The liquidators of a company appealed against a decision that payments made to its shareholders (J) in the period before its liquidation could not be recovered because they had not been made at a “relevant time” within the Insolvency Act 1986 s.240(2).

The company had been a property development company. In its projects, it relied on loans, including from J. As properties were sold, the company repaid loans from J, making payments on four dates between June 2010 and March 2011. It also paid a dividend of £75,000 to J in June 2010. The company entered insolvent liquidation in May 2011 following an award against it in an adjudication brought by a contractor. The company’s accounts had made no provision for any liability to the company. The liquidators became concerned that the dividend had been unlawful, and sought to recover the payments on the basis that they were preferences. J acknowledged that the dividend had been unlawful and that the payments had been preferences. However, they argued that the payments had not been made at a “relevant time” within s.240(2) because the company had not been insolvent within s.123 on the dates they had been made. An insolvency practitioner instructed as an expert considered that the accounts, in not making provision for the liability to the contractor, had not been prepared in accordance with generally accepted practice, and determined what they would have shown if they had been. He advised that the result of treating the dividend as unlawful was that it had to be categorised as something other than a dividend, probably as a loan to the person to whom it had been paid. The effect of that was to increase the company’s net assets by £75,000. On the basis of that evidence, the judge held that without taking the unlawful dividend into account, the company would have been insolvent within s.123 on each of the four dates, but also that the dividend should be treated as an asset, meaning that the company had been solvent on each date.

HELD: The correct approach to s.123 was the subject of authoritative guidance in BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL Plc [2013] UKSC 28, [2013] 1 W.L.R. 1408. That stated that contingent assets could not be taken into account. If there was a present asset consisting of a chose in action, such as a claim in a liquidation, it could be given a value, and what it fetched in a market was good evidence of that value, Eurosail followed. At the dates in question, J, as those in control of the company, had believed that the dividend was lawful. They had had no idea that there was any possible claim against them in respect of the dividend. No asset corresponding to the claim had been shown in the accounts. There had been no reason for anyone to investigate whether such a claim existed and there never would have been unless the company became insolvent. The company’s claim had been a contingent claim. It was contingent on being discovered and on being pursued, which was unlikely so long as J remained in control of the company. The asset was effectively contingent on the company’s subsequent insolvency. The judge should not have taken it into account. Further, it was not permissible to rewrite history. The judge’s approach, which was to treat the company as having a present asset of £75,000 involved a number of counterfactual assumptions: that the dividend’s unlawfulness had been known; that someone on behalf of the company would have pursued the claim before it went into liquidation; that J would not have disputed the claim; that the money would have been recovered from J without cost; and that the company had the funds to pursue the claim. If the sum of £75,000 was removed from the company’s balance sheet, it had been insolvent as at each of the dates in question (see paras 20-23 of judgment).

Appeal allowed

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