CI Ltd v Sonatacus Ltd (Joint Liquidators of)

This Court of Appeal considered whether a £50,000 payment made by an insolvent company to CI Ltd was a transaction at an undervalue under section 238 of the Insolvency Act 1986 or a preference under section 239, and whether CI Ltd was entitled to retain the sum under the defences in section 241. The court analysed the relationships created by an earlier £65,000 advance and concluded that the £50,000 repayment discharged the director's debt to CI Ltd and thereby, insofar as it discharged the company’s debt to the director, constituted a preference within section 239. The court held that the onus was on CI Ltd to show it received the benefit in good faith under section 241(2) and that CI Ltd failed to discharge that onus. For these reasons the court substituted a declaration that the payment was a preference and affirmed the order for repayment.

The court also noted and examined an argument that a preferential discharge of a director’s debt could constitute consideration defeating a s.238 claim, but preferred to determine the matter on the preference point and the good faith defence.

Background and parties: Sonatacus Ltd (the company) traded in mobile phones and accessories; its sole director was Paul Santo Susca. CI Ltd (CIL) was associated with Rahail Aslam. A loan agreement dated 18 September 2000 recorded a £65,000 advance which, although procured by an associated company and paid into Sonatacus’s account, created a personal obligation of Mr Susca to CIL. On 29 January 2001 Sonatacus paid £50,000 by CHAPS into CIL’s bank account. Sonatacus went into creditors’ voluntary liquidation in March 2001 and joint liquidators later issued proceedings.

Procedural posture: The joint liquidators first applied under sections 239 and 240 claiming the £50,000 was a voidable preference. After defence evidence suggested CIL was not a company creditor, the liquidators brought an alternative application under sections 238 and 240 claiming a transaction at an undervalue. District Judge Needham dismissed the preference claim but declared a transaction at an undervalue and ordered repayment. Judge Hodge QC dismissed CIL’s appeal, affirming the undervalue finding on different reasoning. CIL obtained permission to appeal to the Court of Appeal.

Issues:

• Whether the £50,000 payment was a transaction at an undervalue under section 238, or a preference under section 239 (or both).
• Whether CIL received the payment in good faith and for value so as to be protected by section 241(2).
• On whom the burden lay to prove good faith.

Reasoning and decision: The court analysed the legal and factual relationships produced by the £65,000 advance and the £50,000 repayment. It accepted that the £50,000 discharged pro tanto the company’s debt to Mr Susca and discharged Mr Susca’s debt to CIL; insofar as it discharged the company’s debt to Mr Susca it constituted a preference under section 239. Although earlier judges had treated the dispute as a s.238 matter (transaction at an undervalue), the court considered the preference route more appropriate and determined that CIL bore the burden of proving it had received the sum in good faith under section 241(2). The only evidence on good faith was the director/controlling shareholder’s statements, which showed knowledge of the company’s financial difficulties and that payment via the company was more convenient; the court concluded CIL had not shown good faith and substituted a declaration that the payment was a voidable preference and affirmed the order for repayment. The court commented on, but did not finally adopt, a theoretical argument that the voidability of the discharge might offset undervalue analysis.

Relief sought: Declarations and orders under sections 238, 239 and 240 (and consequential orders under section 241) for restitution of the £50,000.

This was an appeal. The appeal is dismissed. The Court of Appeal substituted the district judge’s declaration with a declaration that the £50,000 payment constituted a preference under sections 239 to 241 of the Insolvency Act 1986 and concluded that CI Ltd had not discharged the onus of proving it received the payment in good faith under section 241(2), so the payment was voidable and repayable to the joint liquidators. The court considered but did not finally resolve the competing legal argument under section 238, deciding the case on the preference and good faith point.

First instance/initial applications in the Manchester County Court: joint liquidators applied under sections 239/240 (preference) and, alternatively, sections 238/240 (transaction at an undervalue). District Judge Needham dismissed the preference claim and declared a transaction at an undervalue with an order for repayment. CIL appealed to the Chancery Division before His Honour Judge Hodge QC (M5X158), who affirmed the district judge's decision on the transaction at an undervalue for different reasons. Permission to appeal to the Court of Appeal was granted by Jonathan Parker LJ on 25 July 2006; the appeal was heard in the Court of Appeal (this judgment).