Case law update
IPA Insolvency Practitioner newsletter, April 2024
An insolvency case law update prepared by Neil Stewart, Associate Director at Manolete Partners PLC.
Neil is a Regional Associate Director based in the South of England. Since qualifying as a solicitor in 1998, Neil has specialised in commercial dispute resolution and contentious insolvency. He is an experienced advocate who previously worked for Versiona Law Solicitors. Neil has considerable experience of working on complex, frequently multi-party litigation. He is an accredited mediator, R3 Regional Chair for the Southern and Thames Valley region and has lectured widely on insolvency matters.
The peculiarity of preferences
Where an office holder pursues a director for wrongful trading, fraudulent trading, misfeasance or breach of duty, or brings claims against third parties for transactions at an undervalue, transactions defrauding creditors or void dispositions, the overarching principle is the same. The aim is to restore or replace the loss suffered by the insolvent company.
With preference claims brought under s 239 of the Insolvency Act 1986, along with associated breach of duty claims, a notable distinction arises in that the the company hasn’t necessarily suffered a loss. Typically, a creditor is paid, satisfying the company’s debt in a balance sheet neutral transaction. The principle that is violated is the pari passu treatment of creditors because one has been paid to the detriment of others, where there are insufficient funds to pay them all in full.
Preference claims under s 239 present distinct challenges due to their unique nature.
Preference: s239 conditions
One of the requirements of a preference claim is that the company must have been influenced by a desire to favour the recipient, in the event of the company’s insolvent liquidation or administration (the “desire to prefer” – s 239(5)).
All well and good, but how do you prove the desire to prefer? Well, the statute itself steps in to help at s 239(6) with a presumption of a desire to prefer where the preference is given to a person connected with the company at the time the preference was given. But it is a rebuttable presumption and if the recipient is not “connected” as defined in the Act, the presumption does not apply, in which case the burden of proof remains with the claimant.
You must also prove that the company was insolvent at the time of giving the preference; there is no statutory presumption that applies to preferences regarding insolvency. And, where the preferee is connected, it must have happened within the period of two years before the onset of insolvency (generally, the start of whichever insolvency process the company enters first) or within the period of six months before that time where not connected.
As if that weren’t enough, you might also have to give serious thought to when the operative decision to give the preference took place, as we’ll see in a moment.
The Comet Group litigation
In Darty Holdings SAS v Geoffrey Carton-Kelly [2023] EWCA Civ 1135, CGL Realisations Limited (formerly Comet Group Limited – “Comet”) had entered into a complex series of transactions. There were numerous companies involved and many moving parts, so if you will allow me some poetic licence I will simplify it.
On 9 November 2011, Comet’s parent company’s parent, Kesa Electricals Plc (“KEP”) entered into a sale and purchase agreement (the ‘SPA’) to sell Comet to OpCapita LLP. On completion, the SPA required Comet (which had not been a party to the SPA) to enter a completion agreement, requiring it to pay an unsecured £115m intra-group debt to Kesa International Limited (“KIL”), which it did.
The judge at first instance, Falk J, found that the repayment did amount to an actionable preference and ordered that the £115m be repaid.
Darty Holdings SAS (“Darty”), which had acquired the assets and liabilities of KIL, appealed. Now, Darty had already tried to use a timing point to quash the claim. Pre-trial, they had argued, as a preliminary point, that Comet and KIL were no longer connected by the time of payment of the £115m as a result of Comet’s shares having already been transferred by that time, under the SPA. Deputy ICC Judge Agnello KC dismissed that application.
In a similar vein, in the Court of Appeal, Darty argued that the decision to pay the £115m had been made at a board meeting on 9 February 2012 by the completely new board of Comet which had no desire to prefer KIL. Their desire, said Darty, was only to action the completion conditions of the SPA.
The Court of Appeal agreed. The operative decision, it said, was taken on 9 February 2012, not by the old board when the Company entered the SPA on 9 November 2011.
Conclusion
Does that feel right?
A brief description of such a complex case cannot do justice to the enormous amount of detailed and careful legal analysis and argument by legal heavyweights that led to the final outcome, but there is something uncomfortable in all this, not least for the liquidators of Comet and their backers.
It might be said that the lesson to be drawn is that you must consider carefully not just the timing of the preference but also when the operative decision took place and who made that decision, but I don’t think it is.
The case turned on what might have appeared at the outset to have been a fine, even artificial, point among many other issues, which goes to show that when you are contemplating litigation, you cannot afford to ignore or assume anything. The answer? Make sure that you have a solid indemnity from a funder who is good for the money and will not let you down.
Content courtesy of IPA corporate partner Manolete Partners PLC.
Please note that guest content does not necessarily represent the views of the IPA.