In an article that first appeared on LexisNexis on 26 February 2018, Jon Chesman examines a High Court decision which found the applicant liquidator of a company had made out her case that a transfer of stock from the company to the first respondent, a former director of the company, amounted to a preference and a transaction at an undervalue, so relief ought to be granted under the Insolvency Act 1986 (IA 1986).

Breese (liquidator of Flexi Containers Ltd) v Hiley and others [2018] EWHC 12 (Ch), [2018] All ER (D) 77 (Jan)

What are the practical implications of the decision?

This case demonstrates that in the context of an application seeking to overturn a transaction as a voidable preference and a transaction at an undervalue, the relevant date on whether a person is ‘connected’ with a company pursuant to IA 1986, s 249, is the date on which agreement was reached in relation to that transaction, not the date on which the assets were transferred pursuant to that agreement.

In the face of inconsistent and unreliable evidence from the respondents, the court was prepared to take a common-sense approach as to the commercial reality of the transaction in question. On that basis, the court held that the transaction must have been agreed prior to the first respondent’s resignation as a director, and that she was therefore ‘connected’ with the company at the relevant time.

The court ordered her to pay the sum of £612,834 to the company, plus interest and costs.

What was the background?

On 10 January 2014, the company transferred the entirety of its stock, with a value of more than £620,000, to the first respondent. The £620,000 was purportedly repaid pursuant to charges granted by the company to the first respondent to secure sums which she had advanced to it.

Shortly after the company’s incorporation, the first respondent had been its sole director and shareholder, but had purported to resign as a director and transfer her shareholding to the new director on 5 January 2014 (five days prior to the date of the company’s transfer to her). From the date of her purported resignation, the first respondent claimed that she ceased to have any involvement in the management of the company and that it was therefore the new management that had agreed to make the transfer to her on the company’s behalf.

The company was placed into liquidation on 14 October 2014, more than six months after the date of the transfer.

The applicant challenged the transfer on the basis that it constituted:

  • a preference as it put the first respondent in a better position on liquidation than she would have otherwise been in
  • a transaction at an undervalue as the value of the goods transferred exceeded the value of the debt alleged to be owed by the company to the first respondent

The applicant disputed the date on which the first respondent ceased to be a director of the company and alleged that she was a director at the date of the transfer.

The applicant also disputed the validity of the charges provided by the company to the first respondent on the basis that they were forgeries, had not been registered at Companies House within the required period, were void for securing past indebtedness, and/or did not secure sums advanced after the date of the relevant charges.

The applicant accepted that for the transfer to constitute a preference, the court had to be satisfied that the first respondent was ‘connected’ with the company as at the date of the transfer.

The first respondent resisted the application on the following bases:

  • the company was not insolvent at the time of the transfer, nor did it become insolvent as a result of it
  • she was a secured creditor for the sums repaid
  • she was not a director at the date of the transfer and was therefore not ‘connected’ with the company at that date
  • she had not been preferred, as there were no other creditors of the company as at the date of the transfer
  • there had been no desire to prefer, as the company was changing its business model at the time of the transfer from a ‘bricks and mortar’ sales model to an online direct selling business, meaning that the stock that was transferred was superfluous and needed to be disposed of in any event

What did the court decide?

Insolvency

The court held that, on the basis of the company’s accounts, it was clearly insolvent on a net asset basis as at 31 January 2014, 21 days after the date of the transfer. The judge had seen no evidence to suggest that the financial position of the company was any different between 10 and 31 January 2014.

Secured creditor

The court held that the various charges granted by the company to the first respondent were invalid floating charges pursuant to IA 1989, s 245, on the basis that they secured past indebtedness. As a matter of construction, the charges did not secure sums advanced after the date of the charges. The first respondent was therefore not a secured creditor of the company.

Connected person

The judge was satisfied ‘as a matter of common sense’ that the agreement in relation to the transfer was concluded while the first respondent remained a director of the company. The relevant date was the date on which the transfer was agreed, not the date on which the assets were transferred pursuant to that agreement.

It did not make any commercial sense for the first respondent to relinquish all control of the company without first reaching an agreement regarding how her significant loans to the company would be repaid and that such agreement must therefore have been reached while she remained as a director of the company. The judge also found that documents purporting to show that she had resigned in January 2014 were clearly backdated.

Preference

As a matter of fact, the judge held there were other creditors in existence at the time of the transfer. Accordingly, had the company entered insolvent liquidation on the date of the transfer, the first respondent would not have received repayment of her debt in full, and was therefore preferred. The first respondent had not sought to argue that she had only been preferred to a certain extent; the preference was therefore on an ‘all or nothing’ basis.

The judge was satisfied on the evidence that the rationale behind the transfer was to improve the first respondent’s position and place in her in a better position than she otherwise would have been in in the event of an insolvent liquidation.

The judge gave allowance for the fact that the first respondent had made a further advance of £8,000 to the company after the date of the transfer, and therefore credited that sum from the amount to be repaid by her to the company as a result of the preference.

Transaction at an undervalue

Based on the evidence, the judge was satisfied that the value of the stock transferred to the first respondent pursuant to the transfer was approximately £12,500 more than the sum owed to her, meaning that the transfer constituted a transaction at an undervalue.

Squire Patton Boggs acted for the applicant liquidator in this case.

Interviewed by Robert Matthews.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

*This article was first published by LexisNexis on 26 February 2018.