Inland Revenue v Wimbledon Football Club Ltd & Ors

A voluntary arrangement is not invalid merely because a third party pays non-preferential creditors in full while preferential creditors receive a smaller dividend from the company’s assets. The statutory priority rule applies to payments from the company’s assets, not to payments made from a purchaser’s own funds, provided the transaction is genuine and not a device to divert company assets.

Unfair prejudice must be caused by the terms of the arrangement itself. Differential treatment requires examination but is not automatically unfair. The court must consider all the circumstances, including liquidation and any realistically available alternative arrangement. Differential treatment may be justified where it is necessary to secure a beneficial sale and continuation of the business.

The Commissioners of Inland Revenue applied under section 6 of the Insolvency Act 1986 to revoke or suspend a voluntary arrangement approved by creditors of Wimbledon Football Club Ltd, which was in administration.

The Revenue alleged material irregularity under section 4(4)(a) and unfair prejudice because non-preferential football creditors would be paid in full by the purchaser of the club’s undertaking, while the Revenue would receive only 30 pence in the pound as a preferential creditor. The central questions were whether the arrangement breached the statutory priority rule and whether it unfairly prejudiced the Revenue.

1. Application dismissed. The voluntary arrangement did not infringe section 4(4)(a) of the Insolvency Act 1986.
2. Section 4(4)(a) requires the company’s assets to be applied in payment of preferential creditors ahead of non-preferential creditors. It does not prevent non-preferential creditors being paid by a third party from that party’s own free funds and at its own cost. The position would differ if the company funded the payments, or if the sale agreement were a sham or device concealing a payment from company assets.
3. The authorities establish that unfair prejudice must arise from the terms of the voluntary arrangement itself. Unequal treatment between creditors of the same class is not automatically unfair, although it may require explanation. All the circumstances must be considered, including liquidation and any fairer alternative arrangement. Differential treatment may be necessary to secure continuation of the company’s business.
4. Payment of the priority debts by the buyer was commercially necessary to acquire the club’s league membership and undertaking. The only realistic alternatives were approval of the arrangement or liquidation, in which case no return would be available to the Revenue. The arrangement therefore did not unfairly prejudice the Revenue.
5. Even if a statutory ground had been established, relief would have been refused in the court’s discretion because revocation or suspension would damage the club, buyer, funder and administrators without benefiting the Revenue. The Revenue’s real objection concerned the unchallenged sale agreement rather than the arrangement itself.