Insolvency Preference Without Remedy Argument Rejected

Overview Insolvency Preference Without Remedy Argument Rejected

The matter of Carton-Kelly v Darty Holdings SAS [2022] EWHC 2873 (Ch) is a case of an insolvency Preference without remedy argument rejected by the Court. The claim was brought the Liquidator of CGL Realisations Limited (“Comet”).

This case has been no litigation backwater. Fascinating litigation has historically sprouted from the case that needs no introduction but the reader may obtain a refresher through the two earlier articles fleshed out on this site:

• Comet, Confidentiality & Conflict

• Comet, Confidentiality and Regulatory Intervention

The Preference action here under Section 239 of the Insolvency Act 1986 had its roots in repayment of £115.4m of intercompany debt due to Kesa International Limited (“KIL”) as part of the disposal of Comet on 3 February 2012, nine months before it collapsed.

A notable feature of the proceedings was how long it took to get to judgment. They were issued on 26 October 2018. The judge however handed down her decision within a month of the hearing.

So ten years after the case started a Preference recovery has been awarded by virtue of the Liquidator‘s application.

Remedy For The Comet Insolvency Preference Claim

The judgment gives the impression of a case occasioned by heavily contested litigation with a couple of experts providing evidence on a range of matters.

A notable feature of this decision was the proposition put forward by the Respondent that there should be no order to remedy the Preference if one existed due to exceptional circumstances but this was rejected.

Section 239(3) of the Insolvency Act 1986 instructs the Court in the event of a Preference to make an order to restore the position to what it would have been had the preference not arisen save if the Court considers otherwise.

Battleground Summarised For The Insolvency Preference Argument

The battleground for the insolvency Preference remedy argument was as follows:

In summary, the Liquidator’s claim is for the difference between the amount actually received (being £115.4m of a pre-existing debt of £129m, or 89p/£) and the counterfactual dividend that would have been paid on a liquidation on a proof of £129m (£14.7m or 11.4p/£, as discussed below at [193] to [200]). In contrast, Darty relies on the court’s discretion being wide enough to make no order at all if justice so requires: Re Paramount Airways [1993] Ch 223, 239, on the basis that “exceptional circumstances” exist. (The concept of exceptional circumstances was discussed further by Mann J in Stonham v Ramrattan [2010] BPIR 1210 at [40], and more recently by Trower J in Re Fowlds [2022] 1 WLR 61.)

Darty says that where, as here, the preference took place in the context of a wider transaction it “would not be fair or appropriate to leave that wider context out of account when considering what order the court should make in the exercise of its discretion”: Re Claridge [2011] BPIR 1429 at [42]. It points out that the court is not permitted to reconstruct the position to what it would have been if an entirely different transaction had been entered into: Re MDA Investment Management [2005] BCC 783 at [123]. Further, Darty says that it would be wrong in principle to make any remedial order in circumstances where the real issue was the grant of the debenture to HAL, and that entity would be the main beneficiary of any recovery by the Liquidator.

Court’s Rejection Of The Insolvency Preference No Remedy Argument

The Court’s rejection of the insolvency Preference no remedy argument was fleshed out as follows:

There was no dispute that the purpose of s.239 is to prevent a company defeating or undermining the pari passu principle, namely that creditors should be entitled to participate on a pari passu basis in assets held at the date of the insolvency, and that this should extend to assets that ought to have been held but for ill-motivated transactions putting them out of the liquidator’s reach: Stonham v Ramrattan at [40]. (The context there was a transaction at an undervalue, but similar principles apply to preferences: see Re Fowlds at [39].)

Consistently with this, the order that the court is required to make under s.239(3) is one that restores the position to what it would have been if a preference had not been given. As Neuberger J said in Damon v Widney Plc [2002] BPIR 465, 470, the intention is to ensure that the creditor is neither better off nor worse off, “and, more importantly, that the Company is not better off nor worse off” than if the alleged preference had not been given.

Given the purpose of s.239, I agree that the primary focus must be on the company. This is also consistent with the approach taken by Trower J in Re Fowlds at [93], where, in response to a claim of change of position, he concluded that:

“… it will rarely be possible to give weight to a change of position by the preferee or the transferee, while at the same time honouring the policy which is reflected in the statute, the normal operation of the statutory insolvency scheme and the restorative nature of the relief (if any) it is required to grant.”

Trower J went on to say at [95]:

“The policy that underpins the statute means that the balance is only
likely to come down in favour of the transferee where the circumstances are sufficiently out of the norm to be exceptional.”

In order to repay the KIL RCF, Comet drew down £115.4m of secured debt. The fact that that debt was to be secured was agreed between HAL and Kesa, as made clear by the terms of the SPA. The effect was to deprive other unsecured creditors of access to assets that became available only to the secured creditor.

I cannot see that it would be right for me to refuse to make an order because the Liquidator might have had a claim against HAL, or because he has not objected to HAL proving as an unsecured creditor. Either approach would amount to accepting an indirect challenge to the Liquidator’s actions. No such challenge is before the court. Darty has also not sought to join HAL to the proceedings to make an order against it under s.239(3), as its defence claimed should have been done.

I am also not attracted by the argument that I should make no order because there is no “simple” way of restoring the position. Unless justice requires otherwise, the court must do the best that it can. The starting point under s.239(3) is that the court is required to make an order restoring the position. The fact that doing so might be perceived to be difficult, or the result imperfect, is not a reason to refuse to act. The priority is to restore the company’s position.

… I bear firmly in mind the policy rationale of s.239, namely to prevent a company defeating or undermining the pari passu principle. The transfer of the DB Scheme liability improved the availability of assets as far as other creditors were concerned, and was as much an intrinsic part of the Disposal as the arrangements for repaying the KIL RCF by taking on a new secured borrowing under the HAL RCF.

In summary, and even taking account of the wider context as Darty urges me to do, I do not consider that this is a case where “exceptional circumstances” exist that justify no order being made. Instead, it is appropriate to order the relief sought by the Liquidator, namely the difference between the £115.4m repaid and the counterfactual dividend in a hypothetical liquidation.

In conclusion:
a) Comet was insolvent within s.123(2) IA 1986 immediately before the Disposal.

b) The repayment of £115.4m of the KIL RCF, including the Triptych Amount, constituted a preference.

c) Mr Enoch, and others involved in the key decision making process on the Kesa side, had a desire to ensure repayment of the KIL RCF, and had in contemplation the possibility of an insolvent liquidation of Comet.

d) I am satisfied that, on the particular facts of this case, a decision was taken on behalf of Comet at the time the SPA was entered into on 9 November 2011, which was tainted by a desire to prefer. The relevant decision for the purposes of s.239 was that decision, and not the formal resolutions passed by the New Board on 3 February 2012.

e) This is not a case where exceptional circumstances exist to justify no order being made by way of remedy. Relief should be granted in an amount equal to the difference between the £115.4m repaid and the counterfactual dividend in a hypothetical liquidation. The counterfactual dividend proposed by the Liquidator of £14.7m, representing 11.4p/£, should be adjusted to reflect the removal of Comet’s liability to the DB Scheme.