Summary

Without a trial, a judge could not have been sufficiently certain that a company had been insolvent when payments for the benefit of a director had been made; a declaration of beneficial ownership of a property made on an application for summary judgment was overturned.

Facts

The appellant (R3) appealed against a declaration made on an application for summary judgment ([2012] EWHC 1256 (Ch)) that the respondent limited company (E) was the beneficial owner of 35.5 per cent of a London flat and against an order for its sale.

E processed credit card payments and had been profitable. R3's son (R1), was a director and beneficial owner of E who had caused it to pay a 10 per cent deposit on the £4 million flat. The remainder was funded by a mortgage and the flat was registered in R1's name. Some six months later, R1 assigned his interest to R3 for £25,000 subject to the existing mortgage and a personal loan of £785,000. The subsequent failure of two of E's customers left it liable to cover chargebacks of some £57 million and E was placed in administration. The administrators sought to recover a total of £4.206 million, alleged to have been paid by E to R1 in breach of his fiduciary duties. R1 maintained that the payments had been made while E was solvent and in repayment of director's loans he had made to it.

R3 contended that the orders had been made before disclosure and oral evidence and that she had a realistic prospect of defending the claim on the basis that no breach of fiduciary duty had been involved in R1's purchase of the flat with monies paid to him by the Company.

Held

Whether the payments were a preference and whether R1 had acted in breach of fiduciary duty were tied up with the question of E's solvency and should be investigated at trial. The judge had been wrong to find E's insolvency was beyond reasonable doubt. He could not have been sufficiently certain that E had been either insolvent, or on the brink of insolvency, when the money had been paid to R1 and that R1 had been aware of pending insolvency at the time. Although the contemporary management accounts had provided strong evidence that E had been balance sheet insolvent, an excess of liabilities over assets was not a bar to E continuing to trade, provided that its liabilities could be met as they fell due. R3 had been entitled to rely on the survival of E for a further year as evidence that it had the necessary financial support to continue and that might have justified R1 in taking an optimistic view of the future. Those were issues for a trial and not for a Part 24 application (see para.30 of judgment).

Appeal allowed