Moving Inter-Company And Director Balances Around And The Effect Of Liquidation

This article Moving Inter-Company And Director Balances Around And Effect On Liquidation is prompted by the case of Re Pappy Ltd [2018] BRIR 1451. Offsetting balances that involve connected parties is not an unknown event. What might happen on Liquidation?

Pappy Limited (“the Company”) went into Creditors Voluntary Liquidation on 9 November 2010. It was a wholly owned subsidiary and its immediate parent company was itself a wholly owned subsidiary of another company (“the Ultimate Holding Company”), all under the control of its Director.

The accounts 30 September 2007 showed the Company owed its Director £200,000.

The Director instructed the Company’s accountant on 2 September 2010 to offset £75,000 owed by the Ultimate Holding Company with his loan account with the Company. Had this not happened then the accounts as at 30 September 2008 of the Ultimate Holding Company would have shown it owed £84,002 to the Company, not £9,002.

The Ultimate Holding Company’s accounts as at 30 September 2008 showed the Director was owed £2,593. Had the offset not been done then it would have been an overdrawn Director’s loan account in the sum £72,407.

The net effect was that the Director’s £75,000 original position was moved from the Company to the Ultimate Holding Company. He had been owed at least the £75,000 by the Company on the verge of insolvency and then instead was owed £75,000 by a healthy company ie. the Ultimate Holding Company. The Court said the Director’s position had been improved.

The Director responding to an application by the liquidator that the offset was a preference under Section 239 of the Insolvency Act 1986 said the offset was a tidying-up exercise. He would be owed £75,000 less by the Company and £75,000 more by the Ultimate Holding Company.

The Director submitted that the Company did not have the £75,000 in the first place so no order should be made.

The Court rejected that position and found in favour of the liquidators:

I also find that, as a consequence, the Respondent was plainly in a better position following the transaction. He had been owed £75,000 by a company which was on the brink of insolvency. Following the transaction, he was owed £75,000 by a company with healthy finances. His position was clearly improved as a result of the transaction. I do not find in the Respondent’s favour, therefore, in relation to the first element of his defence to the application, namely that, properly analysed, the transaction cannot be considered to be a preference. It seems to me that it is a preference and that s 239 (4)(b) has been made out, it being common ground that s 239 (4)(a) has been made out…whilst I accept, and I think it is common ground, that the discretion under s 239 is plainly sufficiently wide for me to make no order if justice so requires, in the words of the authority, it strikes me that the usual order is to make the order envisaged by the legislation. As an aside, I note that the observation in the Paramount Airways case concerned the issue of jurisdiction. I do not think that it is unjust to make the order in this case. There was a reduction of a debt owed by Group to the Company. That debt would and should have been available in the insolvency, and as a result of the tripartite arrangement, the Respondent benefited, as I have previously set out.