The Facts

This was an appeal by liquidators to the Court of Appeal from a decision refusing to grant an order that payments made to the respondent directors totalling nearly £450,000 were preferences.

By the time of the appeal, it was accepted that the payments were made within the relevant time and with the requisite intention to prefer.

However, the respondent directors ran the rather novel argument that, if repayment of a distribution of £75,000, which the liquidators also claimed repayment of and the directors conceded was unlawful, just before trial, was included on the balance sheet, the company was not insolvent. The Judge, notwithstanding his finding that Mr Evans was a “singularly unimpressive” witness, agreed with the directors on that point and found against the liquidators.

The Decision

Unsurprisingly, the Court of Appeal allowed the liquidators’ appeal and held that the claim for recovery of the distribution was contingent on that claim:

  • first, being discovered;
  • secondly, being pursued whilst the respondents remained the sole directors;
  • thirdly, being undisputed (which it was not until shortly before trial);
  • fourthly, being recovered without cost (which had not turned out to be the case); and
  • lastly, being recovered because the company had funds to recover it, which it did not.

For those compelling reasons, the Court of Appeal held that the £75,000 unlawful distribution should not be included on the company’s balance sheet. The company was therefore balance sheet insolvent at the time of the payments, which were conceded as preferences and the appeal was therefore allowed.

Comment

The writer suggests that common sense prevailed!