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Overview Of Desire To Prefer And Company Policy

A case popped up on pancake Tuesday, Re De Weyer Ltd [2022] EWHC 395 (Ch) and at its heart was the desire to prefer, being one of the essential ingredients for a Preference. The arguments of the Director fell flat.

Preference Ingredients

The crucial ingredients without which an insolvency preference cannot arise are:

  • a transaction involves a creditor; and
  • it puts them into a better position; and
  • it takes place within two years of insolvency; and
  • it arises from being influenced by a desire to prefer the creditor

The key issue, in this case, was that a property was purchased to enable the company, De Weyer Limited to operate.

The Liquidator claimed that a payment of £315,750 (“the Preference”) paid to two individuals who were shareholders and had been Directors of the company (“the Respondents”) from the sale proceeds of the property, were preferences pursuant to Section 239 of the Insolvency Act 1986.

The Company went into Creditors Voluntary Liquidation shortly thereafter and had previously ceased trading.

The initial defence put forward by the Respondents was that they were secured creditors and this then developed instead into the Preference arising as a matter of “company policy”:

Mr Gallagher submitted the following:
“that [security] was something we looked at and would have liked to have happened but it didn’t occur. We are unsecured creditors, but the company policy we put in place as directors, the company policy was that when those premises were realised, that we as directors who had put money in, as admitted by John Kelmanson, once we put that money in, it was going to be paid on profits, but because of the French company’s [Fournier’s] problems, it was paid out on the sale of the property, in accordance with the company policy that was put together by ourselves.”

The Preference was at a relevant time ie. within 2 years of the onset of insolvency and it was accepted by the parties that the Respondents were creditors.

The Preference was paid to the Respondents through another connected company, but this had no material impact on the overall nature of matters.

Desire To Prefer

What was interesting was the analysis of the desire:

Mr Brown has referred me to the judgment of Millett J (as he then was) in Re M C Bacon Ltd [1990] BCC 78, 87G to 88B, where the following points of relevance to the instant case may be found:

i) it is not sufficient to establish a desire to make the payment or grant the security that it is sought to avoid: there must have been a desire to produce the effect mentioned in s.239(4)(b), i.e. to improve the creditor’s position in the event of an insolvent liquidation;

ii) the mere presence of the requisite desire to produce the effect in s.239(4)(b) will not be sufficient by itself: it must have influenced the decision to enter into the transaction;

iii) the existence of the requisite desire may be inferred from the circumstances of the case; and

iv) the requirement is satisfied if it was one of the factors that operated on the minds of those who made the decision: it need not have been the only factor or even the decisive one.

There is nothing in the statutory wording to require any exploration into the merits or accuracy of any inconsistent belief, although its degree of plausibility is likely to be relevant to the court’s inquiry into whether or not it was genuinely held….it would seem that an incorrect, but nonetheless sincerely held, belief that a particular creditor held registered security and would be paid first on an insolvent liquidation in any event would appear to exclude the presence of any desire to produce the effect in s.239(4)(b).

In my judgment, there is no explanation for what Mr Gallagher (as the Company’s sole director) did, in the context in which he did it, other than that he acted on 9 and 10 February 2017 under the influence of a desire to produce the effect in s.239(4)(b) of the IA 1986 in relation to Ms De Weyer. My reasons are as follows:

i) Mr Gallagher was well aware by the time the Premises were sold that the Company would have insufficient assets to pay its unsecured creditors: see §90 above.

ii) Mr Gallagher had no belief that either of the Respondents was a secured creditor and, save for the failed contention that they were so secured, no proper basis has been advanced to suggest that either of the Respondents had any entitlement to be paid ahead of the other unsecured creditors: see §122 to §124 above.

iii) Once any belief in the existence of any security falls away, all that is left as an explanation for the fact or the timing of the payments is the so-called “company policy”, which was self-evidently not a basis to pay the Respondents ahead of the other unsecured creditors.

iv) In fact, Mr Gallagher’s decision to apply the “company policy” that the Respondents would be repaid from the proceeds of sale of the Premises, despite his knowledge that the Company was insolvent, is in my judgment a clear manifestation of a desire to produce the effect in s.239(4)(b).

v) There is no plausible explanation for Mr Gallagher’s conduct in promising payment to Fournier while simultaneously keeping Fournier in the dark about the impending sale other than that he was acting in furtherance of a desire to improve the Respondents’ position on insolvent liquidation: see §97 above.

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