of $7,140,257 and 5 were in the name of 4 other companies (“the Third Party Notes”) and they had a face value of $3,489,572.  The 4 companies were companies through whom Manlon conducted some of its business, but of which Manlon does not appear to have been a shareholder.  Three of the companies have been dissolved or struck off, two in 1985 and one in 1987.

	4.  On 11 March 1986 Manlon granted a Charge (“the Charge”) to BCCI over “each bill, instrument, debt or other obligation, brief particulars as set out in the Schedule hereto, in respect of which [BCCI] has provided or continues to provide or may provide any facility, banking service or accommodation” and each note issued by the Central Bank in connection therewith.  Manlon by the Charge agreed not to create or permit to subsist any other charge or encumbrance over or in respect of what was thereby charged.  It is not in dispute that the specific descriptions contained in the Schedule to the Charge include the BCCI Notes and the Manlon Notes but the Third Party Notes are not in the Schedule.  Manlon went into liquidation on 8 June 1988.  Its liquidator is Mr. Hocking.

	5.  At the time of Manlon’s liquidation Manlon owed BCCI substantial sums.  BCCI did not prove in the liquidation but chose to rely on its own security.  From 1992 Manlon’s liquidator challenged BCCI’s rights to the Notes.  He took issue on three grounds with BCCI’s claim to have valid security in respect of all of the Notes:  (1)  the Third Party Notes were not covered by the Charge; (2) some of the Notes related to transactions which were not funded at all by BCCI; (3) some of the Notes were funded only in part by BCCI.  He relied in particular on the words of the Charge linking the charged instruments with the provision of facilities by BCCI.

	6.  The Mahomeds had accounts with BCCI in Luxembourg, each account being in the joint names of one of them and of Mr. Aziz. The Mahomeds executed contractual liens and pledges (“the Liens”) over their accounts to secure Manlon’s indebtedness to BCCI.  At the time Manlon went into liquidation two accounts were in credit in a total sum of $1 million, a third in the sum of £148,000.  BCCI in claimed exercise of its security rights under the Liens then applied the moneys in the Mahomeds’ accounts to discharge in part the indebtedness of Manlon to BCCI.  That still left Manlon owing BCCI $2,030,317 and £526,770 on 24 June 1988.

	7.  The Mahomeds challenged BCCI’s ability to take the moneys in their accounts.  On 27 February 1991 they commenced proceedings against BCCI in the Commercial Court for the recovery of the moneys in the accounts.  Thereby they challenged the validity of the Liens.  BCCI defended those proceedings. On 5 July 1991 provisional liquidators of BCCI were appointed.  The proceedings were automatically stayed.  On 14 January 1992 BCCI was compulsorily wound up.  The Mahomeds did not apply for the removal of the stay, because they prepared to try to prove in the liquidation of BCCI.  But in 1992 they also showed that they were aware of an alternative possibility of recovering what had been taken by BCCI, that is to say by claiming to be subrogated to BCCI’s security rights in respect of the Notes to the extent that there was a surplus after Manlon’s indebtedness to BCCI had been discharged.

	8.  In mid-1992 there was concern that the value of the Notes, already well below par, might decline even further because of the political situation in Nigeria.  The solicitors then acting for the Mahomeds, Herbert Smith, urged the BCCI liquidators’ solicitors, Stephenson Harwood, to sell the Notes.  The Manlon liquidator and the BCCI liquidators cooperated to sell the BCCI Notes and the Manlon Notes in August 1992 and July 1993.  The Third Party Notes were not sold until 1997.

	9.  In the meantime on 21 July 1992 Herbert Smith raised with Stephenson Harwood the possibility that the Mahomeds had an interest in the surplus proceeds of the Notes.  On 18 August 1992 Stephenson Harwood replied saying that the sale of the Notes would not by any means satisfy Manlon’s indebtedness to BCCI and that in any event the Manlon liquidator was challenging BCCI’s right to the Notes.  In a letter of 26 August 1992 to Stephenson Harwood Herbert Smith set out what they considered was the correct position of the Mahomeds.  They suggested that there would be a substantial surplus on the Notes after Manlon’s indebtedness to BCCI was discharged.  They said:
	“In the circumstances we consider that our client may be entitled to be subrogated to the rights of Manlon [sic] in respect of the surplus proceeds of the sale of the promissory notes and/or the interest gained therefrom.”
A Settlement Agreement dealing with other matters was made in October 1992 between the Mahomeds and Manlon’s liquidator, by Clause 12 (b) of which the Mahomeds reserved their rights, if any, to be subrogated to BCCI’s rights for Manlon’s indebtedness to BCCI, in particular in the event of any recovery of promissory notes or other security held by BCCI.  BCCI’s liquidators were not parties to that agreement.  

	10. Much correspondence then ensued as to whether the Mahomeds were entitled to further information about their accounts and about the Notes.  On 22 April 1993 Herbert Smith reverted to what they had said in their letter of 26 August 1992 and asked for a response from Stephenson Harwood.  On 27 April 1993 they wrote again to Stephenson Harwood.  They said that they had had an indication from the Manlon liquidator’s solicitors, Denton Hall, that some of the Notes were to be sold and they asked whether Stephenson Harwood would confirm that the notes were to be sold without prejudice to the Mahomeds’ rights, which they expressly reserved.  Stephenson Harwood replied on 28 April 1993, expressing surprise at the contents of Herbert Smith’s letter of 27 April and saying:
“We are not aware of any claim by your clients to the Notes in question although we are of course aware that your clients are seeking to prove as unsecured creditors of BCCI SA.  The intention is to realise the Notes to cash in order to preserve their value so that in due course the rights to the same as between our clients and Manlon Trading Limited can be determined.  We note your reservation of your clients’ rights but, with respect, would suggest that if your clients intend to advance any claim to those Notes you should provide us with details of the basis on which such a claim is advanced.”
There was no substantive response to that suggestion.

	11. On 1 July 1992 Herbert Smith had submitted draft proofs of debt in BCCI’s liquidation.  But they were not finalised until April 1996 when a formal application was made to the BCCI liquidators for the proofs to be admitted.

	12. There had been prolonged negotiations in correspondence and discussions between Manlon’s liquidator and the BCCI liquidators over their rival claims in respect of the Notes and their proceeds.  Offers of settlement were made by BCCI’s liquidators but rejected by Manlon’s liquidator.  Eventually an agreement was reached, Manlon’s liquidator and BCCI’s liquidators respectively taking the commercial view that it was in the interests of the creditors of their company to avoid litigation.  The approval of the respective liquidation committees was obtained.  On 25 June 1996 a Settlement Agreement (“the Agreement”) was entered into by BCCI and its liquidators and Manlon and its liquidator, dividing the proceeds of the BCCI Notes and the Manlon Notes and also dividing the Third Party Notes (at their estimated realisable values) between them on the basis of whether or not BCCI had provided funding in respect of the underlying transactions giving rise to the debts for which the Notes were issued.  In the case of a Note where BCCI had only provided part of that funding, BCCI took only a corresponding part of the proceeds of that Note.  The net result was that of the sales proceeds and estimated realisable values together with interest BCCI took $2,418,502 whereas Manlon took $4,073,073.  The moneys (including estimated realisable values) taken by BCCI were insufficient to discharge Manlon’s indebtedness to BCCI.  Had BCCI taken all the Notes and their proceeds, there would have been a surplus which would have been more than sufficient to recoup the moneys taken from the Mahomeds’ accounts by BCCI.

	13. The Mahomeds were not consulted or informed about the intention of the BCCI liquidators to enter the Agreement.  Nor did the BCCI liquidators obtain the sanction of the court for it.  Only in the following year did the Mahomeds learn of the Agreement and of the amount of Manlon’s indebtedness to BCCI.  In the meantime they had been pressing their claim to be creditors of BCCI.  On 3 September 1996 their proofs were rejected, and in accordance with Rule 4.83 of the Insolvency Rules 1986 they appealed against the rejection of their proofs by commencing proceedings in the Companies Court.  They very properly discontinued their proceedings in the Commercial Court, the order to that effect recognising that the Companies Court proceedings were in effect a continuation of the earlier proceedings by providing that the costs of the Commercial Court proceedings should be costs in the Companies Court proceedings.

	14. Recognising that, if they were successful in the Companies Court proceedings, they would only receive a dividend from BCCI (being in insolvent liquidation), the Mahomeds then changed tack.  On 31 March 1998 they sought leave pursuant to s. 130 (2) Insolvency Act 1986 to commence new proceedings against BCCI (as well as Manlon) in which they wished to claim a declaration that they were entitled to subrogation to BCCI’s security rights. Thereby they sought to revert to the claim raised as a possibility in 1992 and 1993.  In his Affirmation in support of the Mahomeds’ application Mr. Aziz expressed their concern as being that an attempt had been made to defeat their subrogation claim.  Bad faith is not now asserted by the Mahomeds.  Mr. Aziz correctly stated:
“I am of course conscious that the Companies Court proceedings are predicated on BCCI SA’s security over the [Mahomeds’] accounts being invalid, whereas the Chancery Division proceedings will proceed on the basis that the security is valid (otherwise the subrogation will not arise).”

The Mahomeds also applied for a stay of the proof of debt proceedings in the Companies Court pending the final disposal of the writ proceedings which they proposed to bring in the Chancery Division if given leave under section 130 (2).  In evidence, Mr. Aziz described the proof of debt proceedings as a secondary alternative to the subrogation claim.

	15. The Mahomeds then issued two Ordinary Applications dated 3 September 1998 under s. 168 (5) against BCCI’s liquidators and Manlon’s liquidator, asking:

“For the relief claimed in the Points of Claim herein, in particular for an Order that [the Agreement] be set aside; alternatively for an Order [that] the [BCCI liquidators] and [the Manlon liquidator] do procure that the same be set aside.”

	16. The Points of Claim set out the background facts, including in para. 9 that the BCCI liquidators had contended in the Companies Court proceedings that by means of the Liens BCCI was authorised to apply the balances in the Mahomeds’ account to discharge indebtedness of Manlon, and that the contention was accepted and averred for the purposes of the subrogation proceedings without prejudice to the Mahomeds’ right to assert in the Companies Court proceedings, as an alternative case, that the Liens were of no effect.  It is averred that in June 1988 BCCI had absolute title to the BCCI Notes and security by virtue of the Charge over the Manlon Notes and that the Third Party Notes were delivered to BCCI.  It was further averred in para. 2.4:
“In the premises, it appeared to the [Mahomeds] that they were entitled to be subrogated to the security rights of BCCI to any of the .... Notes over and above those whose proceeds were necessary to cover Manlon’s indebtedness (“the Surplus Notes”), alternatively are entitled to the proceeds thereof (“the Surplus Proceeds”).

It is further averred that had the proceeds of the Notes been kept by BCCI, there would have been Surplus Proceeds to which the Mahomeds would have been entitled to be subrogated.  They referred to a number of matters.  They suggested that the basis on which the division of the proceeds of the Notes was agreed by the BCCI liquidators was unreasonable.  They said that no proper enquiry was made of Mr. Aziz as to how the underlying transactions were funded and all the underlying transactions were in any event funded by BCCI.  They claimed that BCCI had title to the BCCI Notes by virtue of being holders in due course but that BCCI’s liquidators placed little or no reliance on that fact and made no proper enquiry of Mr. Aziz.  They said that they were persons aggrieved by the act or decision of the BCCI liquidators.  The relief claimed was the setting aside of the Agreement, a declaration that the Mahomeds are entitled to subrogation to BCCI’s rights in the Surplus Notes and Surplus Proceeds, an account and payment of sums found due, alternatively compensation in equity.  All those heads of relief, it is said, were available to the Mahomeds by proceedings under s. 168 (5), not against BCCI or Manlon, but against the liquidators personally.

	17. The BCCI liquidators and the Manlon liquidator each applied to strike out the Ordinary Application against them on the ground that it disclosed no reasonable cause of action, was scandalous, frivolous or vexatious or was otherwise an abuse of process.  Those were the applications which came before Jacob J.  The judge acceded to both applications.  In his judgment delivered on 26 March 1999 the judge applied the test, derived from the decision of this court in Re Edennote Ltd. [1996] 2 B.C.L.C. 389, that in the absence of fraud the court will only interfere with the act of a liquidator if he has done something so utterly unreasonable and absurd that no reasonable man would have done it.  The judge said that it should be assumed that the liquidator had taken reasonable advice.  The judge was content to assume that there was jurisdiction to set aside a concluded transaction.  He rightly directed himself that as it was a strike out application he had to decide whether what the liquidator had done was arguably perverse.  The judge considered the underlying merits of the rival claims of the BCCI liquidators and of Manlon’s liquidator.  He was of the view that the contention of Manlon’s liquidator based on the construction of the Charge was tenable.  The judge concluded that there was no possibility, still less a realistic possibility, of it being shown that the actions of the BCCI liquidators were so perverse that no reasonable liquidator could have entered into the Agreement.  The judge found that the position of Manlon’s liquidator was even stronger.  The judge ended his judgment by referring to the complaint made by the Mahomeds that they were not told what was going on.  But he said that there was no reason or duty to tell them what was going on.  He was therefore of the view that the proceedings clearly ought to be struck out and did so.  The judge also dismissed the Mahomeds’ application for leave pursuant to s. 130 (2).  There has been no appeal against that dismissal.

	18. On the application for permission to appeal to this court a detailed draft Notice of Appeal challenging on a large number of points the judge’s decision relating to BCCI’s liquidators and Manlon’s liquidator was put before the court.  As the single Lord Justice considering the application on paper I indicated that I was minded to refuse leave.  But at an oral hearing Robert Walker L.J. referred to the decision of this court in Mitchell v Buckingham [1998] 2 B.C.L.C. 369 (on which the Mahomeds had not previously relied) and gave leave limited to the following issue in relation to the BCCI liquidators alone:
“whether (if the evidence shows that the Mahomeds were not sufficiently consulted) it was proper for the liquidators to proceed without such consultation and without the directions of the Companies Court in circumstances where a subrogation claim was put forward by the Mahomeds.”

	19. No application to this court has subsequently been made by the Mahomeds to be allowed to appeal on further grounds.  Yet the Notice of Appeal, stating that the appeal is brought with the leave of Robert Walker L.J., is in effect in the same form as that put before the Lord Justice and bears no acknowledgment of the fact that the permission which he gave was that dictated by him at the oral hearing and was not for the grounds on which permission had been sought in the Notice of Appeal.  Miss Newman Q.C. for the Mahomeds submitted that she should be allowed to challenge the conclusion of the judge on the merits of the compromise effected by the Agreement.  I cannot believe that Robert Walker L.J. intended to give leave on points like that when limiting the ground on which he gave permission in the way indicated.  Of course this court on an appeal retains a discretion to allow additional issues to be raised, notice of which has been clearly given in accordance with para. 2.13.2. of the 1999 Practice Direction for the Court of Appeal (Civil Division).  But that discretion will be sparingly exercised (see Yorkshire Bank plc v Hall [1999] 1 W.L.R. 1713 at p. 1725 per Robert Walker L.J.).  The beneficial purpose in a Lord Justice giving permission to appeal in specifically limited form so as to confine the hearing by the full court to what is considered by the Lord Justice to be properly arguable would be undermined if the appellant could treat himself as free to argue points beyond that for which permission was given.

	 20. Mr. Snowden has put in a Respondents’ Notice.  The BCCI liquidators first challenge the factual premise of the permission to appeal that the Mahomeds were at the time of the Agreement advancing a subrogation claim.  I do not intend to take up time on this point.  Although the Mahomeds had not asserted that claim for several years before the Agreement and at the time of the Agreement were actively pursuing the inconsistent claim that the Liens were of no effect and that the Mahomeds were therefore creditors of BCCI, they had put forward the possibility of a subrogation claim in 1992 and 1993 and had reserved their rights on it.

	21. The BCCI liquidators further contend by the Respondents’ Notice that the Mahomeds are not entitled by reason of their subrogation claim to avail themselves of s 168 (5) nor is the relief which they seek available to them under the subsection.  They further say that they were under no duty to the Mahomeds to consult them or to seek directions from the Companies Court prior to entering into the Agreement.

	22. Miss Newman stresses that we are concerned with an application to strike out and that it is only if the Mahomeds’ case is incontestably bad that the judge’s decision should be upheld.  I agree.  But if the court reaches the conclusion that it is plain and obvious that the Mahomeds cannot succeed, then it serves no useful purpose to allow the case to go to trial.  In response to points taken by Mr. Snowden on the Points of Claim, she submitted that they were only draft pleadings and that the Mahomeds could not be tied to them.  But as I have already pointed out, the relief sought by the Ordinary Application is specifically linked to the Points of Claim.  At no stage before the judge or this court has any amendment to the Points of Claim been put forward and this appeal must therefore be determined on the basis of the claims there asserted.

	23. I shall consider first the objection taken to the attempted use of s. 168 (5) by the Mahomeds against the BCCI liquidators.  That subsection has the following features:
(1)  it only applies in a compulsory liquidation, the liquidator being an officer of the court;
(2)  it enables “any person aggrieved by any act or decision of the liquidator” to use the summary procedure provided by the section to come to court for the relief indicated;
(3)  the relief primarily indicated is the confirmation, reversal or modification of the act or decision, the power to make such order as the court thinks just being ancillary thereto;
(4)  it confers a discretion on the court.

	24. Only the second and third features call for comment.  The words “any person aggrieved” are very wide at first sight and are not on their face limited to creditors and contributories.  The provision goes back a long way.  It first appeared as s. 24 Companies (Winding up) Act 1890.  It was borrowed from s. 90 Bankruptcy Act 1883 which was enacted in part to remedy the injustice created by the disability of the bankrupt to sue, even where he had been gravely wronged by his assignee (see Williams and Muir Hunter on Bankruptcy 19th ed. (1979) p. 426).  With a solitary exception no authority has been cited to us where a person not being a creditor or contributory has been allowed to apply under the subsection.  That exception is Re Hans Place Ltd. [1993] B.C.L.C. 768.  In that case a landlord was held able to challenge under s. 168 (5) the exercise by a liquidator of the power conferred on liquidators by s. 178 Insolvency Act 1986 to disclaim onerous property such as a lease.  But there must be some limit to the class of persons who can complain under s. 168 (5).  An example is provided in Re Edennote Ltd.  Nourse L.J. (with whom Millett L.J. agreed) said ([1996] 2 B.C.L.C. at p. 393) of applicants under s. 168 (5) who were both unsecured creditors and persons denied an opportunity to purchase an asset of a company in compulsory liquidation sold by the liquidators:
“In the latter capacity alone, like any other outsider to the liquidation, they would not have the locus standi to apply under s. 168 (5).”

	25. Since the conclusion of the hearing I have found the decision of Laddie J. in Hamilton v The Official Receiver [1998] B.P.I.R. 602 which I mention only for the sake of completeness.  In that case a contributory of a company in compulsory liquidation offered the liquidator £1,000 for the assignment of a speculative claim of the company against solicitors.  The liquidator had no intention of pursuing the claim or of selling or otherwise realising the claim.  On the application of the contributory offeror under s. 168 (5) Laddie J. ordered the liquidator to assign the claim to the offeror for £1,000.  The judgment is silent as to the capacity in which the applicant was allowed relief under s. 168 (5) and it does not appear that his attention was drawn to Edennote.  In my judgment the decision can be supported on the same basis as Edennote was decided.

	26.  In general I respectfully agree with the sentence which I have cited from Edennote.  It could not have been the intention of Parliament that any outsider to the liquidation, dissatisfied with some act or decision of the liquidator, could attack that act or decision by the special procedure of s. 168 (5).  However, I would accept that someone, like the landlord in Hans Place Ltd., who is directly affected by the exercise of a power given specifically to liquidators, and who would not otherwise have any right to challenge the exercise of that power, can utilise s. 168 (5).  It may be that other persons can properly bring themselves within the subsection.  But the mere fact that the act or decision is that of a liquidator in respect of an asset of the company the proceeds of which would be available for unsecured creditors is not enough, as can be seen from the example of the persons denied an opportunity to buy an asset of the company from the liquidators in Edennote.  Nor in my view is it enough that the person claiming to be aggrieved by the act or decision of the liquidator in respect of assets of the company is a surety when his subrogation rights do not in any way depend on the company being in liquidation.

	27. Miss Newman submitted that the Mahomeds were undoubtedly creditors of BCCI.  That is not right.  The capacity in which they bring proceedings under s. 168 (5) is as sureties claiming subrogation rights.  As Mr. Snowden said, a surety asserting rights of subrogation is not a creditor in the liquidation of the company but is seeking to enforce rights outside the liquidation.  Further, this is no ordinary subrogation claim.  As I understand the Mahomeds’ stance, they say that they should be standing in the shoes of BCCI, as a secured creditor of Manlon, because in effect they as sureties have paid the money in their accounts towards discharging Manlon’s indebtedness to BCCI and that if BCCI, by its liquidators, had utilised the charged securities properly there would have been a surplus of Notes or proceeds, after the discharge of Manlon’s indebtedness, to which they would have been entitled by subrogation.  But there is no extant claim against BCCI for the breach of some duty owed by it to the Mahomeds, there being no appeal from the dismissal of the application under s. 130 (2). 	

	28. The difficulties facing the Mahomeds in bringing proceedings under s. 168 (5) do not end with the fact that they are outsiders to the liquidation.  What they are attempting to do is to make the BCCI liquidators personally liable to pay compensation. Miss Newman submitted that the relief sought came within the subsection because the relief was the reversal or modification of the BCCI liquidators’ decision to enter into the Agreement and the court was being asked to make an order to meet the justice of the case by requiring the payment of the surplus proceeds or compensation equivalent thereto to the Mahomeds to the extent of their rights of subrogation.  But that is unrealistic.  Manlon and its liquidator were a party to the Agreement, and as against them, in the light of the judge’s decision and the refusal of leave to appeal, the Agreement cannot be set aside or modified.  Nor therefore can there be any question of reversing or modifying the decision by the BCCI liquidators to enter the Agreement or their act in executing the Agreement.  Shorn of its camouflage this is a bare claim for compensation from the liquidators, and even if there were a sound basis in law for such a claim, without the possibility of a reversal  or  modification of  an act or decision of a liquidator in my judgment s. 168 (5) cannot be used for that purpose.

	29. Nor, in my judgment is there a sound basis in law for making the liquidators personally liable to pay compensation.  Liquidators are agents of the company.  They do not normally render themselves personally liable for their actions as liquidators, even though their principal, the company, may be liable.  They are not fiduciaries for the company’s creditors and it is hard to see how they could be fiduciaries for non-creditors like the Mahomeds claiming subrogation rights.  Nor in my judgment is there a sustainable case that they assumed responsibility to the Mahomeds in relation to the settlement of the dispute with Manlon’s liquidator over the Notes.  If the Mahomeds as sureties have a complaint it is against BCCI that it must be asserted.

	30. For all these reasons it seems to me that the application under s. 168 (5) was misconceived, and the appeal should fail on this preliminary point alone.

	31. But because of the limited permission granted by Robert Walker L.J. I shall also consider the point thereby raised.  What the Lord Justice had in mind in giving leave was the exception recognised in Mitchell to the perversity test which the court in Edennote said was the appropriate test for justifying interference with the decisions of a liquidator.  In the Mitchell case unsecured creditors who had obtained a judgment against an insolvent English company issued writs of garnishment in Florida.  The administrative receivers of the company then presented a petition to wind up the company and the provisional liquidators successfully applied to an American bankruptcy court to restrain the judgment creditors from obtaining an advantage by the writs of garnishment over other unsecured creditors.  The judgment creditors applied to the English court for an order that in the event of a winding up order being made, the rights conferred on the liquidators by s. 183 (1) of the Insolvency Act 1986 (preventing a creditor from retaining a benefit as against the liquidator under an incomplete execution on the subsequent winding up of the company) should be set aside.  It was then recognised that s. 183 did not have extra-territorial effect and the application was treated as being at least in part under s. 168 (5) as an application to override the liquidators’ exercise of discretion in seeking the restraining order from the American court.  Harman J. applied the Edennote test in saying that the liquidators’ action had not been manifestly unreasonable.  This court held that the Edennote test, whilst applicable to decisions taken by liquidators as to the realisation of assets of the company for the benefit of the general body of unsecured creditors, was not applicable to the decision to apply to the American court.  The argument of counsel which was accepted was that the application was “concerned with competing creditors:  in particular, with the efforts of one pair of judgment creditors to put themselves in the position of secured creditors before the position was frozen by the onset of the winding up” ([1998] 2 B.C.L.C. 369 at p. 391 d-e).  That was said to be a matter for the Companies Court or for liquidators acting under the control of the Companies Court.

	32. The circumstances of the present case seem to me far removed from those of the Mitchell case.  They have nothing to do with competing unsecured creditors.  What was involved was a decision by the liquidators on the realisation of assets of the company in the form of the Notes in circumstances where a rival claim to those Notes had been made.  Compromise in such circumstances calls for a commercial decision to be taken. That decision did not involve purely legal issues.  Mr. Dargan, the partner in Deloitte & Touche with overall responsibility on behalf of BCCI’s liquidators for recovery of Manlon’s indebtedness to BCCI, said:  “I considered it was unlikely that BCCI would achieve a better result through litigation and indeed there was a real risk that BCCI would recover less.”  In my judgment this is a case where it is for the liquidators to decide at their own discretion what compromise (if any) is acceptable.

	33. Further, I cannot see on what basis it could be maintained that liquidators in the position of the BCCI liquidators were under some duty either to consult (or notify) the Mahomeds or to obtain the approval of the Companies Court before entering the Agreement.  I have never heard it suggested that a secured creditor who is contemplating realising the charged assets is under some duty to consult the debtor or the surety of the debtor, even if he is aware that the price he obtains on realisation may mean that the debt is not discharged and so there are no surplus proceeds which the surety might claim by subrogation.  To import some such duty would impose a major restriction on the freedom of action of the secured creditor which has hitherto never been recognised.

	34.  The authorities seem to me to point strongly in the other direction.  In China and South Sea Bank Ltd. v Tan [1990] 1 A.C. 536 at the date of a creditor’s default shares held by the secured creditor as security, according to the surety for the debtor, had a value in excess of the debt.  The creditor did not exercise its power of sale and the shares became valueless.  The creditor then demanded payment from the surety and obtained summary judgment.  The Hong Kong Court of Appeal set aside that judgment, holding that it was arguable that the surety’s liability was extinguished or reduced by the creditor’s breach of duty owed to the surety.  The Privy Council allowed the creditor’s appeal.  Lord Templeman, giving the judgment, stated that equity intervenes to protect a surety, so that if the creditor acts in a way which is inconsistent with or injurious to the surety’s rights, the surety is discharged from liability.  But he continued (at p. 545):

“In the present case the security was neither surrendered nor lost nor imperfect nor altered in condition by reason of what was done by the creditor.  The creditor had three sources of payment.  The creditor could sue the debtor, sell the mortgage securities or sue the surety.  All these remedies could be exercised at any time or times simultaneously or contemporaneously or successively or not at all.  If the creditor chose to sue the surety and not pursue any other remedy, the creditor on being paid in full was bound to assign the mortgaged securities to the surety.  If the creditor chose to exercise his power of sale over the mortgaged security he must sell for the current market value but the creditor must decide in his own interest if and when he should sell.  The creditor does not become a trustee of the mortgaged securities and the power of sale for the surety unless and until the creditor is paid in full and the surety, having paid the whole of the debt is entitled to a transfer of the mortgaged securities to procure recovery of the whole or part of the sum he has paid to the creditor. 
	The creditor is not obliged to do anything.  If the creditor does nothing and the debtor declines into bankruptcy the mortgaged securities become valueless and the surety decamps abroad, the creditor loses his money.  If disaster strikes the debtor and the mortgaged securities but the surety remains capable of repaying the debt then the creditor loses nothing.  The surety contracts to pay if the debtor does not pay and the surety is bound by his contract.  If the surety, perhaps less indolent or less well protected than the creditor, is worried that the mortgaged securities may decline in value then the surety may request the creditor to sell and if the creditor remains idle then the surety may bustle about, pay off the debt, take over the benefit of the securities and sell them.  No creditor could carry on the business of lending if he could become liable to a mortgagor and to a surety or to either of them for a decline in value of mortgaged property, unless the creditor was personally responsible for the decline.  Applying the rule as specified by Pollock C.B. in Watts v Shuttleworth, 5 H. & N. 235, 247, it appears to their Lordships that in the present case the creditor did no act injurious to the surety, did no act inconsistent with the rights of the surety and the creditor did not omit any act which his duty enjoined him to do.  The creditor was not under a duty to exercise his power of sale over the mortgaged securities at any particular time or at all.”

	35. Miss Newman does not submit that the Mahomeds are discharged from liability as sureties by the action of the BCCI liquidators.  But she asserts that the BCCI liquidators were in the circumstances of the present case under a duty either to consult the Mahomeds or to obtain the sanction of the court.  She could point to no authority in support of the alleged duty to consult.  In my judgment to impose such an obligation on a secured creditor would impose a serious fetter on the freedom of the secured creditor to exercise his power of sale over the charged property at the time and in the manner he chooses.  It would be quite contrary to the thrust of the reasoning of the Privy Council in the China and South Sea Bank case.  The fact that the secured creditor happens to be in liquidation cannot alter the position.  The same must apply to a compromise in respect of rival claims to such property.  Nor could Miss Newman point to any authority directly in point in support of the alleged duty to obtain the sanction of the court.  For the reasons already given, the Mitchell case is readily distinguishable, the present case not raising purely legal issues concerning competing priorities between creditors in the liquidation of BCCI so as to require the involvement of the Companies Court.

	36. The liquidator is given the power to apply to the court for directions in relation to any particular matter arising in the winding up (s. 168 (3)).  But by subs. (4), subject to the provisions of the Insolvency Act 1986 “the liquidator shall use his own discretion in the management of the assets”.  If a liquidation committee is formed under Chapter 12 of Part 4 of the Insolvency Rules 1986 the liquidator is empowered by s. 167 (1)(a) Insolvency Act 1986 with the sanction of the court or the liquidation committee to exercise any of the powers in Parts I and II of Sch. 4.  They include in paras. 2 and 3 powers to compromise claims against the company or questions affecting the assets of the company.  The liquidator is under a duty to report to the committee all such matters as appear to him to be of concern to them with respect to the winding up.  A compromise such as that embodied in the Agreement might well be of concern to the liquidation committee which might be expected to wish to maximise BCCI’s assets.  The BCCI liquidators did report to that committee and obtained its approval.  In my judgment it is impossible to say that the BCCI liquidators in failing to obtain the sanction of the court breached some duty owed to the Mahomeds.

	37. I would add that the existence of the duty now alleged is not pleaded in the Points of Claim nor are the consequences of the breach of the alleged duty.  Miss Newman has told us that if the Mahomeds had been consulted they would have funded litigation to resolve the dispute with the Manlon’s liquidator over the Notes.  This is not pleaded nor is it in evidence.  What is pleaded is that Mr. Aziz, if asked, could have given the true facts to the BCCI liquidators.  Some of his assertions have been challenged by Manlon’s liquidator and subsequently modified by Mr. Aziz and it does not follow that what Mr. Aziz claimed to be the facts would be found to be the facts.  But all this is by the way, in the absence of a duty to consult.

	38. In my judgment, therefore, the Mahomeds fail on the ground on which they were given permission to appeal even on the stringent test required for striking out.

	39. This conclusion makes it unnecessary to go into all the points on which Miss Newman argued the judge had erred.  It is sufficient to say that I agree with her that the judge was wrong to assume that the BCCI liquidators had taken proper legal advice:  that they consulted solicitors is in evidence but what that advice was has not been revealed.  But on the substantive question argued before the judge I am not persuaded that the judge was wrong to hold that Manlon’s liquidator had an arguable position in the negotiations with BCCI’s liquidators over the Notes and that BCCI’s liquidators were not acting perversely in entering into the Agreement.

	40. For these reasons, which owe much to Mr. Snowden’s admirable argument, I would dismiss this appeal.

LORD JUSTICE Schiemann:

	41. I agree that this appeal should be dismissed for the reasons given by My Lord. There was some dispute as to whether every way in which Miss Newman sought to argue the appellant’s case was fairly within the grounds identified by Robert Walker L.J.  In the event she argued them subject to the  objection to them taken by Mr. Snowden.  If I do not refer to them further it is because none of them overcome the basic problems which my Lord has identified.

	42. We are concerned here with a debtor, a creditor and surety for the debtor. We can ignore the fact that the bills which were allegedly given as security by the debtor have been turned into promissory notes. I shall hereafter refer to them as the notes. The creditor asserted that the notes were in their totality given as security by the debtor.  The debtor asserted that not all of the proceeds of the notes were security for its debt. I agree with My Lord that a creditor who holds disputed security from a debtor is not under a duty to give notice to the debtor’s surety before the creditor enters into a compromise agreement with the debtor whereunder some of the alleged security is surrendered to the debtor. I see no reason why the fact that creditor and/or debtor are in liquidation should affect the foregoing.

	43. Bad faith is not alleged. It is understandable that the creditor Bank, acting by the liquidator, took the view that, rather than dispute further about the notes, it should compromise on the matter. There clearly were a number of potential difficulties which faced the creditor had it sought to realise the notes without the co-operation of the debtor. Miss Newman suggested, without supporting evidence, that the Mahomeds would have been prepared to fund litigation between BCCI and Manlon as to the former’s entitlement to the notes and that the conclusion of the litigation would have been an order compelling Manlon to co-operate in the realisation of the notes. Perhaps. However, I see no obligation on the creditor to go down the litigation road even at the Mahomeds’ expense. It is not for the courts to investigate the merits of the compromise. No action against the creditor is extant or asserted as a possibility.

	44. Had the compromise been entered into by a director of the creditor company acting on the creditor company’s behalf no right of action would have existed against him. I did not understand this to be disputed. In effect the Mahomeds are seeking to make the liquidators liable personally to pay compensation for an action which, had it been done by directors, would not have made those directors liable. The liquidators consulted the liquidation committee and obtained its approval. I see no basis for also requiring the liquidators also to obtain the approval of the court.

	45. I can see nothing in s.168(5) which in these circumstances arguably renders the liquidator liable to compensate the surety.

MR JUSTICE Wilson:

	I agree with both judgments.

Order:  Appeal dismissed with costs in the form of the order amended, save that detailed assessment is on the standard basis.  Leave to appeal to the House of Lords refused.  Order does not form part of approved judgment.