The Court of Appeal recently considered when precisely a company had given a preference within the meaning of the Insolvency Act 1986 – a question of timing which may impact on whether an insolvency practitioner can later unwind the preferential treatment for the benefit of creditors as a whole.
Here we look at what a preference is, and when it is deemed to be given.
Preferences
The insolvency process is designed to achieve a pari passu distribution to creditors - so that the assets of the company are distributed in proportion to the debts owed to creditors. In order to uphold this scheme, an insolvency office holder has powers to investigate and bring claims to reverse certain transactions entered into in the period immediately before insolvency, for the benefit of the creditors as a whole. One such example is in s.239 of the Insolvency Act 1986 which provides that where a company has at a relevant time given a preference to any person, the insolvency office holder can apply to court for an order restoring the position to what it would have been if the company had not given that preference. For these purposes:
- a preference is anything which puts (and is intended to put) a creditor into a better position than they would be in insolvency – the preferential treatment of one or more creditors in the period before insolvency; and
- the relevant time that the law is concerned with is the two year period immediately before insolvency. If a preference was given during this period, and the company was in fact unable to pay its debts at that time, there is a statutory presumption that the preference was given intentionally, and the preference can be unwound. The relevant time is judged according to when the preference was actually given; which may be distinct from when the company (acting through its directors and officers) decided to give a preference – a distinction which was at the core of this case.
Factual background
The case in question – Darty Holdings SAS v Geoffrey Carton-Kelly (As Additional Liquidator of CGL Realisations Limited) [2023] EWCA Civ 1135 – concerned a transaction by which the former electronics retailer Comet repaid £115 million of intra-group debt. It entered administration eight months later, which was subsequently converted into a creditors' voluntary liquidation in 2013. The liquidator argued that the intra-group debt repayment was a preference.
There was a dispute about when the company gave the preference in question – was it:
- 9 November 2011 – when the company's owner entered into a Sale and Purchase Agreement (the SPA) which anticipated the repayment of £115 million Revolving Credit Facility ("RCF"); or
- 3 February 2012 – when the company's newly installed board of directors passed resolutions which had the effect of actually authorising the repayment.
A little more context is necessary for the difference to become clear. The SPA was entered into between the company's then owner, and a new buyer. The company itself was not a party. Although the SPA provided completion mechanics which envisaged the repayment of the debt, the company was not itself contractually bound by them, and the purchaser would need to procure a board meeting at which the company's new board would resolve to make the anticipated repayment. Crucially, therefore, those entering into the SPA which provided for the repayment were not those who would subsequently be required to approve the payment, and indeed the board of the company changed between the SPA and the resolution. In those circumstances, were the company's hands effectively tied to make the repayment when the SPA was executed?
First instance decision
The judge at first instance found that the company was insolvent immediately before its sale; that the £115 million repayment constituted a preference; and that the owners (who entered into the SPA) had a desire to ensure the £115 million repayment in contemplation of the company's insolvency. Crucially, the judge found that the key decision was the one taken on behalf of the company at the time the SPA was entered into – while the later board resolution was a necessary formality, the substantive decision to make the preferential repayment had already been made at the time of the SPA. Since the decision on that day had been tainted by a desire to prefer a creditor, the transaction was a preference.
Court of Appeal decision
It was common ground between the parties that none of the new board who passed the resolution on 3 February 2012 were influenced by a desire to give a preference. Therefore if that (contrary to the judge's view at first instance) was found to be the date of the operative decision to make the repayment, then the appeal would succeed.
Ultimately the Court of Appeal found unanimously that the company did not make a decision to repay the funds until the date of the board resolution, and there was no basis for the inferential finding that the company made a decision at the earlier date of the SPA – while matters were arranged (by others) so that the company's new board would have little choice but to accept the terms on offer on 3 February 2012, that was not the same as the company having decided to accept them in November 2011. In the circumstances, the operative decision was the one made by the new board in February 2012 and, since that decision was not influenced by a desire to prefer a creditor, the transaction was not a preference under s.239 Insolvency Act.
While the case is obviously highly fact-specific, this is not an isolated scenario – the Court of Appeal was referred to various previous authorities considering the question of when such operative decisions were made. However, the case illustrates the difficulties attendant on insolvency practitioners appointed following such business sales, and in clawing back alleged preferences where the payment lever was installed at the behest of a creditor, but only pulled later, and by new, unconnected decision makers.
If you would like to discuss the decision, or our insolvency practice more generally, please contact Jason Freedman.