Bucci v Carman; Re Casa Estates Ltd

The Court of Appeal rejected the appellant's challenge to Warren J's finding that Casa Estates (UK) Ltd was unable to pay its debts when it made payments to a connected person. The court applied the tests in section 123 of the Insolvency Act 1986 (cash-flow under section 123(1)(e) and balance-sheet under section 123(2)) together, and held that the intermediate court was entitled to apply the correct legal test (as explained by the Supreme Court in Eurosail) and to reach its own evaluative findings on the available evidence. The liquidator relied on section 238 to recover transactions at an undervalue and, because the recipient was a connected person, the statutory presumption of insolvency under section 240(2) applied and remained unrebutted.

Background and parties: Casa Estates (UK) Ltd (Casa UK) introduced investors to Dubai property transactions. Casa Dubai acted as an intermediary in Dubai and there was an undocumented set-off arrangement. Mr and Mrs Bucci controlled Casa UK; Mrs Bucci was company secretary and received payments totalling £103,988 which were conceded to be transactions at an undervalue. The liquidator, Mr Carman, sought recovery under section 238 of the Insolvency Act 1986 and relied on the presumption in section 240(2) because the recipient was connected with the company.

Procedural history: At first instance HH Judge Purle QC found Casa UK was paying its debts as they fell due up to late 2008 and that the presumption of insolvency was rebutted. Warren J on appeal (reported at [2013] EWHC 2371 (Ch)) disagreed, applying the Supreme Court's approach in Eurosail, and held the presumption was not rebutted. This appeal to the Court of Appeal followed.

Issues framed:

• When is a company deemed unable to pay its debts (interaction of section 123(1)(e) and section 123(2))?
• Whether the intermediate court was entitled to substitute its own factual evaluation where the lower court had applied an incorrect legal test?
• Whether the appellant had rebutted the statutory presumption of insolvency under section 240(2).

Facts and evidence: Casa UK mixed investors' deposits with its own funds, did not maintain a client account, recorded turnover including gross sale prices, and made substantial loans to a related company (Gianluca (UK) Ltd, GUL) which the trial judge found of no real prospect of recovery. Experts agreed that if the GUL loan was given no value Casa UK was balance-sheet insolvent from March 2007 onwards. The liquidator's evidence was that Casa UK remained able to pay creditors only because it received further investor deposits that were treated as company funds.

Court's reasoning: The Court of Appeal held that the cash-flow and balance-sheet tests in section 123 stand side by side and that a finding that a company is paying debts at a particular time does not preclude the court from examining how that was being achieved. The Supreme Court's decision in Eurosail (and the approval of Briggs J in Re Cheyne Finance) requires a realistic, fact-sensitive enquiry into near-future cash-flow and, where appropriate, into balance-sheet considerations including contingent liabilities. HH Judge Purle QC had applied an inappropriate "point of no return" approach and had not dealt with material evidence that Casa UK was meeting debts by using new deposits and by misusing investors' money; therefore Warren J was entitled to apply the correct test and to make the contested factual findings. Given those findings, and the statutory presumption under section 240(2), the payments to Mrs Bucci were not shown to be made by a solvent company.

Relief sought: The liquidator sought recovery of sums paid in transactions at an undervalue under section 238, relying on the two-year special rule for connected persons under section 240(1) and the presumption in section 240(2).

Appeal dismissed. The Court of Appeal concluded that Warren J correctly applied the law as explained in Eurosail and was entitled to reassess the factual findings; he reasonably found that Casa UK had not rebutted the presumption of insolvency because it had been able to pay debts only by applying new investor deposits (and because, if the GUL loan was given no value, the company was balance-sheet insolvent).

First instance: HH Judge Purle QC (Companies Court) found Casa UK was paying its debts and that the presumption of insolvency was rebutted. First appeal: Warren J, High Court (Chancery) decision reported at [2013] EWHC 2371 (Ch), reversed the trial judge and held the presumption was not rebutted. This appeal to the Court of Appeal resulted in dismissal ([2014] EWCA Civ 383).