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Liquidator Elliot Green Wins Preference claim from a case brought by Oliver Elliot’s CEO, Elliot Green in the case of Green (Liquidator of Stealth Construction Ltd) v Ireland [2011] EWHC 1305 (Ch). This was a case in which Elliot Green was appointed Liquidator of Stealth Construction Limited.

What Was The Preference Claim Brought By The Liquidator, Elliot Green?

The Claim

Elliot Green in his capacity as the liquidator of Stealth Construction Limited (“the Company”) applied for a declaration in Green v Ireland that the grant on 9 December 2008 of a second legal charge over a property owned by it to secure loans totalling £300,000 made by the respondent, Joanna Elizabeth Ireland, was a Preference under Section 239 of the Insolvency Act 1986. Elliot Green applied for orders that the charge be set aside and that Mrs Ireland pay the sum of £130,414.09 paid to her as holder of the charge.

The Charge

The charge was created pursuant to an agreement or arrangement made in October 2007, when Mrs Ireland advanced £145,000 as the first part of her loan. The loans were made for the purpose of, and duly applied in, the purchase of the property. The principal issues which arise are, first, whether the agreement or arrangement created binding obligations or gave rise to an equitable interest in or charge over the property, and, secondly, when the operative decision to grant the legal charge was made and whether it was influenced by a desire to put Mrs Ireland in a better position in an insolvent liquidation.

Background To Liquidator Elliot Green Wins Preference Claim

The company was incorporated in April 2007 and commenced business shortly afterwards. Its directors and equal shareholders were Susan Gillis and Manuel Costa. Miss Gillis was an interior designer and Mr Costa ran two construction companies. Their intention was to use their skills and experience in the purchase, redevelopment and sale or letting of luxury residential properties in London.

Between August 2007 and March 2008 the company purchased three properties in Primrose Hill and St John’s Wood. These purchases were funded in each case by loans made by Royal Bank of Scotland (RBS) and a number of individuals. Loans were also made to fund the redevelopment of the properties.

The property relevant to the present application was 20 Hill Road, St John’s Wood, London NW8. Contracts of purchase at a price of £2.85m, with £142,500 payable on exchange, were exchanged on 26 October 2007. Because the vendors needed to obtain a grant of probate, it was agreed that completion would be delayed until early 2008. The purchase was completed on 25 March 2008.

The purchase of the property was funded by loans of £2m from RBS and £300,000 from Mrs Ireland and by further loans from other individuals. A first legal charge over the property was granted to RBS immediately on completion on 25 March 2008. The second legal charge in favour of Mrs Ireland was granted on 9 December 2008.

Mrs Ireland’s Investment Into Stealth Construction Limited

Mrs Ireland and Miss Gillis are sisters. On a number of occasions during the autumn of 2007 Miss Gillis asked Mrs Ireland if she wished to invest in the company. Miss Gillis stayed with Mrs Ireland and her husband over the weekend of 20/21 October 2007. In discussions, Mrs Ireland agreed to lend £300,000 to the company for a term of one year, with interest at the rate of 15% payable at six-monthly intervals. The purpose of the loan was to assist in the purchase of the property. Miss Gillis told Mrs Ireland that the bulk of the purchase price would be paid out of a loan from RBS secured by a first charge. Mrs Ireland told Miss Gillis that she would require a second charge over the property.

On 23 October 2007 Mrs Ireland transferred £145,000 to the account of the company’s solicitors Saunders Bearman. They received instructions to apply it in payment of the deposit on exchange of contracts for the purchase of the property and did so on 26 October 2007.

Steps Towards A Second Charge

Steps were then taken to put the second charge in place. The consent of RBS as first chargee was required under the terms of its security and first Miss Gillis and then Saunders Bearman, in a letter dated 27 November 2008, requested its consent, which was given. Under cover of a letter dated 26 November 2008, Saunders Bearman sent a draft charge to Miss Gillis. In the letter, Mr Saunders wrote that she was going to let him see the letter between her and Mrs Ireland recording the loan, which would be annexed to the charge, and in a postscript stated that he had received from her the two letters dated 23 October 2007 and 28 February 2008 and that he had amended the charge on that basis.

The second charge was executed on behalf of the company and dated 9 December 2008. It was duly registered both with the registrar of companies under the Companies Act and on the title register at the Land Registry.

The company failed to repay loans to other lenders and on 16 June 2009 a petition was presented to wind up the company based on a debt of £483,750. A winding-up order was made on 29 July 2009. In August 2009, RBS appointed receivers of the three properties owned by the company and charged to it, and in due course the properties were sold and RBS was fully repaid the sums due to it.

In December 2009, the net surplus of £130,414.09 arising in respect of the property at Hill Road was paid to Mrs Ireland as holder of the second charge.

Legal Issues: How To Win A Preference Claim

Mrs Ireland and Miss Gillis are sisters, Mrs Ireland is a person connected with the company. This had two consequences. The first is that the ‘relevant time’ for the purposes of Section 239(2) of the Insolvency Act 1986 is any time within two years ending on 16 June 2009 when the winding-up of the company commenced. Therefore execution of the charge in December 2008, and the agreement made in October 2007, occurred at ‘a relevant time’. The second is that, if the company gave a preference to Mrs Ireland by the execution of the second charge, the company is presumed, unless the contrary is shown, to have been influenced in deciding to give it by a desire to put Mrs Ireland into a position which, in the event of the company going into insolvent liquidation, would be better than would otherwise have been the case, in other words, to prefer her.

The Preference Dispute

Mrs Ireland did not accept that the execution of the second charge in December 2008 constituted a preference, as defined in Section 239(4)(b) of the Insolvency Act 1986, by reason of the rights already enjoyed by her as a result of the agreement made in October 2007 and the application of her loans in the purchase of the property.

Secondly, and if the execution of the charge satisfied Section 239(4)(b) of the Insolvency Act 1986, Mrs Ireland submits that the company’s decision to grant the charge was taken in October 2007 and was not influenced by a desire to put her in a better position. The liquidator submits that the decision was taken in late 2008 and that Mrs Ireland has not rebutted the statutory presumption that it was influenced by a desire to put her in a better position.

This focus on the date of decision, for the purposes of the relevant desire, rather than the date on which the legal charge was executed, stems from the terms of Section 239(5) and (6) of the Insolvency Act 1986 and authorities beginning with Re MC Bacon Ltd [1990] BCC 78.

The Rights Arising From The Charge Documents

The documents were circumstantial and it was held that no enforceable contract for the grant of a charge in favour of Mrs Ireland was made in October 2007 and no case was made out that following the making of her loan Mrs Ireland had any enforceable right to the grant of a security over the property or any equitable interest in the property following completion of its purchase.

Was The Grant Of The Charge Dated A Preference To Mrs Ireland?

The test of a preference contained in Section 239(4)(b) of the Insolvency Act 1986, is whether the act in question “has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done.”

The test of a preference contained in Section 239(4)(b) of the Insolvency Act 1986, is whether the act in question “has the effect of putting that person into a position which, in the event of the company going into solvent liquidation, will be better than the position he would have been in if that thing had not been done.“

The Decision To Grant The Charge: How To Win A Preference Claim

It was the decision to give a preference, rather than the giving of the preference pursuant to that decision, which must be influenced by the desire to produce the effect set out in Section 239(4)(b) of the Insolvency Act 1986. The relevant time was the date of the decision, not the date of giving the preference.

There was a delay of over a year with the company was under no obligation to grant the charge. The charge was granted only because Mrs Ireland raised the issue. The court found it a reasonable inference that Miss Gillis, whether on her own or with Mr Costa, decided that the company should proceed to grant the charge to Mrs Ireland.

The Decision Of The Court – How To Win A Preference Claim

The time for judging whether the company was influenced by a desire to improve the position of Mrs Ireland was held to be about November 2008. This was considered an issue of the thought processes of the directors of the company. They knew that the company was unable to pay its debts, including the debt to Mrs Ireland, as they fell due. Objectively the court said, it would seem likely that Miss Gillis wished to improve the position of her sister but in any event, without calling Miss Gillis and/or Mr Costa to give evidence, Mrs Ireland is unable to rebut the presumption created by Section 239(6).

The requirements of Section 239 of the Insolvency Act 1986 were therefore held to have been met.

Result: Liquidator Elliot Green Wins Preference Claim.

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Disclaimer: How To Win A Preference Claim

The comments in this page ‘How To Win A Preference Claim’ is not legal advice and ought not be relied upon as such. No liability is accepted by the author for any reliance placed upon this post ‘How To Win A Preference Claim’. You should seek independent legal advice to consider the discrete facts of your scenario.