The Court of Appeal has unanimously overturned the largest value unlawful preference ruling to date. The Court held that, in the context of a restructuring transaction, a change of board composition at the time of the operative decision to repay an intercompany debt meant that the 'new' board of directors had no desire to prefer. As such, the High Court's finding that there had been a payment constituting a voidable preference to the tune of £90 million was set aside.
Background to the appeal
The case involved former high street retailer, Comet Group plc (Comet). Comet began to experience financial difficulties in 2010 when it reported a £3.8 million loss, which increased to a £31.8 million in 2011. Comet also had a £307 million pension scheme deficit. Comet's parent, Kesa International Ltd (Kesa), became concerned that Comet was a drag on the Kesa group and sought to sell the company in 2011 as a going concern. Kesa agreed to sell Comet to the private equity fund OpCapita on condition that a £115.4 million loan outstanding under an unsecured intercompany revolving credit facility (theRCF Loan) provided by Kesa to Comet was repaid in full.
Before the completion meeting in February 2012, at which the Comet directors would vote on whether to approve payment of the RCF and facilitate the sale, all but one of the Comet directors resigned. New directors were appointed who then immediately voted in favour of repaying the RCF Loan. Comet entered administration later that year on 2 November 2012 and subsequently entered liquidation.
Comet's liquidators brought an unlawful preference action against Kesa's successor, Darty Holdings SAS (Darty), under section 239 of the Insolvency Act 1986. To succeed, the liquidators would have needed to show that the repayment of the RCF Loan amounted to a decision to place Kesa, a connected party, in a better position should Comet subsequently enter liquidation, and that the company had a desire to prefer Kesa. The High Court held that the payment was indeed a preference on the basis that, amongst other reasons:
- There was no meaningful distinction between the 'old' board and new board when it came to Comet's decision-making;
- The entire transaction and sale to OpCapita was subject to repayment of the RCF Loan. Therefore Comet's decision was effectively taken when Kesa agreed the sale of Comet's shares to OpCapita on 9 November 2011. The new board simply gave effect to that decision when the transaction was approved at the February 2012 Comet board meeting; and
- Darty had not discharged the connected party burden of showing that the Comet directors had had no desire to prefer Kesa.
The High Court ordered Darty to pay an amount equal to the difference between the £115.4m repaid under the RCF and the counterfactual dividend in a hypothetical liquidation, which difference came to approximately £90 million. This was understood to be the largest successful preference claim to date.
We considered the High Court's decision in greater detail here.
Darty appealed. Central to the appeal was the timing of the decision to make the repayment. The Court of Appeal held that the time for assessing the desire to prefer was when the operative decision was made. It unanimously concluded that the decision to repay the RCF was not binding or enforceable until the new board met and resolved to do so in February 2012.
The evidence was that the new board members knew they had to vote in favour of the repayment or risk being replaced by a further board of directors who would approve it. Nevertheless, the fact that the old board members may have been influenced by a desire to prefer Kesa could not be said of the newly constituted board who were, despite the risk of removal, ultimately responsible for the decision as to whether the RCF Loan was to be repaid. Consequently, the Court of Appeal set aside the preference ruling.
The Court of Appeal's decision clarifies that the time for examining whether there is a desire to prefer is when the operative decision is made, rather than when the commercial deal is formulated.
Whilst the preference claim was unsuccessful in this case, it is worth bearing in mind that in certain circumstances a claim based on breach of directors' duties may provide an alternative route for recovery.
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