Stone & Rolls Ltd v Micro Communications Inc

Where liquidators allege that payments were loans or transactions at an undervalue, they bear the burden of proving that case on the balance of probabilities. The court may assess the commercial logic of the transactions and the contemporaneous documents, including payment instructions and accounting records. Inconsistent documents do not require rejection of a coherent explanation supported by the overall evidence. Payments made through an intermediary may constitute partial reductions of an existing debt where the evidence shows that they were used to acquire assets or discharge liabilities for the debtor’s benefit. A transaction’s connection between companies may be established through common beneficial control, but that does not itself establish a loan or an undervalue. Claims under sections 238 and 240 of the Insolvency Act 1986 therefore fail where the alleged absence of consideration is not proved.

The liquidators of Stone & Rolls Ltd claimed against Micro Communications Inc in respect of seven payments made by Stone & Rolls. They advanced a debt claim on the basis that the payments were loans and an undervalue claim under sections 238 and 240 of the Insolvency Act 1986.

Micro Communications contended that the payments were made at the direction of Mercury Consultants Ltd and represented partial reductions of Stone & Rolls’ indebtedness to Mercury. The central issues were whether the payments were loans, whether they were transactions for little or no consideration, and whether the companies were connected through common control.

1. Claims dismissed. The liquidators established that Stone & Rolls, Micro Communications, Mercury and related companies were ultimately controlled by Zvonko Stojevic. That established the alleged connection for the undervalue claim, but did not determine whether the payments were loans or transactions at an undervalue.

2. The liquidators bore the burden of proving both the alleged loans and the alleged absence of consideration. The court approached the evidence on the balance of probabilities and remained alert to the danger of reconstructing the documents merely to reach a perceived coherent account, referring to Rhesa Shipping Co S.A. v Edmunds [1985] 2 Lloyds Rep 1 (HL).

3. The contemporaneous evidence supported Micro Communications’ case. The payment instructions, the March 2001 fax, the accounting material and the use of the funds supported the conclusion that transactions T1–T5 were used in acquiring the Vienna property and that T6–T7 were used in acquiring part of the Bank of Austria debt, with the payments operating as partial reductions of Stone & Rolls’ debt to Mercury.

4. The court rejected the liquidators’ argument that the subordination agreement with Fortis prevented that conclusion. Even if the agreement had the construction advanced by the liquidators, it did not prevent Micro Communications proving how the payments were in fact used. The absence of a proof by Mercury and the absence of intervention by Fortis also made the subordination debate immaterial to the claims.

5. The evidence relied upon for the debt claim was undermined by the evidence of Mr Price, including his withdrawal from the original schedules and the absence of loan documentation. The inconsistent documents did not outweigh the commercial logic and documentary evidence supporting Micro Communications’ account.

6. Accordingly, the liquidators failed to prove that the payments were loans or transactions at an undervalue. Both the Debt Claim and the Undervalue Claim were rejected, and the actions were dismissed.