Summary

Where a director of an insolvent company had also been a shareholder and guarantor of the company's parent, and the insolvent company had made payments to the parent that preferred the parent, that did not mean that the director had also been preferred under the Insolvency Act 1986 s.239(4).

Facts

The first applicant liquidator applied for a declaration that payments made by the second applicant company (O) to the first respondent company (C) were preferences in favour of C and the second respondent director (M), and for an order that the payments be repaid by C and M. M was a shareholder and director of C. O had been incorporated as a wholly-owned subsidiary of C, with M as its sole director, to supply pharmaceuticals. O had substantial liabilities to various parties, including C, a bank, and companies whose products O distributed. A dispute arose between O and one of the creditor companies, which later developed into legal proceedings. During the dispute, O made several payments to C. Another of the creditor companies brought winding-up proceedings against O, and it was decided not to resist them. C and M admitted that the payments to C had, as a matter of fact, preferred C and that they had been made at the relevant time. The liquidator submitted that (1) under the Insolvency Act 1986 s.239(4), the payments constituted a preference in fact of M as well as of C, since he had been guarantor of both C's and O's liabilities to the bank and was a shareholder in C; (2) in making the payments, O had been influenced by a desire to put either C or M into a better position than if the payments had not been made, pursuant to s.239(5); (3) if M had not been preferred himself, a remedy nevertheless lay against him, having regard to s.241(1) and s.241(2) and the court's ability to make orders against third parties.

Held

(1) The proposition that M had been preferred as a result of being either a guarantor of C's liabilities or C's shareholder was incorrect. Although, on a literal construction of s.239(4), the construction contended for was possible, very much clearer wording would be required for the section to have the effect contended for. Otherwise s.239 could operate to require a person to disgorge a benefit obtained in some other capacity than being a guarantor, even though the benefit had nothing to do with their status as guarantor and they had not benefited in that capacity. Nor was M preferred as guarantor for O: although the payments reduced C's exposure to the bank, and consequently reduced O's exposure as guarantor for C and M's exposure as guarantor for O, the bank was fully covered by O's book debts and stock, so M was in no different position than he would have been in had the payments not been made. There was therefore no preference in favour of M. (2) The requirements of s.239 had been satisfied in relation to the payments. The onus was on C and M to rebut the presumption that there had been a desire to better C's position, meaning they had to show on the balance of probabilities that O had acted solely by reference to proper commercial considerations, Wills v Corfe Joinery Ltd (In Liquidation) (1997) BCC 511 Ch D (Companies Ct) considered. They had argued that the bank had put O under pressure to make the payments to C so that it could reduce its liabilities to the bank. Given the seriousness of the position with the creditor companies, and a perception that their claims represented a very serious risk to O's future viability, it was difficult to accept that a desire to improve C's position in the event of O's liquidation did not operate in some way in influencing the decision to make the payments absent very persuasive and reliable evidence to the contrary. The finding that there had been a desire to prefer might have been different had it been possible to have confidence in the general reliability of M's evidence, but it was not possible to have such confidence. (3) Section 239(3) required the court to make an order that would restore the position to what it would have been had O not made the payments. Although s.241(2) specifically envisaged making orders against parties who had not themselves been preferred, the court could only properly exercise its discretion against such a party if that was part of restoring the position of the company, Sonatacus Ltd, Re (2007) EWCA Civ 31, (2007) BCC 186 considered. Where the preference amounted to a payment to a creditor, the starting point was that that creditor should be ordered to repay the relevant money. C was therefore to repay the money: since the money had not been paid on to M, it was inappropriate to make an order against him in order to restore O's position.

Application granted in part