Cosy Seal Insulation Ltd (the Company) fitted insulation for homeowners and sold the corresponding carbon emission savings to energy companies. After fundamental changes to government policy, leading to a downturn in the insulation sector, the Company ran into financial difficulty. In a series of transactions before the Company entered administration, it made loan repayments to the director in the region of £500,000 (the Loan Repayments) and sold certain carbon credits to its sister company (the CC Purchaser) for £100,000 deferred consideration (the Deferred Consideration Payment).
The administrators challenged the Loan Repayments as preferences and the Deferred Consideration Payment as a preference and a transaction at an undervalue.
- The Company was cash flow insolvent at the time of the Loan Repayments and the Deferred Consideration Payment. Creditors were either paid late, or not at all, due to a systemic lack of funds. It was not merely a temporary lack of liquidity.
- The director could not provide a cogent rationale for the Loan Repayments. There was no pressure on the Company to repay its director while other creditors, who were chasing the Company for payment, went unpaid. Therefore, the only possible explanation was that the director was influenced by a desire to prefer himself and was ordered to repay the Loan Repayments.
- The director could not provide a commercial justification for the Deferred Consideration Payment. The CC Purchaser was in no better position to sell the carbon credits and later sold approximately half for approximately £700,000. The director had been influenced by a desire to prefer the CC Purchaser and the CC Purchaser was therefore ordered to repay the Deferred Consideration Payment, as well as the profit on the subsequent sale.
The case is a timely reminder of the law around reviewable payments made in the period leading up to insolvency. Faced with the prospect of an insolvency process, directors should attempt to treat all creditors fairly and, where this is not possible, record the commercial rationale for payments (particularly those which are significant sums).