Phillips & Another v McGregor-Paterson

The court allowed the defendant's appeal against a deputy master's order granting summary judgment to the liquidators. The liquidators had sought summary judgment and declarations under the Insolvency Act 1986 (in particular sections 127, 212 and the preferences provisions in sections 238–240) in respect of three heads of claim: (1) post-petition payments from the company bank account, (2) alleged preferential reductions of directors' loan accounts, and (3) repayment of a third-party loan. The judge held that each head raised triable issues of fact and law which could not properly be resolved on a summary application.

Key legal points: (a) section 127 renders post-commencement dispositions void but does not itself create a cause of action against directors; (b) section 212 is procedural and requires a full examination of alleged misfeasance or breach of fiduciary duty and consideration of possible relief under section 727 of the Companies Act 1985; (c) preference claims under sections 238–240 require proof that the company was unable to pay its debts at the time of the alleged preference (or became so because of it), a fact not amenable to summary determination where contested; and (d) statutory presumptions such as that in section 239(6) may be rebutted and are frequently matters for trial. The existence of a prior investigation by the Public Interest Unit that declined to take action was a factor militating against disposing of the claims summarily.

Background and parties: The claim was brought by the joint liquidators of Wilson Properties UK Ltd against a former director, Mr Neil McGregor-Paterson, seeking repayment or restoration of sums and/or compensation for alleged misfeasance, wrongful trading and preferences. The company had been compulsorily wound up on 18 July 2005 and the liquidators issued proceedings in July 2006. After an investigation by the Public Interest Unit of the Insolvency Service that took no action, the liquidators served particulars of claim seeking three sums (post-petition dispositions, reductions in directors' loan accounts alleged to be preferences, and repayment of a loan to third parties) relying on provisions of the Insolvency Act 1986 (including sections 127, 212, 238–240 and 214).

Procedural posture: The deputy master granted summary judgment and declarations on 14 August 2008. The defendant appealed out of time and applied for an extension. Kitchin J directed an oral hearing and the appeal, extension and permission were heard together by Henderson J, who proceeded on the basis that permission and the extension would be granted.

Nature of the application and issues:

• (i) Whether the deputy master was entitled to decide on summary judgment that the defendant was accountable under section 212 for post-petition dispositions that were void under section 127;
• (ii) Whether payments reducing directors' loan accounts were preferential payments under sections 238–240, and whether the statutory presumption in section 239(6) operated so as to permit summary disposal;
• (iii) Whether the repayment to Ms Hall and Mr Mooney was a misapplication/preference requiring restoration and whether these matters could be disposed of without trial.

Court's reasoning: The court found that the deputy master had erred in granting summary judgment. On the post-petition dispositions the judge emphasised that section 127 only renders dispositions void and does not itself create liability against a director; allegations of misfeasance or breach of fiduciary duty under section 212 required a full trial because factual disputes existed about the defendant's involvement and possible defences, including potential relief under section 727 of the Companies Act 1985. On the preference claim the court held that the critical question whether the company was unable to pay its debts at the relevant times could not be resolved on paper and that the reverse-burden presumption in section 239(6) could not fairly be treated as irrebuttable without a trial. On the third head the judge concluded the repayment raised triable issues as to whether the funds were used for the company's benefit and whether any impropriety arose. The prior Public Interest Unit investigation, which took no action, also militated against summary disposal. Overall the judge concluded there were realistic prospects of success for the defendant on each head and no compelling reason to refuse a full trial.

Relief sought and disposition: The appeal was allowed; permission to appeal and an extension of time were granted, and the matter was remitted for trial with directions to be agreed. The judge reserved costs and further directions for handing down of the judgment.

Appeal allowed. The deputy master erred in granting summary judgment and declarations on all three heads of claim because each raised triable issues of fact and law (including questions about the company's insolvency at relevant times, the defendant's knowledge and involvement, the potential for relief under section 727 of the Companies Act 1985, and the effect of a Public Interest Unit investigation). The matters must proceed to trial.

The deputy master (Deputy Master Farrington) granted summary judgment and declarations in favour of the liquidators on 14 August 2008 (order entered 19 August 2008). The defendant filed an appellant's notice on or about 6 October 2008 and sought an extension of time. Kitchin J directed an oral hearing and that the appeal be listed (direction dated 10 February 2009). The appeal, together with the applications for permission and extension, was heard by Henderson J in the Chancery Division and is reported at [2009] EWHC 2385 (Ch). Prior related interlocutory proceedings included a rescission application and appeal concerning the winding up order dealt with by Mann J (reserved judgment handed down 1 February 2007) and the original winding up order made by District Judge Farquhar in Peterborough County Court on 18 July 2005 (neutral citations not provided in the judgment).