CI Ltd v Sonatacus Ltd (Joint Liquidators of)

For a preference claim under the Insolvency Act 1986, a company payment may prefer the person whose debt to a third party is discharged, even where the third party is not the company’s creditor. The statutory remedy may reach a person who received the benefit of the preference. Under section 241(2)(b), that recipient bears the burden of establishing good faith. Good faith is not established where the recipient knew of the debtor’s financial difficulty and knew, or deliberately shut its eyes to the likelihood, that the payment came from the insolvent company. The court left unresolved whether the payment was also a transaction at an undervalue, because the preference provisions provided a sufficient route to recovery.

Sonatacus Ltd, which was insolvent and later entered creditors’ voluntary liquidation, paid £50,000 to CI Ltd. CI had lent £65,000 personally to Sonatacus’s director, but at his request had paid the money into Sonatacus’s bank account.

The joint liquidators first sought relief under sections 239 and 240 of the Insolvency Act 1986, alleging a preference. They later brought an alternative claim under sections 238 and 240, alleging a transaction at an undervalue. District Judge Needham dismissed the preference claim but granted the undervalue claim. His Honour Judge Hodge QC dismissed CI’s appeal, relying on a different analysis. The Court of Appeal had to determine whether the preference claim could succeed against CI as recipient of the benefit and whether CI could establish the statutory good-faith protection.

1. Disposition. The Court of Appeal unanimously dismissed the appeal. It substituted a declaration that the payment of £50,000 constituted a preference within sections 239 to 241 of the Insolvency Act 1986 and affirmed the order for payment, or made such other consequential order as appropriate.
2. The underlying debtor-creditor relationships were decisive. CIL’s payment of £65,000 made Sonatacus indebted to Mr Susca and Mr Susca indebted to CIL. Sonatacus’s later payment to CIL discharged those debts pro tanto. To that extent, Sonatacus gave Mr Susca a preference under section 239, although CIL was not itself Sonatacus’s creditor.
3. Section 241(1)(d) permits an order against a person who received a benefit from a preference, whether or not that person was the person to whom the preference was given. Under section 241(2)(b), a recipient seeking to retain the benefit must establish the relevant protection, and the burden of showing good faith rests on the recipient.
4. CI failed to discharge that burden. Mr Aslam knew that Mr Susca’s companies were in financial difficulty and that the loan had been paid into Sonatacus’s account for Mr Susca’s convenience. When CI received the £50,000, he must have known that it was likely to have been paid by Sonatacus while insolvent, or must at least have shut his eyes to that possibility. On either basis, good faith was not established.
5. The Court did not finally determine the alternative undervalue issue. The reliance below on Phillips v Brewin Dolphin Bell Lawrie Ltd [2001] 1 WLR 143, page 153, was treated as arguable but the competing analysis could not simply be rejected without further submissions. The preference claim made that unnecessary. Smith LJ added that the financial effect of a voidable discharge and the recoverability of the payment might not be precisely counterbalanced.
6. The liquidators’ proposed retrial application based on alleged forgery, untruthful evidence and fraud did not require determination.

1. Court of Appeal (Civil Division). On 25 January 2007, the court dismissed CI Ltd’s second appeal, substituted a preference declaration and upheld the payment order under [2007] EWCA Civ 31.
2. Chancery Division, Manchester. His Honour Judge Hodge QC dismissed CI Ltd’s appeal from the district judge and affirmed the transaction-at-an-undervalue declaration, without determining the preference claim.
3. District Judge Needham. On 29 November 2005, the preference application was dismissed and the alternative transaction-at-an-undervalue application was allowed.